普登 (UNM) 2013 Q3 法說會逐字稿

Good day and welcome to the Unum Group third-quarter 2013 earnings results conference call. Today's conference is being recorded.

At this time for opening remarks and introductions, I'd like to turn the conference over to Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead.

Great, thank you, Jason. Good morning, everyone and welcome to the third-quarter 2013 earnings conference call for Unum.

Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements.

Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the section titled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors in our Annual Report on form 10-K for the fiscal year ended December 31, 2012, and our subsequently filed Form 10-Q. The SEC filings can be found in the investors section of our website at unum.com.

I remind you that the statements in today's call speak only as of the date they are made and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found also on the website in the investors section.

Participating in this morning's conference call are Tom Watjen, the President and CEO; Rick McKenney, Executive Vice President and CFO; and Kevin McCarthy, Executive Vice President and Chief Operating Officer; as well as the CEOs of our business segments, Mike Simonds for Unum US; Peter O'Donnell for Unum UK; Randy Horn for Colonial Life; and Jack McGarry for the Closed Block.

And now I'll turn the call over to Tom Watjen. Tom?

Thank you, Tom and good morning, everyone. The third quarter was another strong quarter for the Company, with growth and operating earnings per share of 6.3% to $0.85 per share, and an increase of 10.4% in book value per share, excluding ACOI, to $31.63. And let me touch on a few items before turning things over to Rick.

First, I continue to be very pleased with the strength of our core business operating results. Unum US had another very strong quarter overall with profit margins for this business segment continuing to improve, as we stay focused on disciplined underwriting, pricing and risk selection, often at the expense of top-line growth. These strong results were driven in part by another quarter of solid risk results in our group disability line, where the benefit ratio improved again to 82.9%.

Colonial Life's operating results remain strong as well, with solid risk results and sound expense management driving another good quarter for this business. Lastly, while we're still below our long-term expectations, Unum UK showed strong improvement over the third quarter of last year, as the aggressive group life repricing and repositioning actions we began taking late last year have begun to have a favorable impact on our results for that line of business. I continue to feel very good about the results of our core businesses where our disciplined approach to the business has resulted in consistently strong margins, cash flow and operating return on equity, which was 14.5% for the quarter.

Secondly, our Closed Block segment was also in line with our expectations this quarter. As we have said in the past, this segment particularly the long-term care product line, will continue to be an area of focus for us for some time to come. I mentioned last quarter that we had taken steps to devote additional resources to this critically important area.

I can see early signs of the benefits we'll derive from this increased management focus on this challenging line of business. As Tom White mentioned, Jack McGarry CEO of this business, is with us today on today's call and available for your questions.

Third, while it continues to be a challenging environment to profitably grow our business in the US, we saw improved sales trends this quarter within a number of important segments of our businesses. Most notably, LTD sales increased 9% in Unum US, while core market sales in Unum US, which includes our STD, LTD and group life lines of business increased 2% and voluntary benefits sales in Unum US grew 6%.

We also saw sales in Colonial Life increase by 1% in the greater than 50 life area of the marketplace. As we discussed last quarter, the biggest challenge for Unum US and Colonial Life remains in the very small end of the market, which we define as the less than 50 life employer. This market segment continues to be impacted by the soft pace of economic growth, the political environment and distractions brought on by the implementation of healthcare reform.

While we believe these headwinds in the US are likely to continue, we expect to continue to see pockets of growth. And we remain committed to maintaining our disciplined approach to the market and not chasing business, but instead protecting the strong margins and returns we have worked so hard to build in our core business segment. Rounding out my review of the sales trends, I'm also pleased that we're seeing somewhat better pricing trends in the UK market, where sales in local currency grew by just under 4% for the quarter.

Moving to investments, I continue to be very pleased with our investment results, including the credit quality of our portfolio. Interest rates and investment yields remain a challenge, but we continue to maintain our investment-quality standards and remain focused on raising prices in those products that are most interest-rate sensitive.

And finally, our capital position remains very strong with our continued solid statutory results and cash flow providing us with significant financial flexibility, financial flexibility which not only allows us to continue to repurchase stock, but also as Rick will touch on further in a moment, financial flexibility that also allows us to evaluate alternatives for moving our Bermuda-based insurance subsidiary to the US and still operate comfortably within the capital outlook we've given you last year. We closed the third quarter with a risk-based capital ratio of 397% and a holding company liquidity position of $678 million, both on the higher end of our target range for 2013.

So to summarize, before we move to a more detailed discussion of the quarter, we're pleased with the overall results we saw in the third quarter. The current business environment presents top-line growth challenges, but I'm very encouraged by the growth we did see in certain of our markets.

Our risk results remain very strong and we're committed to maintaining our disciplined underwriting, pricing and risk selection practices to protect the solid margins, returns and cash flow that we have consistently produced in our core business lines. I believe that this strategy, along with our strong brand and market position, continues to position us very well to both operate effectively in this still difficult environment, while capitalizing on the long-term growth opportunities we continue to see in our marketplace.

Now I'll turn things over to Rick for a review of our operating results. Rick?

Great. Thank you, Tom.

As Tom mentioned in his comments for the third quarter, we reported operating earnings per share of $0.85, an increase of 6.3%, which brings our growth and operating EPS to 6% for the first three quarters of the year. As a result of this, we're refining our outlook for the full year to the higher end of the 0% to 6% range as we look to the fourth quarter.

Again in the third quarter, across the Company we continue to see positive trends. Drilling in a little bit deeper into the results, first on Unum US, operating earnings increased year over year with favorable experience in the group disability and group life and AD&D lines, offsetting slightly lower earnings in the supplemental and voluntary lines.

Focusing first on our group disability business, we continue to perform very well with a benefit ratio at a tick under 83% for the third quarter of 2013, which compares favorably to an almost 85% in the year-ago quarter and 84% in the second quarter of 2013. The underlying experience continues to be strong, with stable to lower overall claim incidents and continued strong claim recovery performance.

We didn't adjust discount rates as the interest reserve margins remains comfortably above our target range and consistent with the margin in the year-ago quarter. The profitability of this business also continues to benefit from the pricing discipline we show on new sales and renewals. We're very pleased with the performance of this business and the strong returns it continues to produce.

Group life and AD&D also produced good results for the quarter, with operating income increasing by 4.3% to $58.5 million. The benefit ratio was steady in the quarter at 71.5%, reflecting favorable underlying risk experience.

And finally in Unum US, the supplemental and voluntary line reported operating income of $82.7 million for the quarter, down from the $85.7 million in the year-ago quarter. The benefit ratios for the primary lines of business were slightly higher from the year-ago results but very much within our expectations, as the underlying risk results remained generally stable. Persistency trends also tracked with our expectations in the third quarter.

Moving to Unum UK, operating earnings were GBP20.1 million for the third quarter, improved from the year-ago quarter which was GBP17.3 million, but off slightly from the second quarter of GBP21.8 million. We're pleased with the overall progress we're seeing in our UK business, particularly with the repricing and repositioning of the group life block of business. In addition, the underlying claim experience for the group life business improved in the quarter.

We did have softer sequential results in the group disability product in the quarter; however, this was not too surprising given as historically we are subject to seasonal volatility for disability claims in the third quarter. Overall for the UK, this quarter's results are within our anticipated range and we continue to make solid progress on restoring the high-margin expectations we have for this business.

Colonial Life continues to produce solid steady results with operating income at $69 million for the third quarter. The benefit ratio is slightly higher at 53% for the quarter, as we experienced slightly unfavorable risk experience in the life product line and the accident, sickness and disability product line, which offset improved claim experience in the cancer and critical illness product lines. Overall, the underlying profitability of this business remains strong.

And finally, the Closed Block generated operating income in the third quarter of $25.7 million, consistent with the year-ago quarter. The slight improvement in the interest-adjusted loss ratio is attributable to a lower average claim size in individual disability line and more favorable development in the active life reserves in the LTC line.

In addition, the Closed Block is slightly less than for miscellaneous net investment income in the third quarter relative to both the second quarter and the year-ago quarter. Overall, the results of the Closed Block this quarter are also in line with our expectations.

Wrapping up the earnings picture, I would quickly highlight an item related to our tax rate. There was an income tax rate reduction in the UK enacted in July and we adjusted deferred tax assets and liabilities through income on the date of enactment of that change.

For the third quarter of 2013 this resulted in a $6.3 million tax benefit. This lowered our effective tax rate by about two percentage points. You'll recall that in the year-ago third quarter a similar UK income tax rate reduction was enacted, which resulted in a $9.3 million benefit.

Now let me move to a discussion of our sales and growth trends. We saw some challenges in the first half of 2013 for new sales, driven in large part by the pace of economic growth, the political environment and disruption in certain sectors of our markets from healthcare reform implementation. However, we did see good progress in the third quarter.

In Unum US, as Tom highlighted in his introductory comments, we saw improved sales trends in the core employee benefits markets and in voluntary benefits. That combination of businesses, the focus areas of growth for Unum US, produced sales growth of 4% in the third quarter following a decline of almost 18% in the second quarter.

Persistency trends in our Unum US lines remain in line with our expectation, helping to produce positive premium growth for Unum US in total. I would add that we continue to see little benefit to premium income from the overall economy and employment trends on our business.

In the UK sales were up by 3.7% this quarter in local currency. Disability sales in the core market showed an increase year-over-year, while sales in the group life market increased due to higher enrollments on existing cases. In short, we were very pleased with the underlying quality of these sales.

Persistency in the UK continues to be impacted by the pricing actions we are taking, particularly in the group life line where the last of an unprofitable large case during the quarter helped contribute to a reduction in persistency to 65%. These were all driven by actions that we put in place to improve the profitability of the book, and it is trending as we expected. Persistency in the disability line remained relatively stable at 82%.

Finally at Colonial Life, we saw aggregate sales down 3% but premium income grew 3.2% for the quarter and 3.5% for the first nine months of the year. The decline in sales is primarily attributable to the ongoing slowdown in activity in the small end of the market.

This is particularly true in the less than 50 lives market, where the most disruption seems to be going on from the implementation of healthcare reform. In fact we're seeing new account activity down by as much as 28%.

Despite this trend, we did see better sales results in other parts of Colonial Life's markets when large-case sales, which we define as greater than 1000 lives, up by 17% and public-sector sales up by about 2%. In general, we're seeing a continuation of the same trend of fairly stagnant new account growth offset by better sales activity with existing customers. Persistency remains steady with last year's levels.

Quickly moving on to the investment portfolio, the credit quality of our portfolio remains in excellent shape, and the watch list of potential problems remains quite low. Treasury yields and corporate bond spreads were more favorable during the early part of the quarter, and since our investment team was more active putting money to work in the early part of the quarter, we were able to achieve higher new money yields for the third quarter than the yields we realized in the first half of the year. Fortunately by the time those higher rates reversed themselves in the final weeks of the quarter, we had put most of our cash to work.

In addition, during the early weeks of the third quarter, we sold approximately $400 million of our lower-coupon corporate bonds and in a tactical trade, reinvested into higher yielding mortgage-backed securities and corporate securities to take advantage of the move-up in interest rates at that time. This activity resulted in a net realized investment loss which came solely from interest rates and not credit. The trade enabled us to slightly enhance the investment yield while improving the credit quality of the portfolio.

Moving on to an update on capital management, we continue to see very positive trends which produce a strong overall capital position. Statutory net income remains healthy at $153 million for the third quarter and $500 million for the first nine months of the year.

The weighted average risk-based capital ratio for our traditional US life insurance companies was approximately 397%, at the upper end of our target 2013 range of 375% to 400%. Holding company cash and marketable securities was also up, totaling $678 million at the quarter end.

I would also note that during the quarter we entered into a five-year credit facility of $400 million, further solidifying our capital structure. Share repurchase activity totaled $75 million in the quarter, which brings the total on a year-to-date tally up to $269 million or 3.6% of our outstanding shares.

As we approach year-end we're evaluating various options for our Bermuda-based insurance subsidiary. As a reminder, we've had a Bermuda entity since 1996. In this entity we've reinsured certain long-term disability and long-term care blocks.

As we look at it today, it does not provide the benefit worthy of it structure; therefore we have a goal of moving the business onshore under a domestic regulator in a subsidiary with a financial profile consistent with our traditional US insurance companies. I would stress that the move would not have an impact on our consolidated GAAP fourth-quarter earnings.

We expect keep our year-end capital metrics within the target levels we've previously communicated. That is, RBC, in the 375% to 400% target range and holding company liquidity in the target range of $500 million to $800 million. I would also stress that this move would not preclude us from repurchasing shares in the fourth quarter.

Right now we're pushing to complete our work before year-end and will update you with our progress at our investor meeting that we have scheduled for December 16 in New York. We look forward to taking you through this, as well as our outlook for 2014 at that event.

And now I'll turn my comments back to Tom for his closing comments. Tom?

Thanks, Rick. Before we move to your questions, I'll close by reiterating how pleased we are with our operating results for the third quarter.

We continue to generate solid profitability and returns by focusing on the basics, disciplined pricing, underwriting and expense management, along with a commitment to sound risk management and managing our investments in capital. That focus on the basics will not change.

This completes our prepared remarks. Operator, let's move to the question-and-answer session.

Thank you.

(Operator Instructions)

Jay Gelb, Barclays.

Couple follow-up questions. So the move for the Bermuda operation back on shore, how much capital do you feel that will deploy in the course of doing that?

Certainly, Jay. This is Rick McKenney. Let me answer a couple things.

One is we're still working through the details, so we brought that out to you today. We do expect to have more details around that by Investor Day, but we're still working through the structure.

How I would highlight that is actually we're going to be within the ranges of capital that our outlook, that we really put out to you over the course of this year. We feel good about that and how we take it out. As I mentioned in my notes, we'll still have the ability to buy stock in the quarter and get to those levels.

So I think this is going to be a good move for us. We'll give you more details as we get to Investor Day and the structure solidifies.

On that topic of buybacks, it's been running $100 million a quarter in the first-half, down to $75 million in 3Q. Just trying to get a sense of what a decent run rate is on a quarterly or annual basis absent that shift.

Let me take you through how we're thinking about our capital. First I'd start out with staying our capital generation this year has been excellent. We mentioned even through 3 quarters, $500 million of statutory earnings, which is better than I think we've anticipated, certainly better than our run rate that we've had.

We've talked about before, we think about capital deployment in many ways in terms of what are the best use of our capital as we take that out. We've certainly done it through share repurchase, and that is an important piece of how we deploy capital.

I'd also take you to other things that we've done in the course of the year, retiring debt in the first quarter, solidifying our pension position in the second quarter. And now we're talking about re-domesticating our Bermuda business, which as I just mentioned in my last comments, we'll adjust some of that capital that we take in. We think those are all good uses and certainly we'll continue to do that.

Specific to share repurchase, I think that as we mentioned in our comments last quarter, there were a lot of factors going into how much stock we will buy in a given quarter, when we will do that in the quarter and how we'll go through. I think that those still hold, but I'd take you back to how much capital we're generating, and we certainly will put that capital to work on an active basis.

Okay. And then finally on the strong recovery in group LTD sales in the US, what's changed relative to the prior two quarters? I know a significant focus by some benefit managers at large corporates on the looming Affordable Care Act implementation had been a drag in the first half.

Did that ease off in 3Q? I'm trying to get a better sense of what changed.

Jay, let's ask Mike Simonds to speak to that. Mike?

Thanks, Tom. Jay, I'd say the headwinds that we've been feeling for the first half of the year have definitely still out there in the market when it comes to healthcare reform. That being said, we did see that abate just a bit as a number of healthcare decisions, particularly for larger employers, get made around midyear. They can now turn their attention a bit to some of our lines of business.

We were encouraged to see the increase in disability. We're encouraged to see the increase, as Tom mentioned, in our core and in our voluntary benefits sales.

But we're still cautious around the outlook, given that employers still have a great deal to work through, particularly in the small end of the market. With fewer prospect out there, fewer employers looking to make changes, we continue to see a pretty aggressive pricing environment as carriers are looking to meet sales goals with fewer prospects available.

If I can add to Mike's comments too, I think he said it well. The big challenge for us is still on the small end of the marketplace. I'm not sure we saw a real swing in sentiment over the course of the last quarter.

We're still cautious as we look forward and that obviously affects both the sales activity within Unum US, but also in Colonial as well, but again, there were some encouraging signs. But as you see, we're not going to deviate from that more disciplined approach.

If the business is there to be done at a profitable level, we'll certainly be getting more than our fair share. If not, we'll sit on the sidelines. I don't think there's been a real fundamental shift in the quarter, especially amongst that smaller employer piece, which is affecting both Unum US and Colonial.

Okay. That makes sense. Thank you.

Thank you.

Eric Bass, Citigroup.

Just one follow-up on the Bermuda captive. How are you thinking about the long-term care statutory reserves? Am I correct that as part of the re-domiciling process, you might have an opportunity to increase those reserves?

The way I'd answer that for you, Eric, is that when we bring it back on shore, we are expecting that we will have a Company and business that is actually similar in its reserving and capital policies that we have in US. That is a key part of that and well take you through the details on that. But it will look very similar to our other practice as we have for other US businesses.

Okay. And would that be a higher level of reserves than today, on a statutory basis?

I think, Eric, that gets you to some of the discussion around capital we just said. We're going to have to bring you those details to you on Investor Day.

I think those will all be coming into play in terms of how we look at what reserving levels look like as well as what capital levels look like. We'll give you more of those details at Investor Day, and quite frankly, when we're done with this process, which we aren't done yet.

Eric, if I could add to it again, I think that you said it before, but this is our decision to do this. This doesn't have to be done, but I think as we looked at our own capital structure, the quality of our capital, looked at obviously some of the things that are happening in our industry, we think this is the right time to entertain this.

And fortunately we have the financial flexibility to do so. And I think as you said, Rick, when the dust settles we'll have this back on shore at a level, most likely with reserves and capital that are equivalent to the other parts of our business.

Okay. Thanks. And then you mentioned the increased resources that you've allocated to the Closed Block.

Can you talk a little bit more about, specifically about what you're doing? Particularly for the long-term care block?

Yes. Let me turn things to Jack. But as you -- just to remind others, what we did talk about last quarter was the fact that this Closed Block, and especially the long-term care component of the block, is going to be with us for many, many, many years to come. This will be an ongoing focus that -- we're raising our focus, frankly, to be sure that we are managing that business for the long-term.

We appointed to Jack to run that business and Jack has certainly added to his resources. Jack, take people through a little bit, some of the early things that you've been involved in.

Yes. And a big piece of what we've done with the resources, is we've really consolidated resources around long-term care. We're running it as a strategic business unit, so long-term care currently has basically all of the functions within it that affect its outcomes.

In addition, we've significantly strengthened the actuarial resources that we're bring to bear on long-term care. As many of you may know, I'm an actuary running the long-term care line.

We have selected some of our best actuaries in the Company to come into the unit and work on reserving, repricing and capital management. We are underway.

It's going to be a process in terms of building the tools and doing the analysis, but we feel like we're off to a great start. And that really is the focus of the unit, continue to do the operating things that continue to produce stable results.

But a big focus on reserving and financial modeling. A big focus on rate increases and making sure that we get those in the best way possible. And then the final focus on capital management.

Thanks. And a final, any updates in terms of how on the repricing, the environment for getting rate increases through on long-term care?

Yes. Actually for the last couple of quarters, I think we've been saying that we believe the environment's getting better for rate increases. We've had great success with our last round of rate increases. We are above our planned level that we had built into our reserves.

Previously, one of the things that happened actually is that there's been some movement at the NAIC, particularly at state, that have awarded rate increases, understanding the inequity of them awarding rate increases where other states haven't. There's begun to be some internal pressure among regulators to have a more consistent approach to rate increases.

We think that's been a very positive development. We're very optimistic about the next round of rate increases that we are working diligently to get out there, that we will continue to have good success.

Great. That's helpful thanks for the comments.

Thanks, Eric.

Suneet Kamath, UBS.

Couple follow-ups on UPI. Rick, in your prepared comments you said that part of your decision to bring it onshore was that it was not producing the desired benefit that you were looking for when you originally set it up. Can you talk a little bit about what you had expected it to do, and why it wasn't producing what you thought it would?

Sure, Suneet. I'll take a shot at that.

I think that in my comments, I also mentioned it set up in 1996. So I don't have a good insight in terms of those details.

When you look at it where it is today and the environment that we're in today, there is benefit there in a sense. I think from the way we look at it, as Tom mentioned, the quality of capital, the structure, the simplicity of the structure of the Company, those benefits are outweighed by the simplicity we can have by having it onshore with a similar reserving and capital process we have for our other lines.

I think that's when we get to it. It's not dollars and cents benefit. I think it's much more about it had outlived its usefulness as a structure.

Okay. As we think about your capital generation model, the slides that you typically show us excluded, I believe, UPIL because it was just the Unum US businesses. So I'm assuming that once you bring it onshore, we're going to have to roll in what is now UPIL into that capital generation model? And I think on a year-to-date basis, UPIL is losing maybe $30 million, $40 million of statutory earnings.

My question is, am I right in terms of rolling it in? How should we think about the impact on that capital generation going forward once it's brought onshore?

Sure. I think we are getting a little bit out there, which is some of the things we'll probably talk to you about at Investor Day. I think that when you think about the consolidation of it, one, the UPIL results have a lot of factors that go into it.

It is a reinsurance entity, so there's a lot of timing differentials, different treatment of how investment income, capital gains and losses, are treated. There's more noise in there than it would be actually onshore.

If you think about that loss, I think if you're looking at $30 million relative to the overall capital generation, which has been $500 million year-to-date, it's somewhat immaterial. I probably wouldn't focus on that too much. We'll give you better insight into that as we get to Investor Day.

Okay. My last question on this was, I wanted to follow-up on Eric Bass's question. I think where he was going was to try to understand how this change might impact your prior discussion of statutory reserves on long-term care. If I go back to last quarter's call, I think you had originally talked about it as a three- to five-year timeframe before you'd need to take a charge with a starting point of 2011. I think you said with the improvement in rates, maybe we're closer to the four-year time frame.

My question, following up on Eric's question, was does this decision alter that guidance from a timing perspective or from a order of magnitude perspective? I think you've talked about a $250 million after-tax charge.

I know you're saying this is your decision to do, but how does that affect the prior guidance? Can we still rely that or is that something we'll have to address?

Certainly, Suneet. Let me clarify, we've never talked about a $250 million charge related to anything and certainly aren't going to talk about that.

What you're talking about is GAAP concepts, so when you look at the reserves that we've talked about in the past and what we're evaluating, is purely GAAP. This has zero impact in terms of our GAAP processes. This is purely a structure, a capital structure, a statutory structure, that we're dealing with here.

Those two are not correlated things in terms of one impacting the other; they're very different things. I said in my comments, to be very clear, this has no impact on US GAAP, the structuring that we're doing here.

All right. I follow-up. I thought that now that GAAP and stat LTC reserves were the same number, that changes in one would probably drive changes in the other. But I guess that's what you're saying is not the case?

That's not the case. I think the build-up on the reserve basis and how they move can be very different and have been very different.

I think that was more of a guidepost to say where they were as opposed to one change will drive another change. That's not the case.

All right. Thanks. I'll follow-up.

Yaron Kinar, Deutsche Bank.

One other attempt at the Bermuda restructuring, and then the capital deployment question. If I hear you correctly, cash generation is tracking a little higher than you estimated at the beginning of the year.

And yet guidance for share deployment has come down a little bit. Would it be fair to assume that that gap of, call it, maybe $150 million is roughly what you expect to invest as you think of re-domesticating that business unit, or that subsidiary?

Let me say I appreciate you trying to work backwards into the details, but until we actually get to the year end, we still have more details to work through. We'll give you a lot of those movements as we get there.

But when you think about capital generation and deployment, I want to reiterate capital generation has been quite good. We've been very active deploying capital, including I don't want to lose the fact that we bought back $75 million in the quarter.

I also mentioned in my comments, we expect we'll probably buy back shares in the fourth quarter as well, depending on all the factors, including whereas we mentioned last quarter, where the price is, what's going on overall in the Company. We will be buying back shares in the fourth quarter.

So when you get through all those different pieces, we'll give you what we're doing as part of the Bermuda structure. We'll also give you a view in terms of where we are from a capital deployment perspective, both generation-wise and what we expect to put back through multiple channels.

Okay. I guess I'll just have to be patient one more month. (laughter) And then if we switch over to sales for a minute, if I understood the comment to Eric, it was that there was some uptick in the focus for management teams on benefits purchasing in the second half of the year.

Do you think that's a temporary issue? Or are we now past the most severe pressure period that we saw in the first half of the year?

Mike, why don't you take that one please?

Yes, sure. Happy to do it. I'd say we did see a little bit of that, particularly in the over-50 life market where you don't think about employers have a few more resources to be able to sort through decisions on multiple fronts.

We see that up just a bit. I do expect that with things like the employer mandate being pushed out a year, that in the coming quarter and in actually, frankly, the next few quarters, we'll continue to have to swim upstream a bit, as employers and their broker advisors help them sort through their ultimate healthcare decisions.

That being said, what I would say is what's coming out of those healthcare decisions continues to be a couple of important things for us. One, the employer remaining very engaged in the overall benefits process. And the other being a constant push towards more consumer-driven benefits with more employee engagement.

That's a trend that we started to see six or seven years ago, that's been the basis of most of the investments we've made in our capabilities, is this idea of choice products, enrollment education and communication. So even as I think we're going to continue to see some short-term headwinds it plays into a longer trend that I think we're very well-positioned, both actually the Unum and the Colonial Life brands here in the US.

Okay. Thank you very much.

Mark Finkelstein, Evercore.

Maybe one last crack at the Bermuda situation. If I just look at it, nothing economically is changing. The risk is the same.

How you have to fund it really doesn't change that much, other than maybe just some cosmetic impacts of capital and reserving et cetera. In that context, should we be thinking about some easing of holding company cash positions?

Or even RBC down the road? Or should we be thinking about historical levels of margins above margins that we've been talking about?

Certainly I'd like to take that one on, Mark, in terms of how we're thinking about this longer-term. I think that when you evaluate this structure and as we talked about the simplification that we'll get as bringing this back on shore, it does give better clarity in terms of the different pieces that we have out there, the cash that we will hold at the holding company.

I'd throw into that as well, the credit facility that we just put on, as well as our RBC levels. So all those come into play and as we look forward. I think having that clarity and taking you through that is actually going to be helpful as we get into 2014 and beyond.

Okay. So no real clarity at this stage on whether we can assume reductions or changes in how you've been thinking about it?

Not the structure, and I think it's more of an outlook-type conversation that we'll have in December.

Okay. Fair enough. You should have some clarity, I think, on January 1 renewals.

So I'm curious in the light of the prior conversation about how employers are looking at the situation. Are you seeing anything that fundamentally changes your outlook on what persistency's going to look like as you head into 2014?

Thanks, Mark. We do have a pretty good line of sight, particularly towards the larger end of the market where employers are making decisions with a bit more lead time for implementation. I think on balance, actually feeling pretty good.

As you know, we've been consistently over the last couple of years, looking to modest rate increases in the 5% to 8%, mid-to-high single-digit ranges. We're having good success with that placement. Persistency's tracking well within our expectations going in. Feel very good about that.

That's the flip side of the malaise of healthcare reform, is when employers are sorting through healthcare decisions, it does add to the stickiness of existing programs. It's helped facilitate, I think, a pretty successful renewal approach here.

Pushing on that a little bit, if I think about what this line might look like when we get to Q1 2014 earnings, you've been trending in that high 80s percentile. Based on what you know today, you're not seeing anything that would fundamentally alter that to the downside?

In terms of persistency?

Correct.

Yes, I think that's reasonably safe. There's still a lot of work to be done in our core market. That's a big business for us, so we've got our heads down working closely with brokers and with clients. Service levels are very strong for us right now.

That usually correlates pretty well with strong persistency. We're optimistic but also want to be clear that we've got real work to do in placing January renewals yet to go.

Okay, fair enough. One final quick question. UK persistency on group life, been 65%. Looks like if I average the second quarter and first quarter, you were in that level for the second quarter as well. I know you're going through a pretty exhaustive group life repricing process.

Does that get better from here? How do we see that persistency level playing out? It's interesting that you actually had better sales in group life in the UK as well?

I was thinking, Peter, step back a little bit too and remind everyone what's your renewal program and repricing program is what you're undertaking actually, at this point. And to Mark's last question, to where you're seeing the sales before we get into the persistency?

Yes, thanks, Tom. If I take the sales first of all, taking the group life sales that's actually come through selling to basically expanding coverage with group life schemes. Basically we've been [excuse me] keeping basically the old enrollment, which is a pension change in the UK, means that more people are taking up pensions.

We're seeing it an uptick in group life sales off the back of that. Pretty comfortable about the profitability of the new business we're writing on the group life schemes, the new stuff coming in.

Switch business does remain competitive, so we happen to be successful in the large case markets. I think that's going to continue for another while.

We're waiting for some of our competitors to digest that business. As that indigestion problems perhaps that will come back at a more amenable economic return from our perspective, but that would take a while to go through the system.

In terms of renewals, thanks, Tom. What we're doing there is, we're putting double-digit rates through the book.

So that is either getting the rates through, so we're repricing that to our appropriate hurdle returns. Or we are losing, particularly at the large end, some pretty large schemes.

Again, to our view it's pretty irrational pricing in general that's taking this. But our intention, really, is to come out of this with a smaller group life book, but a more profitable group life book. That would be the intention.

I think the persistency you're seeing at the moment will continue this year. We'll see a bit of an uptick next year, as because we've got through more of the book. It's going to remain at lower ends of the long-term range through 2014 as well.

Okay. Thank you.

Jimmy Bhullar, JPMorgan.

On the buybacks, I remember at beginning of the year you had mentioned something about a $500 million number. You bought back a decent amount of stock, but still lower than what you had expected at the beginning of the year.

Wondering if you could talk about what's changed since then? Is it the higher stock price? Or is it other things that are dissuading you from buying back stock, as your stat income's been fairly healthy.

And then secondly on UK margins. They have been pretty stable the last few quarters.

How much of that is better pricing and loss transverses the benefit of the reinsurance transaction? And also what your expeditions are for renewing the reinsurance contract next year?

Rick, you want to start with the stock repurchase?

Yes, certainly. Let me give you a little bit of a different angle on it, Jimmy, too.

When you go back to the beginning of the year and you look at our capital generation model, which has actually been intact for the last several years, we've talked about good steady capital generation and redeployment in multiple meetings. It's putting it back into our business.

It's actually looking to acquire, which we haven't talked too much about, but that's certainly a place where we'd like to deploy capital. Raising our dividend, which we've been doing very consistently, and then share buybacks.

We've talked about $500 million of capital generation, and I think given other choices and particularly given where our stock price was going back even earlier in the year, share repurchase was a perfectly sensible thing to do at quite good volumes. As we've gotten through the year, we've seen other opportunities to use that capital, to be redeployed wisely.

Whether that's retiring some of our debt, whether that's solidifying the pension, whether that's continuing to buy back shares. I'd say when we were dissuaded from capital, I think we just had other choices that we can choose to put that capital to work. Good choices, good for the overall Company, good for our balance sheet, and we'll continue to do that.

I think that the share price played into that. I think Tom talked about that last quarter pretty extensively. But there are other uses of that capital that we certainly will put to work.

We don't feel dissuaded about share repurchase. I'd remind you that $75 million that we bought back this quarter is 1% of our outstanding. They're meaningful numbers that we continue to buy, and we'll continue to do that in the future.

And Rick, if I could add to what you just said, I don't think any of the way we think about the options that are available to us have changed at all actually. Those are the same options that have been in place actually since we began the aggressive share buyback program 5 or 6 years, over which time we have purchased over 25% of our shares.

Those options are the same. We're always looking at relative value of each of those choices. As you can see, we've re-balanced a little bit those priorities, over the course of time based on prices and other considerations.

But those options are still the same. No change there.

And as Rick said, we'll certainly provide a little bit more feedback on that at the upcoming investor meeting. Jimmy, as it relates to the UK question, Peter, you want to touch on that in terms of just not just the margins, but a little bit of the recent experience? And then how that affects both margins, but also some of your thinking about reinsurance?

Yes. Thanks, Tom, thanks, Jimmy. So in terms of the group life book, we're getting through the renewal program.

So you are seeing the benefit of some of the repricing and some of the shedding of the less profitable schemes. Definitely some of that's coming through.

There are two aspects to the reinsurance. One is the retention level, which we brought down.

So any claim we brought down taking it from GBP1 million per claim to GBP0.5 million pounds. That's been very helpful during quarter three.

We saw a number of large claims come through, which the reinsurer took their share of. That's helped manage the volatility and made the margins were stable. There's also in elements which is a quota share, which is whilst we're repricing book, what we found in the marketplace the reinsurers were -- their appetite for this and what the returns they wanted on it, was competitive relative to where we thought the book was priced.

We took that advantage out in 2013. We are currently going through the renewal program in 2014 and looking at that. I expect to retain a bit more, but we'll probably still have some of the quota share in place for 2014, given what we're seeing on quotes at the moment.

Thank you.

Eric Berg, RBC Capital Markets.

While I understand your desire, and you've made clear that you're not going to get into the details of this movement of the Bermuda operation back to the United States. One thing to me seems apparent and I just want to check whether you agree that this is apparent. Because Bermuda accounting is essentially the same as US GAAP accounting, and because US GAAP accounting tends to be more generous, aggressive, than statutory accounting, doesn't it stand to reason we don't need to get into any discussions I don't think, that the statutory reserves that you will be establishing in the United States will be higher than the effectively GAAP reserves that you have established in Bermuda?

And that rather than -- and that therefore there's going to be some hit to your statutory capital in the United States, on an enterprise-wide basis? You will have less statutory capital and more reserves than would have been the case if you didn't make this move, given the difference, given the more conservative accounting in the United States than in Bermuda?

Doesn't that stand to reason? Isn't that obvious?

Yes, Eric. I won't repeat everything you just said, but I'd say what you say very much holds true. I think that's why when we talked about the structure we said that we take you back to, we'll be in the ranges of our capital outlook.

But everything you said is true and logical. We'll take to how that impacts us and the magnitude of those when we get there.

I'd just take you back to the answer is, it will be in line similar to our reserving and capital processes we have at other companies in the US. And we will also be within the ranges of capital outlook we've put out there, while still having the ability to buy stock.

Great. My second and final question could be directed to Jack or whomever feels it's appropriate for that person to answer. It has to do with long-term care.

Because Unum has stopped writing new business, both on the group side and the individual side, I would think that you would be disadvantaged, vis-a-vis regulators in the sense that I would think regulators would say -- well, you know, these Unum guys, they sold the business, they did their best to get the product pricing correct, it's under-priced but it's not our problem. And you don't have a lot of leverage because you can't threaten to quit the business, because you already have stopped writing new business.

Why isn't that the case? Why have you been -- I'm a little surprised that you describe your repricing results as excellent, because again, I would think regulators would say -- these are old people, Unum made a mistake, that's his problem, not our problem.

I would think that's how the discussion would go. Why hasn't it gone like that?

It hasn't gone like that because we actually have the results in our repricing efforts. Again, we're ahead of plan in our actual approvals. I think there's lots of reasons.

I think that the flip side of that is some regulators are saying -- look, you can make it up on new business pricing, but given the rates that you want on new business, and are using that as an excuse not to approve rate increases on the old business. So that goes in both directions.

We have not found that being in a Closed Block status has affected our ability to get rate increases. I think regulators understand that if you are in a Closed Block status, rate increases is your only option. And that they're aware of that, and empathetic to it.

Conversely too, Eric, just from the Company point of view, I'd say, Jack, actually the fact that we don't have existing customers we're trying to sell business to or brokers we're trying to sell through, actually makes it a lot cleaner as a decision, actually as a Company. Because we actually we can actually be very specific to experience and allow the rates to just fall out of that experience, as opposed to thinking about the fact that we are also trying to sell new business at the same time.

I understand. That helps. Thanks very much to both of you.

Thanks, Eric.

Steven Schwartz, Raymond James.

Mostly asked and answered. Quickly, maybe I missed this, where is the Company? Where's the UK in terms of repricing the group life business? What percentage of book has been repriced?

Peter, you want to touch on that briefly?

Yes. So briefly, we are about three-quarters of the way through. So we'll be finished at about midway through 2014.

Okay. That's it. Everything else was asked. Thanks.

Robert Glasspiegel, Janney Capital Markets.

Quick question. Your RBC ratio looks like it's projected to be about 12 BPS below where it finished in third quarter at year-end, if you take the middle of the range. Does that factor in the Bermuda impact? Or are there some other moving parts and dividends that are driving that decline?

Yes, Bob. Just to give you a sense that that range has been consistent all along. That doesn't give you a different view that we expect it to come down or move up.

And I take you back to a different structuring pieces we've been talking about a fair bit on the call, in terms of there will be movements and changes relative to that. But we expect it to still be in that range on the overall.

Okay. Just hammering Mark's. Mark said he was last question on Bermuda. I guess I'm going to be the last question potentially.

The Bermuda transaction, did that at all impact the buyback? You mentioned pension and bonds and stock price as other use. Was that at all a factor in keeping a little bit more capital?

I think when we look at it, in terms of the very good capital generation we've had, there is a use of capital that we've talked about with Bermuda, without being too specific. But I think that that's fair that that will be a use of our very good capital generation that we had this year. And we'll get more specific in terms of what that looks like in December.

Okay. So on the margin it could've been a consideration of buyback?

Yes. I think it's very much a consideration on buyback.

Okay. Thank you.

Jeff Schuman, KBW Investment Research.

I wanted to go to the UK first. The business has been resized a bit, premiums, local currency are down, I think 18% year to date. Is there any slight benefit in terms of being able to maybe execute a bit of capital in the UK, given that it's now smaller?

Rick, do you want to touch on that?

Certainly. Jeff, when you look at the UK, that reduction in premium has been purely from the quota share reinsurance that Peter mentioned in his comments. That's a one-time transaction.

We did it on a very short basis, so it was actually out there over a year. It's something that -- we did free up capital as a result of that, but we didn't repatriate that capital at the moment.

Our UK business, we don't talk often about the UK capital generation. It's been very consistent, very steady, very similar cash flow characteristics that we have in US.

And they've been very consistent dividend payments that have been upstreamed. We just didn't remove the excess capital that was created there because we wanted to have the flexibility to adjust that reinsurance structure at the end of this year into 2014.

All right. I know Glasspiegel declared an end to the Bermuda questions, but I don't think I'm going to yield to his authority on that (laughter) so -- One basic question.

If part of the goal here is simplification, is one of the options to do the ultimate simplification and actually recapture the reinsurance? Or are there some basic reasons why you actually need to have another entity?

Jeff, that's a great question. I think when look at evaluating our Bermuda entity, and that's one of the reasons we talk this. It's been a structure that's been in place for quite some time.

A pure recapture is not a simple exercise to go through, so it is an option out there. It's not one that we preclude.

We still could get to that point in the future. But I think that we won't be doing that as part of this step, because of some of the complexities that are built into the structure.

In the future that's very much could be an option. And I think the important part about that, too, is because it will be on a similar basis with our other US businesses, that would be from a financial perspective, basically a non-event.

Okay. And then, I know this is a fairly basic question here. Obviously you're looking at different options, but is it reasonable for us to assume that many of these options might involve a some third-party participation? Whether it's third-party reinsurance, letters of credit, third-party other financing, is that a reasonable assumption?

Rick?

I think that I'd highlight it a little bit different. Those obviously options to us.

This will not look so much like structures you've seen around the industry, that have different letters of credit and financing. This is going to look pretty basic, like a captive reinsurance.

And quite honestly, Bermuda today looks like a very basic reinsurance company. I don't think will look like many of the other structures that you've seen out there.

All right. Thanks a lot.

Thanks, Jeff.

Sean Dargan, Macquarie.

Following up on Jeff's question about why you aren't recapturing. I think there's going to be continued noise around the use of captives.

There's something on the Freakonomics blog yesterday about shadow insurance. Anything changing your thinking about the use of the South Carolina and Vermont onshore captives?

I'd start with our South Carolina captive, which is mainly our Tailwind reinsurance Company. We did buy in the bonds from that.

From a structural perspective, that is now a simplified reinsurance structure we have in South Carolina. Then our Northwind transaction which sits out there is still performing very well. We have no need to bring in the bonds that were issued on that in 2007.

I think it's something straightforward, so no anticipation of changing that structure at all. And also from a reserving perspective, that's reserved on a similar basis that we do in all of our other US entities as well. I don't see much scrutiny there.

Okay, thanks. Just one final question. There were some high-profile employer groups who put large groups of their employees on private exchanges run by insurance brokers. I'm wondering if you participated in that and if you plan on doing so?

Unum is not a household name among consumers. And I'm wondering what your competitive advantage is on a private exchange?

Mike, why don't you take that one from Sean?

Yes, happy to, hello, Sean. We mentioned it earlier, but exchange is very much a hot topic in the market. We very much see them as the latest manifestation of a long-term trend towards more employee-driven benefits.

That really has been the thesis that our investments and capabilities have been based on. And so to your specific question, having made some pretty big investments in employee-choice products and technology, people and process, to facilitate empowering employees has put the Unum and the Colonial Life brands in a really good spot in the marketplace.

As these private exchanges are coming on, actually the demand for us to be involved has been pretty good, pretty consistent. It's resulted in us being connected into 40 plus different exchange mechanisms. I think also importantly, it's allowed us to play in those and on those exchanges where the employer remains very much involved.

So to your specific question, where we've seen a lot of the activity on our fronts and in our product lines, the employer wants to stay involved. There is an element of funding that they're providing in many cases. So that actually positions us pretty well, given a very strong brand amongst the brokerage and employer-client community.

And if I could, Sean, just to add a little to what Mike said. The themes that you're seeing today in terms of more focus on consumer as in giving people choices, didn't just start today or didn't start as part of the Affordable Care Act or exchanges or the government website. This started a decade or so ago, moving from a defined benefit to a defined contribution environment.

And frankly, we've realigned our resources and investments very much to participate in that. If you look at our group business today, the vast majority of our group sales actually have some level of employee contribution.

If you look at our voluntary benefit business, which is both Mike's and Randy's voluntary business, the earned premium compound annual growth rate over the last 8 or 9 years is about 7%. A lot of that growth is frankly coming by providing GAAP products.

Let's use one example. High deductible health plans, I think, have doubled between 2010 and 2013. That's presented great opportunities for our group hospital indemnity products, our accident products, our critical illness products, our medical bridge products.

As Mike said, there's an awful lot there that we've already begun to see where there's a way to play very effectively there in that consumer theme. Again, you're right, our name may not be as widely known as some brands, but we are very effective in getting, with the employers cooperation, in front of the right people at the right set of products. And the benefit communication tools we have actually helped accelerate that.

As Mike said, we feel pretty good about the outlook here. Obviously healthcare reform and exchanges and other things are going to be a topic that we're going to have to deal with here in probably the next year or so. We're finding very effective pockets in there to go and build with both of our two voluntary franchises.

Thank you.

And with that, I think, operator, we'll have time for one last call.

Tom Gallagher, Credit Suisse.

Just a question about back out to beat the dead horse on Bermuda. How should I be thinking about what resources are available to you to fund it? And I realize you're not prepared to answer any questions to size it, but I know you mentioned the credit facility a few times.

Is that something that might be used, UK capital? Or would it just be existing HoldCo cash current statutory surplus that would be used to fund it? Statutory surplus in the US that is?

Tom, that's a fair question. I should highlight, the credit facility that we're highlighted here has nothing to do with the Bermuda process. We thought it would be a good piece of structure to have in the Company, so it something we haven't had for a couple years as we've sat with high cash balances.

But I wouldn't equate these two at all from that perspective. My UK comments around dividends there is just to remind people that it's a very, very strong high-margin operating enterprise. I'd take those two out of the discussion in terms of how we're looking at the process we're going through, of making sure we're within the capital range or the outlook. I take it back to your two points, which is holding company cash we're sitting on and then just statutory generation and capital that we have in our US entities.

Got it. And then that entity has lost a little bit of money for the last few quarters. When you recapture that, would you expect the earnings pattern to change there? Or are you still going to be using, in all likelihood, modified GAAP accounting because it will be in the captive structure?

I'll try and answer that. It's a similar flavor to an earlier question, which is we have had some losses in that entity. If you look back over many periods of time, it's fluctuated a fair degree.

Our reinsurance structures can be more volatile, just by the nature of how the reinsurance treaties work. I think as we look forward, that's going to be woven into our overall capital view.

I think Tom, you highlight a point which is important is, as we've seen on this call, the Bermuda entity has caused a lot of questions. Quite honestly we don't need to be answering those questions, because it is a small piece of our structure. When we have it back on shore in a similar level of reserving capital as our other onshore entities, we hopefully won't be discussing those details in the future.

And this is why I think, Rick, we want to get ahead of things. This has obviously been a focus of the industry and others within the industry and it will continue to be. I think by doing the steps and taking the actions we've begun to share with you today, we're getting ahead of those sorts of things.

But do it from a position of strength, because we do have the financial flexibility. And we do have the sufficient cash flow and the cash generation that's, frankly, allowed us to be in this kind of position, I think, as you said, Rick, in your comments, we can do all that and not do it outside of the range that we provided in terms of capital guidance, nor actually affect our ability to buy back shares this quarter.

No, I applaud you guys for doing that too, from a transparency standpoint. And my last question relatedly is, so the entity that will then be filed going forward, will we have full access? Will that be -- so that will be a US-domiciled entity that we can then have a full set of blue books that we can then evaluate?

Tom, we haven't gotten to that point. We'll have to evaluate a lot of different things here as we get to year end and all the details of that, which still have process steps to go through.

Hopefully we'll have a better view of that Investor Day. But there's still a lot of work to do between now and then for our team.

Okay. Thanks.

Good. Thanks, Tom. And thanks, all of you, for taking the time to join us this morning and look forward to seeing many of you at our investor meeting in New York on December 16. This completes our third-quarter earnings call.

This does conclude today's conference. Thank you for your participation.