Q4 2019 Earnings Call
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Welcome to the fourth quarter 2019 earnings Conference call today's call is being recorded.
I would like to turn the conference over to Mr. Tom.
<unk> relations. Please go ahead.
Great. Thank you Kevin Good morning, everyone and welcome to the fourth quarter 2019 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.
So located in 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 2008.
How large are subsequently filed form 10-Q's, RCC filings can be found in the investor section of our website.
I remind you that a 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.
The presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in todays presentation can be found in our statistical supplement on our website also in the Investor section.
Yesterday afternoon, Unum record fourth quarter, 2019, net income of $296.2 million or $1.44 cents per diluted common share compared to $249.1 billion or $1.15 cents per diluted common share in the fourth quarter 2018.
Net income for the fourth quarter 2019 included a net after tax realized investment gain of $7.2 billion, an after tax cost related to the early retirement of debt of 1.7 million.
Net income in the year ago fourth quarter.
Included a net after tax realized investment losses of $32.6 million. Excluding these items after tax adjusted operating income in the fourth quarter, 2019 was $290.7 million or $1.41 cents per diluted common share [laughter].
Compared to $281.7 billion or $1.30.
That's per diluted common share in year ago core.
Dissipating in this morning's conference call or Unum, <unk>, President and CEO, Rick Mckenney, Chief Financial Officer, Steve's able and Chief operating Officer, Mike Simon as well as Peter O'donnell, who heads our international business and Tim Arnold who heads our colonial life business and now I'll turn the call over to Rick for his opening comments.
Thank you John and good morning, everyone. We called out 2019 with a good fourth quarter. Our after tax operating earnings per share increased 8.5% over the year ago quarter to $1.41 cents.
This puts our full year operating earnings per share $5, a 44 cents and the growth rate of just under 5%.
The fourth quarter, we had a good mix of growth with after tax operating earnings growth of 3% complemented by the additional benefit from share buybacks producing the 8.5% overall increase.
The business environment, we operate it remains mixed with headwinds from low interest rates and economic impacts of Brexit or UK business offset somewhat by the favorable employment trends and a strong consumer in the U.S.
All in all we're pleased with our performance in 2019 and optimistic as we move into 2020.
Looking at her business trends I'm pleased with the premium growth we saw in our core business lives, which are approximately 5% overall for the fourth quarter and for the full year sales.
Sales trends, however were more volatile in this quarter and sell for Unum U.S. were lower on the quarter impacted by the competitive conditions in the employee benefits market and our desire to maintain discipline with our pricing and risk selection.
I feel it's important to remember that because of our focus on disciplined unum U.S. sales can vary from year to year, but I put that in the context that our compound average growth rate has been 5.6% since 2016 and sales and total have exceeded $1.1 billion for each of the past three years.
We saw favorable growth trends that are international lines, and an improved rate of growth. According to life in the fourth quarter, which helped us generate a slight increase in sales for the full year for colonial life.
Total sales for the company for the four year old $1.8 billion.
I persistency levels in our U.S. group lines and international business lines remained steady at very favorable levels, reflecting the strong value proposition, we bring to our in force customers and our distribution partners.
Next we continued very favorable overall margin trends across our core business lives benefit ratios remained within our expectations, particularly in our U.S. based businesses.
This reflects a disciplined approach, we bring to product pricing and underwriting as well as enforced block management through renewals.
Well I didn't new customers in our core business segments is a driving force of our strategy. We know that sustainable growth, we talked requires us to maintain I'll focus on protecting the strong profitability of these businesses.
Expense management trends also continues to be favorable in our core business segments, we're maintaining our focus on effectively managing our expense base well freeing up the capacity to invest in new capabilities I'll come back to spend a moment, but we see significant opportunities for growth and efficiency. It as an important element of success and we'll be continuing this focus on.
Productivity expense ratios and the profitability of our business.
Taking the aggregate these favorable operating trends in our core business segments continue to drive strong margins and capital generation.
As a result, our adjusted operating return on equity was 17.2% for the fourth quarter. Our core businesses also generated healthy statutory after tax operating earnings of over $1 billion in 2019.
Well, the resulting cashflow funding our growth and supporting our capital deployment initiatives.
Wrapping up on our financial results. The closed block had an excellent fourth quarter with historically low loss ratio in the close disability block. We also saw favorable overall results in a long term care business, which has remained within our expectations since we updated assumptions 18 months ago.
Steve will cover all these results in more detail in his commentary.
So to conclude my remarks, we're quite pleased with the results for the fourth quarter and full year 2019.
We entered 2020 with a strong sense of optimism.
You also saw two weeks ago, we named Mike Simons, our Chief operating officer, a recognition of his past success, when they well deserved expansion of responsibilities to drive growth.
We know the delivering consistent long term success as they constantly evolving market for benefits.
And through all of this new product introductions and business acquisitions. We have made requires us to continually challenge our approach to how we do business and mikes new role will be instrumental in this process.
Our team is excited about the opportunities. We got ahead of us and for continued growth and success and I'll, let Steve to cover the details of the fourth quarter results Steve Great. Thank you Rick and good morning, everyone I'm very pleased with the fourth quarter results with a good quarter overall with solid results in our you know them U.S. and colonial life businesses, both of which came in consistent with.
Patients the Cocowalk had excellent results, while the international business had a tougher quarter, reflecting the challenges we face in the UK business environment, our fourth quarter tax rate was slightly higher than expected in the quarter, but was inline with our expectations for the full year result of normal volatility, we expect to see over the course of the year.
Before any its investment income rebounded in the fourth quarter from an unusually low amount in the third quarter, but remain below our expectations at historical trends for the full year. All in all we ended the year in good shape with after tax adjusted operating earnings per share of $5.44 within our growth expectation of 4% to 7% that we established New York.
Now I'd like to dig more deeply into the results.
Starting with Unum U.S., we continued to see solid underlying results in the fourth quarter as adjusted operating income increased 5.8% to $263.1 million with each of our three reporting lines showing positive year over year results.
Premium growth remained healthy at 5.1% year over year, driven primarily by continued strong group persistency.
Net investment income increased slightly less than 1% helped in part by an increase in mid point its investment income over the year ago core.
Benefits experienced in the segment was generally favorable with the benefit ratio declining slightly to 67.3% in the quarter you adjusted operating return on equity freedom U.S. remain quite strong at over 18% in the quarter.
Then within Unum U.S. adjusted operating income for group disability increased 2.9% to $83 million in the fourth quarter. We continue to see good premium growth and strong benefits experience as well slightly higher net investment income.
Premium income increased by 5.7% as the enforced block increase from prior periods sales growth and continued strong persistency our group insurance lines.
The benefit ratio improved to 74% in the fourth quarter from 76.2% a year ago, driven primarily by favorable claim recovery experience in our group long term disability product line, which was partially offset by higher claims incidents.
Net investment income in the quarter was slightly higher as higher miscellaneous investment income offset the effects of reduce assets back into line and lower portfolio yield on those assets.
The increase in the other expense ratio compared to the year ago quarter was primarily driven by the rapid growth of our Weve services keep in mind that the fee income related to those services is included in the other income line.
Excluding the service business, we saw slight improvement in the operating expense ratio in the fourth quarter relative to a year ago.
Adjusted operating income for the group life in a Dnbi line increased by 6.1% in the fourth quarter to $68.2 million premium income increased 4.8% primarily from prior period sales growth.
The benefit ratio of 71.7% was generally consistent with a year ago quarter of 71.6%.
The expense ratio declined slightly due the ongoing focus on expense management operating efficiencies.
It was a more volatile quarter for sales in our unit I'm eating U.S. group lines of business declining 9.4% from a year ago quarter for yourself, however declined by less than 1%.
Persistency and our group wines in aggregate continues to be a bright spot for us at 90.5% for full year 2019 compared to 90.3% in 2018.
Finally, the supplemental and voluntary line adjusted operating income was $111.9 million for the fourth quarter, an increase of 7.9% relative to the year ago quarter, bringing income grew by 4.5% primarily driven by prior period sales and the growth in our dental and vision product wise.
Partially offset by unfavorable persistency across all businesses.
Looking at benefits experienced for each product line the benefit ratio for individual disability was slightly lower relative to last year due to a lower average claim side and favorable claim recoveries.
The benefit ratio for the voluntary benefits line with higher primarily due to unfavorable claims experience across all products.
Finally in the dental and vision line that benefit ratio was higher relative to the year ago quarter due to higher utilization.
The expense ratio for the supplemental and voluntary line improve relative to the year ago quarter from our focus on expense management and operating efficiencies.
Sales for the supplemental voluntary line were lower by 5% for the fourth quarter with declines in both the individual disability and voluntary benefits product lines offsetting growth in the dental and vision product line.
Full year 2019 sales in our supplemental and voluntary line were flat.
Are you are Unum International segment reported adjusted operating income of $23.9 million for the fourth quarter decline of 21.4% from a year ago quarter. The decline was driven primarily by lower operating income from the UK line of business in local currency.
In local currency the UK Unum UK lineup is that's reported adjusted operating income of 17.4 million pounds in the fourth quarter at quite a 21.6%. These results reflect growth in premium income of 8.6% relative to the year ago quarter from higher persistency sales growth and the benefit of rate increases in the group.
Long term disability product line.
Net investment income for Unum, UK declined 8.7% to 20.9 million pounds in the fourth quarter due impart to lower investment income from inflation index linked bonds that we hold to support the claim reserves associated with our group policies that provide for inflation linked increases and benefits and also lower yield on fixed rate bonds.
The benefit ratio for the UK business increased to 77.3% in the fourth quarter compared to 74.6% a year ago, primarily due to unfavorable claims experience in both the group long term disability and group life product lines, partially offset by lower inflation rate increases and benefit.
International sales in us dollars increased 13.8% in the fourth quarter with sales in the UK in local currency, increasing 13.9% and sales and universal and increase in 8.8% on a dollar basis persistency for the UK business continues to be favorable in the base of successfully implementing renewal rate increases over the past.
Two years, as we look to offset interest rate pressures.
While unum UK results are facing continued headwinds from Brexit. We are pleased with the execution of our strategies, which are centered on implementing rate increases maintaining strong persistency in discipline on new sales pricing and actively rating underperforming cases. In addition, we're very pleased with the performance of the important business, which produced strong pre.
I mean growth of 8.6% this quarter on a dollar basis.
We continue to expect our 2020 operating income to be relatively consistent with our results for full year 2019.
Moving on the colonial life segment produced adjusted operating income of $87.7 million for the fourth quarter, an increase of 2.7% from a year ago quarter premium income increased 3.6% for the fourth quarter, primarily driven by prior period sales growth, including the expansion of the dental and vision products offset impart by.
Lower level of persistency benefit ratio of 51.5% were generally consistent with the euro go quarter of 51.6%.
Well the colonial life continue to rebuild momentum with a year over year increase of 2.6% in the fourth quarter, which brings the full year sales to an increase of almost 1% in the quarter, we thought process positive trends in the public sector markets, where new sales increased over 41%.
Persistency for full year 2019 declined to 77%, 78.1% in 2018, but we believe that persistency will level out in 2020 at current levels.
We are confident the actions we've been taken to rebuild our sales momentum and expect improved sales growth levels in 2020.
Now moving onto the closed block adjusted operating income was very strong at $46.1 million compared to 34.8 million in a year ago quarter at expected premium income for that segment continued to decline down by 4.5% in the fourth quarter, which is primarily due to the ongoing policy terminations and maturities for the individual disability line, which is.
Partially offset by premium rate increases within the LPC product.
Net investment income increased 3.1% in the quarter driven by an increase in the level of invested assets backing the LTC line.
Which is partially offset by a lower yield.
In the individual disability product line the interest adjusted loss ratio was 74.7% for the fourth quarter compared to 81.2% last year, which is primarily driven by favorable claims experience.
This quarter's loss ratio was the lowest we've experienced over 10 years, but going forward, we expect the loss ratio to be in the low eightys.
In the long term care business line. The adjusted the interest adjusted loss ratio was 86.7% for the fourth quarter and remains within our expectations of a loss ratio in the 85% to 90% range over the past four quarters, which we feel the more appropriate time to measure a volatile line like LTC the interest adjusted loss ratio for LTL.
C is 88.1% again in line with are expected range.
I will then round out the closed block discussion with three other important topics related to LTC first we made incremental progress with premium rate approvals in the fourth quarter with several new approvals on our group LTC rate filings. We are pleased with the rate of progress you're making two or 1.4 billion dollar assumption I believe we can achieve this goal in the coming years second.
We have exceeded the new money yield target of 5.5% since the third quarter of 2018.
As we've often caution the assumptions back in this business line need to be analyzed over a long term time horizon, given the potential for quarterly volatility, but remain satisfied with how the trends have evolved since reserve update in 2018.
And third LTC related cash contributions to subsidiaries for the full year 2019 for our first unum subsidiary totaled $100 million and for the Fairwind captive totaled $268 million.
Looking out over the next couple of years, our capital plans anticipate these cash contributions.
Going back to our previous historical average of around 200 million combined as we work through the impacts of low interest rates and tax reform.
Wrapping up with the corporate segment, the adjusted operating loss, which excludes $2.1 million of before tax costs related to the early retirement of debt was higher in the fourth quarter at $50.5 million compared to a loss of $40.2 million in a year ago quarter.
This was driven by lower net investment income in higher interest expense, which was offset by lower operating expenses.
Next door Aarons for traditional U.S. insurance companies were quite strong in the fourth quarter with statutory after tax operating earnings totaling $266 million compared to 250 $15 million in a year ago quarter and totaled $1.3 billion for the full year.
Capital metrics remained in good shape with the weighted average risk based capital ratio for U.S. traditional life insurance companies at approximately 365% consistent with our plans for the year.
Also consistent with our expectations cash at our holding companies totaled $863 million at year end 2018 early in the fourth quarter, we completed the tender and redemption transactions that we began late in the third quarter, which generated the small debt extinguishment cost reported in the fourth quarter. In addition.
Share buybacks in the fourth quarter were $100 million and totaled $400 million for the full year 2019.
I'd also highlight the book value per common share excluding AOCI I as of December 31, 2019 was $48, a 92 cents, which was an increase of 11.2% over 2018.
So for full year 2019 after tax adjusted operating income per share was $5.44 an increase of 4.6% over full year 2018.
Looking at 2020, we continue to expect growth in after tax adjusted operating income per share in the 4% to 7% range, which is consistent with the outlook. We provided at our outlook meeting in December.
Now I'll turn the call back to Rick for his closing comments and look forward to your questions.
Thank you, Steve and again, we're very pleased with the fourth quarter and we're in full swing for the new year. In 2020 team is here to respond to your question. So I'll ask Kevin to begin the question answer session Kevin.
Thank you, ladies and gentlemen, if you wish to ask your question about this time, please signal by pressing star.
From Keybanc. Please ensure the mute function on your telephone the switch off.
To reach out real quick.
Limit yourselves to two questions after which you may rejoin the queue again sorry.
Question.
Our first question comes from Ryan Krueger of KBW. Please go ahead.
Hi, good morning.
Disability.
Can you give a little bit more color on the benefit ratio.
Improved.
The lower discount rate.
Just hoping you some incremental color.
To offset that.
Yes.
Mike That's sharp good morning, right Yep. So as you noted good solid loss ratio in the group disability line at 74% I'd say to your question, specifically strong recoveries and offsets in the quarter more than help offset a moderate increase in new claim incidents and as you.
Noted and as we've talked about at Investor Day, we did.
Having lower that you claim discount rate on new equipment girls by 25 basis points in the quarter.
Got it and then on on competition you made a number of comments in December.
Gary competition.
Dr. traditional group.
Are you seeing more competition in traditional group as well or.
This quarter.
More volatility.
Combined voluntary.
Ryan, It's really just step back and talk a little bit about how the competitive landscape has changed over the last several years you would note a number of players.
That have sold businesses to others the incumbents in our space and so that's been the dynamic that we have seen out there and that has covered across the group space on the voluntary space you would have heard us talk about new entrance people getting into the voluntary space that that will not necessarily historically been in that space and so we're seeing how thats playing out over time.
I actually talk a little bit more about fourth quarter feel very good above the sales we saw in our UK operations colonial life on the better trend that we saw in the first half of the year and then we did see unum us down a little bit on the quarter, but when you look at a fourth quarter go back to the greater than 1.1 billion in sales.
And our maintaining our pricing discipline, which you see a year in and you're out there will continue to push through that.
I think the recognition of the competitive landscape changing our a number of players that really like this space.
Good.
Bodes well for us that we're in front of the pack and as they go through and and come into the space and go through integration, we're focused on growth in the future. So I'm very very satisfied where we are but we're also looking forward to to where it is competition will come and go we've been sort of that for many many years.
We don't necessarily see the the year rational competitor, which is the one thing you can't do much about.
But we expect competition and we think it's actually good for our business in the longer term, maybe Mike you would add anything on the what you're seeing particular to our lines fourth quarter. I think you summed it up well in the fourth quarter, maybe just a little bit more color.
We did see a decrease of about 8% overall, but if you unpack it a little bit sales to our existing clients are actually up about 7% that's really important to us.
Tend to build stickier longer term relationships and becoming more favorably priced and what you have to do you go out and winning new client relationship I think thats, where we felt.
The most competition is in the new clients market and I'd say.
Not terribly different than what we had seen emerged over the full second half of the year and pretty consistent with prior cycles.
In the past.
I guess I, just close by saying as we look out into 2020, there's a lot of reasons for optimism, we're certainly going to maintain that pricing discipline.
You have known and seen from us very consistently but new capabilities rolling out, particularly in that core market, where we have struggled to get some some growth within our targeted underwriting margins with.
The rollout of our new digital platform, we will now be thinking core clients from Onboarding all the way through the administration of their benefits completely digitally and we think thats going to help.
Set us apart as low as a new investment in sales reps in the core where we have now they've got a dedicated team to target. The smallest ended the quarter market, where we see a lot of opportunity to grow.
Tim I think I might have couple of comments about the market on the voluntary side, yes sure. Thanks, Mike.
I think about the results the corner lights out in 2000, I can certainly comp the competitive environment was one factor, but just as a reminder of some of things we talked about in December we made changes in our recruiting model that had an impact on our sales that has nothing to do as compared to competitive environment.
We also made changes in a number of key distribution relationships, we made some changes and migrating toward higher persistency industries, and perhaps away from some lower persistency industry. So we feel great about the quality of the sales we had in 2019, the public SEC growth that Steve talked about earlier with that being the highest persist.
Seeing industry and our book, we feel very good about that.
We feel great about the continued contribution of dental.
And our book and we had a strong year again selling to our existing customers. So that's also helpful and as we look forward maybe at the risk of Saudi over answering but as we look forward to agree the rig market opportunities are tremendous there's still 6 million businesses out there that have more than one employee and less than 100.
Those businesses tend to be underserved their employees are certainly under served with less than half of America's workers, having adequate life or disability insurance.
Very strong value prop at all markets in all segments with our current footprint, we can reach over 80% of America's workers within one hour drive of one of our primary offices.
We have 6000 people get benefits education, and counseling, which is desperately needed business environment and on the recruiting front. After a challenging second third quarter, we rebounded nicely in the fourth quarter and at our back to levels that we saw before we made the strategic shift in our crude recruiting approach. So were we remain pretty optimistic and we still feel comfortable with the guy.
So I was on that up right and I think competition yesterday document, but as you can hear from the team runoff us.
Thanks, a lot.
Our next question comes from.
50. Please go ahead.
Thanks to the first question on pricing, particularly in U.S economy last in this interest rates you're down.
So far this year. So how do you feel about the level of pricing that you're putting out in the market and you have to make it works in more price through to contend with where rates are today.
Okay. Thanks for the question, it's Mike and actually pretty consistent with where we.
We're in December is.
Like we talked about in the past certainly.
Yields are one factor that we're going to put into new business and renewal balancing.
Claim trends and expense levels. We're also getting factors in factored in so there's some puts and takes and like we talked about in December.
We're in a really good spot given current returns to.
Probably nudge rates up a couple of points certainly low single digits across most products and segments, but I think what are the things. We work really hard to do is deliver consistency to clients in terms of predictability to acquire clients.
A sustainable rate and then where we need to make adjustments, they're going to be pretty pretty modest.
And then Rick in your opening comments, you talked a little bit more about expense efficiencies and some of the actions you guys might be taking can you just provide a little bit more color on what some of those actions would be and.
How material they could be in terms of driving her.
Yeah. Thanks, Tony is is a big part of our commentary, but it's part of the actions or focus on on comes on two fronts, maintaining the efficiency that we you've heard year in narrow maintaining a very good expense ratio. It's not outsize, we do it in every year. We look at how we can maintain efficiency I think we're leaning into it a little.
A bit harder these days and the goal is is to actually be able to channel on our investments into these growth opportunities. We see you hear the optimism that we have but we've got to make sure that we're putting the money behind these opportunities to go after and so the expense efficiency that you see will really be plot. Most go back into our capabilities as we go forward. So that's why you hear about.
Little bit more about it because we're a little bit more focused on but it really will be going back more towards the opportunities we capabilities that we see.
In the next several years.
Thank you.
Our next question comes from Thomas Gallagher Evercore ISI. Please go ahead.
Good morning, just the follow follow up on on the competition in the group.
Would you say it I heard your comment about the 7% increasing sales to existing clients. Some some most of the competitions colleagues from new.
Client sales.
Would you say.
That you're close on a lot of these cases that that you're not winning.
And the reason I ask is yes.
She really losing on price by a larger wider margins.
Just curious if you would have optimism that sales would recover 2020 or is it not that far apart on pricing.
To the point, where do you think you could.
You could kind of recover from a sales standpoint.
[music].
Yes, I would like thanks for the question I would actually say.
Not that far off in general is gonna be some volatility prospect of prospects are you one.
Does not apply to all.
I think Rick hit it.
Earlier in the call, where we didn't really don't see an irrational competitor to which we have seen at times in the past, where you might be significantly out I'd say we've got.
Pretty healthy.
Market out there I'd say in general.
In the hot.
And thats that bodes well as we.
We are going to put them new tools into our salespeople and here in 2020.
And I think that.
I think that does bode well and fuel the optimism around the guidance, we put out there for continued steady.
Topline growth I'd say the other pieces, there's just there's less churn in the market and that's my observation certainly reflected in our persistency and as we looked at our one one renewal cycle, there's just less than that business moving in the traditional food side.
Gotcha, and then just a question on I guess.
Close block performance was very favorable.
Was that mainly just increased mortality in the quarter and I guess just related Lee.
Just given that you've had several years of good performance. There does that would you say that improves the possibility or optionality.
Are you doing something with that block to free up capital or where do you still had done on thoughts regarding that.
Yeah. Good morning, Tom This is Steve I'll take that wouldn't so just related to the quarter around our close block individual disability income business I'd say it with a combination but probably the main driver was just lower incidence is a bit of an anomaly for us.
Have lower incidence on that block. We did also see strong mortality, but probably not that was outsized what we would normally see in a fourth quarter. So I would I would say was mostly driven by incidence definitely would not see that sustainable into the future My comments I guided back down to the.
Ladies and that's still where we are but I do have to say we feel good about how that block performed if you go back that block. The majority that block is that a special purpose vehicle with securitized with nonrecourse debt that depth has performed very very well, so I think thats a really.
The next to the consistency of the profits coming off of that block.
That's actually going to be paid off going into the middle part of next year. So I'm. So we feel good about it but again you know if you're thinking about kind of forward looking a bit below 80% or loss ratio is probably a more normalized level. When it comes to just you know the block itself and how we're thinking about opportunities we continually test the market.
And can to explore the market.
Variety ways, one we definitely look at a reinsurance.
Obviously, we'll look at a potentially re levering that block once that that's paid off but it also is generating some nice distributable cash flows and so we all saw the option just slipped that come through.
And how would be available at the holding company. So we'll continue to explore all three of those options as we see but whatever we do it's going to be for the benefit of shareholders and so we'll make sure that economically it makes sense for for the company on the shareholders.
Okay, Thanks, and if I could just sneak one more in just.
365, RBC do you have a pro forma estimate of what that RBC would be if you recapture the long term care captives, what what adjustment we should make.
RBC.
Yeah, I would I would just go back to how we think about our targets for risk based capital.
We we try to keep it in aggregate of 350 and and.
That's what we guide towards as far as our traditional insurance companies, we don't really publicly disclose what that would look like but I I think we'd still be you know around that 350 range if were to do that.
Okay. Thanks.
Our next question comes from Humphrey Lee of Dowling and partners. Please go ahead.
Good morning, and thinking about taking my questions.
Looking at U.S.K., you pointed out there's the.
In terms of brick say that interest rates and also you have some on favorable underwriting the corner, but I think the profit margin is one of the lowest it up I can recall like given some of the ongoing impact how should we think about the profit margin full deadlines business going forward.
Maybe I just started will turn it over to Peter I mean, one other things I would remind you Humphrey, though when you look at that line of business is still a mid teens are we business. So it has a little bit lower we've talked about than our comments in the quarter and the while the Brexit.
Having is still a mid teens are we business is very good let me turn over to Peter to give some more details in terms of where the margins stand and whether golf.
Yes, Thanks, I'm, sorry, maybe I'll, just take a step back and sort of give you my view of where the business is so.
Yes, we've experienced the challenged environment recently with the significant uncertainty you embraced it and as you guys mentioned its interest rates. It I'm. The exchange rate I would say are there sort of most visible indicators of that would you know interest rates down below 10 year down below 1% and the exchange rate being under $1.30 for most year could use it's not one thirteensix, we've stayed pretty stable around that.
Very positive about the election results in December it's really good I think this is in the UK. If you talk to most business leaders to see a stable government for at least five years. However in 2020, we expect the external environment to be very similar to 2019 as the UK based future relationship of the you.
Steve mentioned in his remarks to feel good about the focus on making in many areas. We've seen good growth in products not sensitive to interest rates. Good expense control good core growth and persistency is being good given the renewal program.
However, it's on our long term disability product, we've seen the most pressure both interest rates and higher claims incidents and severity moving away from a long term averages, but we'd be responding to that again over the last two years without rate program, which we were store margins are also being very disciplined pricing you business.
We do see volatility by quarter end 2018, we averaged around 20 million higher in the first top and low in the second half I wouldn't worry too much about that trying to the second half. It does tend to move around a lot, but basically we landed about 80 million for the year and as Rick mentioned, an orally he just under 40%.
In 2020, you'll continue to rewrite the book and work with clients to improve claims grow those non interest rate sensitive products I would expect the detail each be broadly in line with 2019, but it can move around that 20 million mean by quarter, it's difficult to call. It by quarter. So overall very positive about the positioning and prospects for the business over the medium term given the actions we.
Haven't heartache, taking on particularly as we see returned to more normal and political environment as we care of Brexit.
That's helpful and then shifting gear that p. The U.S., so you've talked about the efficiency and anything and I. Appreciate the color that you provided but just looking at a good visibility the extensive kind of came up I.
I think part of it is because of the least management that you housing activity.
Spending bolt to grow that business. So I guess, how should we think about time.
The general expenses for good visibility going forward.
Think about efficiency gainful youre on the writing business, but it seemed kind of long lead management.
Not sure Okay. Good morning, it's Mike So you nailed it so in that group disability segment is where we how's our fee based services business, primarily lead management, which increasingly is becoming not just FM away at the federal level, but state level and municipal level as well.
Corporate leave so that in combination with the sizable disability fee based services that we provide is growing we see that as a very attractive business for us over time and one of our biggest areas of investment so.
The overall profile of the company that Rick was talking about we're going to continue to drive efficiency at the macro level and that is one.
Primary plays that we're reinvesting funds back into the business we.
That is a real problem that we can solve for clients in a differentiated.
The way and so as we do that in that in this segment as you can computing kind of an OE ratio with premium measure denominator and fee based business, you're going to continue to see that.
Well, we ratio continue to drift up what I would tell you is that if you pull the fee based businesses out of the segment, we actually saw about a 50 basis point decline in the traditional operating expense ratio there. So.
In summary, as you kind of look out for that segment I would continue to expect some modest growth and not expense ratio because of the growth in fee, but you should know that underneath that we're continuing to sort of drive efficiency on insurance side.
So should we expect that kind of expenses for good visibility to maybe at least in the near term.
God willing faster than top line.
I think if that growth slightly faster, that's probably reasonable we'll see that.
I see that ratio quantify.
That makes sense. Thank you.
And suffered.
Our next question comes from Andrew Klingerman of Credit Suisse. Please go ahead.
Great. Thank you.
Just wanted to know our lean a little bit on some of the yearly questions. So.
Unum us in the group disability area.
This year.
Your benefits ratio of 74.4% last year.
I mean 2018.
76.1 so.
So I just think about.
It's an earlier comment you made it does.
Even being able to get low single digit rate increases.
Maybe just give some color on where that benefit ratio to stabilize it sounds like some 75%.
It's doable.
As favorable claims recovery this quarter, but it seems like 75% or lower.
It's doable coli slower.
Maybe talk a little bit about that.
Yeah, Andrew Thanks for the question, it's Mike So.
I think it's reasonable to have that sort of 74% to 75% range in mind I would say just in general that is pretty tight when you think about a business like this that that can overtime, particularly at a quarter to quarter level have some some volatility.
Yes, as we look out and look at the the trends on the major drivers of that benefit ratio that seems like a reasonable range.
Hey.
I'm still trying to reconcile your ability to grow sales and voluntary markets.
Unum us is voluntary business.
5% year over year and it looks like in colonial overall it was.
For sensata versus 5% to 7% guidance.
Hey, maybe.
Maybe just focus specifically on.
On the pricing there is pricing coming down.
Now, let's start with colonial life and go back to the yeah. Andrew Thanks for the question pricing on the voluntary side really isn't an issue almost all the products that are sold on the voluntary sellers shelf right in and not at prices not of negotiating points. So the negotiating points tend to be around.
What type of participation you think you might get based on the enrollment conditions, what's compensation looks like whether there are technology companies that would need to share in some of the compensation et cetera. So those are the negotiating points, we don't see those being any particular real threat to us.
Mike on the Asa Yeah, I'd say, we talked about it a little bit backing in the upper end to the market is as Tim said much less price pointed it's around the the underwriting and the product.
Features and we talk a little bit about that we've rolled out some new products. They are I think really oriented creating additional consumer level value there's less expense both.
The cover administration because of the OE Ics expense gains that we've had but also.
Through the channel and as those conditions level out we've seen actually some pretty nice growth on that subset of new products and about 25% of all of our new sales in the quarter came in.
Product chassis is in just looking at new clients is about 50%. So I think it will take some time, but as we look at the pipeline for voluntary ended the unum branded side of the business I think there's reasons for optimism.
So much.
Yep.
Our next question comes from Erik bass.
Mr Research. Please go ahead.
Hi, Thank you do you expect New York Life's acquisition of Cigna's group business have much impact on the market and historically have you seen mutual companies approach the market much differently from a pricing or target margin perspective.
Yeah. Thanks for the question, Eric I mean, I think I haven't step back I made some comments about how the markets change as well prior to that acquisition you have had consolidation and the benefit space, we for different reasons and different players. You've also seen some acquisitions done from foreign players that have come into the space as well so there's a lot of.
Dynamics, adding a new competitor in there that is in the mutual space. You know this is this business still.
Needs to be while managers and work through the business. So I don't we haven't seen the dynamics jet, but but I think that.
It should be similar to other competition, we've seen of people have gotten into the space might want to add.
Well just also specifically the question we've had a couple of long term mutual competitors in this space and have not seen a materially different sort of orientation to.
Other competitors.
Got it thanks, and you've had some good success with the leaves management services product are there other opportunities to add ancillary kind of fee based services or products to drive growth in the future.
Sure we absolutely do think that that is the case I think.
The lead service gives us a point of intersection in a pretty meaningful way down to the consumer level at the work site and we can see.
A lot of potential services branching off from that as well so.
That is one of the thing is it kind of look forward as a company. We've got a very strong insurance and benefits footprint across the U.S. in UK and we see increasingly that theres opportunities to introduce new primarily.
Digital backed by people services.
Alongside those insurance products.
Thank you.
Thanks, Eric.
Our next question comes from Jimmy Bhullar of JP Morgan. Please go ahead.
Hi, I'm first just a question on loss trends in the visibility business, obviously, they've been very favorable and I guess, the labor markets, hoping as well.
Do you see anything that would suggest that margins are not going to hold up at the recent level I know your guidance is little bit more conservative than what you've been reporting and are you pricing based on what years, what you've seen in terms of loss claims trends over the past year or so or more based on longer term averages.
Sure Yeah. So on group disability I, just take it back to the commentary earlier, I think 70% 75, and the loss ratio is very reasonable and consistent with what our expectations are.
Looking out as I was saying earlier, you look sort of the major.
Factors that would imply that sort of impact loss trends and we don't see.
Things that would materially impact appetite as it.
Say every time into his insurance business its involve taking some risk.
And there there's certainly can be particularly when you look at it on a quarterly basis some volatility.
There but.
Our approach is about being really smart and disciplined upfront about the risks that we take on and then just.
Investing heavily in a remarkably talented group of professionals.
That handle the claims process from the clinician to the book rehab disability benefits specialists. It is a really impressive machine and quite effective that helping support people returned to work in a very consistent way.
And just on like the changes upcoming changes in long duration.
Contracts in terms of accounting do you have any better insight you will be affected I guess, the LTC and I'd I've businesses or do you have to most exposure, but when do you think you'll be able to.
Give some idea on what the impact on your book value would be.
Morning, Jamie that Steve I'll take that one so I step back just a little bit just on the new accounting guidance.
This is a GAAP only accounting guidance, how we view it will have to change our reporting our and our disclosure disclosures for GAAP basis financial reports.
From a statutory cash flow from a capital deployment perspective, we see this as a bit of non event.
It was delayed a year out so you know the effective date is in 2020 and so the teams working through it.
The recent change was adding that scope claim reserve liabilities, though we're working through that.
The majority of the impact will be around discount rates things that we've talked about before so.
As we look out we're planning for the 2022 implementation the teams working hard at it and you know as we get more information, we'll disclose it as it makes sense, but really nothing new to talk about right now.
Okay. Thank you.
Thanks, Jamie.
We have no further questions at this time.
Great. Thank you Kevin I'd like to thank everybody for joining us on the call. This morning.
Kevin I know completes our fourth quarter 2019 earnings call. Thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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