普登 (UNM) 2014 Q4 法說會逐字稿

Good day everyone and welcome to the Unum Group fourth quarter 2014 earnings results conference call.

Today's conference is being recorded.

For opening remarks and introductions, I will turn the conference over to the Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead, sir.

Great, thank you, Debbie. Good morning everyone, and welcome to the fourth quarter 2014 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 SEC and are also located in the sections titled Cautionary Statement Regarding Forward-looking Statements and Risk Factors in our annual report on form 10-K for the fiscal year ended December 31, 2013 and our subsequently filed forms 10-Q. Our SEC filings can be found in the Investor section of our website.

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 in our statistical supplement on our website, also in the Investor section.

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

Now I will turn the call over to Tom Watjen.

Thanks Tom, and good morning everyone.

The fourth quarter was a good one for the Company, with operating earnings per share excluding the special items outlined in our release of $0.90 per share, an increase of 5.9% over last year . This brought our full-year operating earnings per share to $3.55, a growth rate of 6.9%, in line with 5% to 10% outlook for growth we provided coming into 2014.

These results largely reflect the positive operating trends we've been highlighting throughout the year, that is strong sales momentum, accelerating premium growth in our core businesses and stable risk experience. This quarter, we also to the appropriate actions necessary to deal with the impact of low interest rates on our businesses, particularly long-term care, and we will cover that in more detail in a moment.

But for now, let me highlight a few points before turning things over for Rick for his more detailed remarks. First, we again saw excellent sales results across all of our core businesses this quarter, continuing a trend we have been building throughout 2014. Unum US sales increased by 25% for the quarter and 21% for the full year with strong results across all product areas and all sectors of the markets we serve.

Likewise at Colonial Life, sales this quarter were also strong, increasing 15.7% for the quarter and 11.6% for the full year, again with solid performance across all market segments. And finally, Unum UK sales continue to rebound this quarter, increasing 27.8% for the quarter in local currency. These solid results across all three of our businesses reflect the strength of our competitive position in our market and today's generally more favorable conditions .

Second, these strong sales trends over the past few quarters, combined with improved persistency in most of our business lines and our ongoing focus on managing renewals in our in-force block has resulted in accelerated premium growth. For all of our core business segments combined, premium income grew by 5.7%, the strongest we've seen in several years, and each business contributed.

Unum US premiums grew 5.8%, Colonial Life increased 4.2% and Unum UK increased 10.5% in local currency. This growth has not come from any meaningful economic recovery, but instead is primarily the result of adding new customers and expanding our relationships with existing customers.

And finally, we continue to see strong, stable operating margins and returns on our core business segment. These results up us maintain the financial flexibility needed to both support our business needs, including support the growth we're having, while also returning capital to our shareholders .

Our primary challenge and one faced by all those in our industry is the present low interest rate environment, which we don't expect to abate anytime soon. This quarter, we took steps necessary to manage through this environment, both with the Closed Block LTC reserve action, as well as the new claim reserve discount rate adjustment in our Unum US LTD business. I would add that we do this from a position of strength with industry-leading operating margins and significant financial flexibility.

Now before I turn the call over to Rick, I wanted to take a moment to release on the release issued yesterday announcing the leadership changes here at Unum. After 12 of the absolute best years of my life serving as the CEO of this company, I have announced that I will be retiring at this year's annual meeting.

This is something we all are well prepared for as our board and leadership team has spent a considerable amount of time on succession planning over the last five or six years. I'm very pleased that Rick McKenney, who as you know is our CFO and internally chairs our operating committee, will become President and join our board April 1 and will succeed me as CEO at our annual meeting in May, and that Jack McGarry, currently President and CEO of our Closed Block, will succeed Rick as CFO on April . We have an excellent plan in place to fill Jack's current role as head of Closed Block, which obviously remains a critical area of focus for the Company.

The board and I have great confidence in Rick, Jack, and our whole team, and I can assure you that we will not miss a beat. It will be a very smooth transition, and I step back from active management knowing that Unum is in good hands and poised for even better things ahead.

Now as for me, the board asked me to continue as part of the board for the next two years and to assume the chairman's role at the annual meeting. My focus is on fulfilling my new role as chairman and helping to assure we have continuity at both the board and management levels. I am happy to answer any questions you have later, but for now, let's get back to the discussion of our strong fourth quarter and full-year results.

And for that, I will turn things back over to Rick.

Thanks, Tom, and thanks for the comments, and I very much look forward to the opportunity.

As far as our investors are concerned, I expect a very smooth transition. You can also expect a continuation of the execution on the strategy which you have become accustomed to with Unum, which is one of disciplined growth.

Let me turn back to our discussion on what was a very good quarter. I will start first with Unum US, where in total fourth quarter operating earnings declined by 2.2% to $212.4 million with favorable premium growth that Tom mentioned offset by lower net investment income and our change in discount rate that we talked about. The overall benefit ratio for the segment was stable at 71.3%, which we will dissect by each business line.

Operating income in our Group Disability business declined to $66.7 million from $68.9 million a year ago. Premium income increased by 5.7% on strong sales and improved persistency. But the benefit ratio increased to 83.7% in the quarter from 83.2% a year ago and 82.1% in the third quarter.

As we indicated at our investor meeting in December, we reduced the new claim reserve discount rate in our LTD line in the fourth quarter by 50 basis points, causing a reduction in operating earnings of $6.6 million and elevating the benefit ratio by 1.2%. Clearly today's low interest rate environment was the driver of this decision and is also the driver of the lower net investment income as the portfolio yield continues to decline given the lower new money investment yields.

While the impact of lower yields was offset somewhat by higher miscellaneous net investment income this quarter, the interest rate environment continues to create ongoing pressures. As we discussed previously, we manage this impact by gradually repricing our inforce business through the renewal process, which we will continue to do in 2015 and also through pricing adjustments in new business. From an underlying risk perspective, we did experience slightly higher claim size in the fourth quarter that was consistent with our longer-term expectations and experience.

Group Life and AD&D results also declined slightly year-over-year . Premium income growth continues to accelerate, increasing 6.7% in the fourth quarter. But the benefit ratio was slightly higher at 70.8% compared to 70% in both the year ago and previous quarters.

In the supplemental and voluntary lines, operating earnings were relatively flat at $85.3 million compared to $85.8 million year ago. Premium income increased 5%, while risk trends in both lines were generally stable. So overall despite the pressure from lower investment income and the discount rate adjustment, it was a solid quarter for the Unum US Segment, with operating ROE remaining in the 13% to 14% range, well above industry average in the group business.

Looking at Unum UK, operating earnings were GBP24.1 million for the fourth quarter, up almost 9% from the year-ago quarter. Our risk results were solid in both the Group Disability and Group Life business, which helped the benefit ratio improve to 68.9% this quarter compared to 73% in the year-ago quarter. The margins remain in very good shape for Unum UK, which generated an operating ROE of slightly over 18% for the year.

Colonial Life continue to generate strong, consistent results with operating earnings increasing 7.1% in the fourth quarter to $74.3 million. Claim experience remained generally stable with the benefit ratio at 52.3% for the fourth quarter compared to 52.4% in the year-ago quarter.

Net investment income benefited from favorable miscellaneous net investment income in the quarter. The underlying profitability of Colonial Life remains excellent, producing an operating ROE in the 16% to 17% range for both the fourth quarter and the full year.

Rounding out the enterprise with the Closed Block, with the completion of our reserve review in long-term care, we booked to reserve strengthening in line with the expectations we provided at our investor meeting in December. The addition to GAAP reserves was $698 million or $454 million after-tax.

The assumptions behind the change are consistent with what we discussed at our meeting back in December, with the net effect of the charge largely reflecting our expectation that interest rates will remain low over the next four to five years before gradually returning to more historic levels. In addition, the statutory impact from our year-end LTC reserve work was $57 million. This is included in our capital position at year-end 2014 and reflected in our 2015 capital plans.

Excluding the impact of the reserve charge, operating earnings for the Closed Block were $30 million in the quarter compared to $26.8 million in the year-ago quarter . Risk results were generally in line with our long-term expectations.

In the LTC block, the interest adjusted benefit ratio was 89.6% for the fourth quarter, towards the higher end of our 85% to 90% range due to unfavorable mortality that we saw in the quarter. For the full year 2014, the interest adjusted benefit ratio for long-term care was 85.9%, reflecting the more favorable results we experienced in the Block earlier in the year. In the Closed Disability Block, we saw much better performance in the fourth quarter , primarily from lower claim incidence after experiencing a higher level of volatility than normal in previous quarters, with the interest adjusted benefit ratio at 81% for the fourth quarter and 83.6% for the full year 2014.

I will move now to our sales and growth trends across the Company, and as Tom highlighted in his remarks, we are very pleased with the results this quarter and for the full year. In Unum US, total sales increased by 25% in the fourth quarter and 21% for the full year, a very strong set of results. The growth was well-balanced between growth in the core Group market under 2000 employees, which increased by 23% this quarter, and our large case business which increased by almost 35% .

It's important to note that the bulk of our large case growth came from existing customer relationships where our understanding of the case is much better. The growth was also well-balanced by product line, with LTD sales increasing 39% on strong growth in the core market segments, short-term disability increasing 10%, and Group Life and AD&D increasing by almost 27% on opportunistic sales in the large case market, primarily to existing customers.

In addition, sales in the voluntary benefits grew by 21% and by 3% in the individual disability line. In addition to the strong sales momentum, our persistency for Unum US remains very encouraging, increasing to 90.5% for our Group benefit lines, which include long-term disability, short-term disability and life, and for the full year 2014 from 87.7% from the full year of 2013.

The net result combined with our ongoing renewal pricing strategy generated premium growth for Unum US this quarter of 5.8%, the strongest rate of growth in several years. I'd also emphasize Tom's comment that we continue to see only slight improvements to premium growth from economy and employment trends.

Likewise at Colonial Life, we again had very good sales results in the fourth quarter and for the full year . Sales in the fourth quarter increased by 15.7%, primarily driven by growth in the core commercial and public sector markets. Full year 2014 sales increased by 11.6%, the strongest annual rate of growth since 1990.

New and existing account sales growth were both strong as we focused on recruiting and the development of quality sales reps, along with continually emphasizing reworking our existing account base. Persistency for Colonial Life primary product lines was stable to slightly higher for the year, helping to drive overall premium growth in the fourth quarter of 4.2%, the highest quarterly rates in 2012.

Finally in the UK, sales increased by almost 28% in the fourth quarter following an increase of 15% in the third quarter. Group disability sales continue to build momentum while our Group Life sales are reemerging off of low results while we are repositioning that business for better profitability. Also we're seeing much better levels of persistency in 2014, persistency for Group disability improving to 90.1% from 82.2% the year before in and persistency in the life block improving to 76% from 66.7% the year before.

Overall it was a very strong quarter -- encouraging quarter for our growth trends in our core business segments, and importantly, we're also happy with the pricing we're getting on the business we're selling today. As I said earlier, we are continuing to see some evidence of improved top line growth for better employment and economic trends. However, that benefit does not appear to be accelerating.

My comments on our investment results mirror my comments from the past several quarters: that is, continued solid asset quality for the portfolio, but continued declines in our portfolio yields as new money investment opportunities remain difficult. While we remain disciplined in our asset selection, we also remain disciplined in balancing the decisions we make on discount rate changes and associated pricing actions. Our move this quarter with our long-term disability business reflects that discipline as we put in place a 50 basis point reduction with an eye towards maintaining a healthy interest margin in their reserves.

Looking at capital management, we estimate that the weighted average risk-based capital ratio for our traditional US life insurance companies finished 2014 at just over 400% and our holding company cash and marketable securities was $575 million. This comes from statutory operating earnings of $618 million for 2014 that are within our range of expectations.

Wrapping up, I want to affirm our 2015 outlook for growth in operating earnings per share in the range of 2% to 5% range. I wouldn't say that with a sharp move down in rates we've seen since our outlook meeting it would pressure us to the lower end of that range, but we will have to see how that plays out in the coming months.

Also in closing, I'd like to remind you that as of January 1, we are adopted new accounting standards for investments in qualified affordable housing projects, which will reduce earnings by $0.04 in both 2014 and 2013 restated. We will post the details on our website by next week. So overall, we would summarize a very good quarter with an improving topline.

And let me turn the call back to Tom for his closing comments.

Thanks Rick.

Before we move to your questions, I will close by just repeating that we're very pleased with our overall results for this quarter and for 2014. Our strong sales, persistency in premium growth, along with stable risk experience, set us up well for the future . Without question, the current level of interest rates is challenging, but we're confident that we're taking the necessary steps to manage effectively in this environment.

Our focus hasn't changed. We continue to properly grow our business, to maintain strong margins through our disciplined pricing, underwriting and expense management and to generate capital which we can continue to use to support the needs of our business including investing where necessary to support growth, but obviously also continuing to return capital to our shareholders.

This completes our prepared remarks. Debbie, let's move to the Q&A session.

(Operator Instructions)

Steven Schwartz, Raymond James.

Can you hear me?

We can, yes.

Congratulations, Tom and everybody. I want to talk about -- I guess Rick, I should probably know this. In the statutory operating earnings that you show in net earnings in your capital, is First Unum included in there?

Yes, First Unum is included in that.

My understand -- in the investor day, you talked about $150 million stat charge for First Unum for LTC reserves. I think it came out a little bigger. How do you get from $149 million that came from operations with that stat charge win First Unum?

The stat charge we have in First Unum is a direct move to capital, so it doesn't flow through the capital earnings that you'd see in First Unum. Although it is included in those results, that actually movement in reserves floated straight through the capital line.

And then following up, the non-First Unum stat charge, the $57 million, it was my impression I think on investor day that a stat charge was unlikely and that there was significant margin if interest rates stayed where they were for a long time. Do we take away from this that that is not the case?

Jack, do you want to pick that one up?

Yes, we talked about it on investor day that this was largely a GAAP charge. As we work through and set all the reserve numbers across the different entities, this charge emerged.

My view is it really doesn't change anything we said at investor day. We're still very comfortable with our GAAP reserves.

We still have a decent margin between our GAAP and staff reserves. All of these charges, First Unum and the $57 million, were built into our capital plans for 2015 and so were reflected in our estimates for share buyback and free cash flow generation.

Jack, one more if I may on this topic, and then I will turn it over. The $57 million, was that claims reserves or AOR?

It was both.

It was both. Okay. Thank you guys.

Jay Gelb, Barclays.

Good morning and congratulations from us as well to everyone in the transition. I just had a couple of questions on that last night.

Could you give us some perspective on why announce the transition now? I know it wasn't related to the fourth quarter charge, but if you just clarify that, it would be helpful.

And I do run the risk, Jay, of over answering a little bit here because I almost have to step you back a little bit. We as a company have spent an awful lot of time on leadership development, succession planning actually for a number of years, and that's not just the management team, but the board has been very heavily engaged in that process. And while it's maybe not glamorous work, it's essential if you're going to have good continuity and continue to maintain the principles that are important to the Company, which we believe strongly in.

Actually if you look back over the last couple investor meetings, you would've seen Windows into our thought process. Back in 2013, as you may recall, Kevin McCarthy announced his retirement. We were going through a good smooth transition of that responsibility to Mike Simonds. This past year we talked about Randy Horn stepping out of the Colonial CEO position and a smooth transition to Tim Arnold.

I guess my point is this has been a continuum of work that we as a management team and a board has done. And obviously over the years, the succession of the CEO has to be part of the discussion with the board as well. In this case, it wasn't about age or health obviously. It really was more about when it just felt right.

And just the three things that I think were important in my mind was when it just felt right, or number one, feeling good about the leadership team and having a leadership team in place that has plenty of runway still ahead and that can run this business very effectively for the next 5 to 10 plus years. And obviously we feel very strongly that's the case.

The second thing is where the Company' is on a good trajectory, and not just one quarter or one year, but an extended period of time with solid performance. I think some of us feel very strongly that's been the case.

And then lastly, how do you make the appropriate exit after having been in the role for 12 years, and that's where I think being able to find some way to stay connected through my board activity was a part of that discussion. I think the point is this is a continuum. It's one we've been heavily engaged in now for five or six years.

There's nothing magic about this particular day other than feeling as though all of the stars are properly aligned. And again, I feel very good about what we announced yesterday. And as we all said in our comments, we're going to have a very smooth transition of leadership.

Thank you for that. On the topic of fourth quarter, sales growth again was particularly strong year-over-year. I'm just wondering if you're 2015 sales growth outlook might prove conservative if any of that dimension continues into this year.

Yes, it might be good to go business by business, if we could, Jay, because obviously the fundamentals in each business differ a little bit. But maybe Mike could speak to the Unum US sales outlook.

I think the bottom line, quick answer Jay, is the guidance is still good guidance. We had a line of sight to what the pipeline for fourth quarter looked like when we established that. I don't see big changes there. Just as a quick refresher, we do anticipate good solid 6% to 8% sales growth across most of our segments, in particular the core market Group insurance segment and our voluntary benefits segment.

The offset to that to a degree is the large case market. We had a very good year in 2014, but we do view that as an opportunistic place to write business. We saw rates harden a bit as some competitors needed to reprice their books.

We certainly have the capacity and desire to repeat 2014 in the large case market if we can do so within our disciplined pricing parameters, but our business plan isn't built around that. We're anticipating a bit of a decline to the tune of about 10%, and the net is that sales guidance around 2% to 4%, which I still think holds true.

We felt good about what we bring to market. It's more where is the market itself is going to be, and that's a little bit of a wildcard.

Tim, do you want to touch on the Colonial Life?

Sure, we feel very good about the results that we produced last year. As Rick mentioned, it's the highest growth rate in the Company since 1990.

We feel great about the market conditions overall. We feel good about our sales team.

We feel great about the value profit we bring to the market and the recent activity there. Good progress across all of our market segments, but we still feel comfortable with the range we've given before of 6% to 8% on the sales side.

Good, thanks. Peter, just lastly on the UK?

Similar to Mike really, I think in terms of 2014 we actually outperformed a little bit in the fourth quarter. We had a large one-off transaction which gave us a nice clean through around a claims buyout, which gave us a bit of a following wind for that fourth quarter. So it was a little bit better than we expected.

When I look at the sales outlook, we had 7% to 9% in 2015. Still looking at that, I think that's still challenging particularly given the interest rate environment where our discipline and what we've done as far as we continue to put rates through. It depends on the competitor reaction on that. I feel that's good today.

Thanks so much.

Suneet Kamath, UBS.

Thanks and again congratulations as well to the team. Just wanted to go back to the Unum US LTD sales growth, I think it was 25%.

I know you guys manage the pricing of new business relative to the discount rate. But I just wanted to confirm that the discount rate adjustment that you are making here in the fourth quarter, was that already reflected in the pricing that you put out to achieve this 25% sales growth rate?

Mike?

Yes, so we would -- if you think about the sales cycle depends on the market segment that you are in. But if you are in Group insurance, you think about a sales cycle in the three months range.

Where we see interest rates three to six months back, that's where sales are coming on. Them we feel actually very good work and Rick made it in the opening statement, feel very good about the pricing level of new business as it's coming on.

But just as Peter was saying, as we look forward into 2015 and we talked about this in our guidance meeting, we're going to move new business rates up. We have been thinking low to mid, and I think probably mid is better in terms of what happened with interest rates over the period of time since the end of last year.

Again, feel good about the business that's coming on. We will move it up again, and it will depend a bit on the market and the market conditions as how much that slows sales growth. But again, pretty good about where we are at and the ability to price new business and to renew business over the next year or two to where interest rates are.

Okay, thanks. And then I guess on Group disability and the loss ratio, I think there was a comment in the prepared remarks about seeing higher claims, maybe relative to the year ago. I just wanted to get some color in terms of what you are seeing and where it came from and whether or not you expect that will persist going forward.

Mike?

Sure, we saw a little bit of volatility in the average size of new clients, but actually pretty much within the long-term expectation. Other key factor, submitted incidents bounced around a little bit quarter to quarter, but paid incidence has been very steady.

And then just recovery performance offsets have been rock solid. I'd say overall we're actually pretty happy with that continued consistency out of the risk line for LTD.

Okay and then just last one for me on your capital generation model. I guess for Rick or Jack, if sales are at a level that's persisting here, the $150 million of capital uses that you guys talked about between interest expense and growth funding, should we still expect that to be a pretty good number at these sales levels, or could there be some upward pressure in terms of capital requirements if growth remains strong?

Great, thanks, it's Rick. That's a very good question, and we are seeing sales results. And I'd go back to some of the things we talked about from the overall capital respective.

The first place we want to put our capital is back in our business. So we are doing that, and I think we're very happy about the premium growth.

I would tell you that where we sit today, we don't see a noticeable difference in terms of how that impacts the capital plan. If we continue to grow at these types of rates, you heard we were a little bit more metered as we look out over the course of the year, you might start to see some of that.

That is a situation that we want to have and actually put more capital back into our business. But as we sit here today, I don't think that alters our capital plan.

Okay, great. Thanks guys.

Mark Hughes, SunTrust.

Good morning and congratulations, Tom. The voluntary benefits sales there are quite strong. How does that fit in, or is there a connection with the economy picking up perhaps a little bit, a little more flexibility in terms of insurance arrangements at a lot of small businesses? Is that momentum going to continue in 2015?

Mark, we have two windows into that business. Maybe Mike, talk to Unum US perspective and Tim follow on the Colonial Life piece.

Sure, thanks Mark. Good question. On voluntary, we're seeing a little bit of tailwind on a couple of fronts. We have seen participation at the plan level improve just a bit. I wouldn't say dramatically, but certainly as consumers have a little bit more disposable income as the economy improves, oil prices are a bit lower, that helps us.

We are seeing good cross-selling into our existing group insurance line. That's been a big driver in expanding voluntary through those relationships. And then new clients coming on via the voluntary benefits line.

Sales were up about 21% in the quarter. It was a good year overall. I'd say the pipeline looks good. That will be one of our faster growing business within that 2% to 4% range that we talked about.

For Colonial Life, we are seeing improvement in the economy coming through in our sales results, especially in the small case market. We believe that small businesses are beginning to rebound a bit with hiring, and the less than 500 life segment last quarter, our sales growth was north of 22%. And so we're seeing more traction in that marketplace.

We're also seeing a continued need for the products that we manufacture based on changes happening in the medical industry, higher deductibles created a need for a lot of our products. We also believe that our mission to protect America's workers is resonating in the field. So we feel good about the marketplace and the momentum.

I think you made the comment, this is more macro, some evidence of better underlying natural growth but not accelerating. Anything you want to expand on that?

I was going to say, Mark, from the comments, we did say that. You are thinking the 1% type range, maybe a little bit under that. We haven't seen that accelerated -- it's been consistent. Mike, if you add to that in terms of the natural growth?

The two levers for us in covered payroll are the number of employed going up and then it's sour that is covered for disability and life insurance. They tend to be levered off of income. As Rick said, we've seen probably a little bit more on the number influence, a little bit weaker in terms of the growth on income.

On normal times, that should be, what, 3% maybe?

We could see 2%, somewhere ranging around that, up or down a little.

Thank you.

Bob Glasspiegel, Janney Capital.

Good morning and congratulations to all as well. When you lowered your discount rate, interest rates were probably 40, 50 basis points higher than they are today. So if we got the 10-year staying where it is or 30-year or whatever rate that you look at that have come down from when you set the discount rate for this year, should we look for a headwind going into 2016?

Rick, you want to touch on that?

Certainly Bob. What I would actually say is, and that is what I was trying to articulate around our overall view in the earnings, I think as interest rates stay here relative to what we talked to you about in December, there are headwinds and we view them as that.

Those are things that we have to evaluate as we get out on the year because what we reflected in December certainly was the current environment, which was about 50 basis points different than it is today. So we will have to evaluate that as we get out towards the back half of the year.

There would be a potential you might do the discount rate again during the course of the year if rates stay where they are, or you wait for the renewals, not much you can do over the year?

I think that's going to be a lot to answer as we go through the year. It's still pretty early, Bob, and we just got through that process of going through the discount rate adjustment. So it is early to speculate what we're going to do in the back half of the year.

But you do have flexibility to adjustment pricing midyear as well if you had to.

This is Mike. Absolutely. We actually look at it on a semiannual basis and frankly a little bit even more frequent than that on taxable changes. That is certainly in play.

And the pound is also a headwind as well after being a helpful item for last year. Is that baked into your guidance, and how much of a penalty for currency from UK do you see?

Rick, do you want to touch that?

We have seen that headwind. We often talk about our results for the UK in a pound basis because it's hard to chase around the currency level.

But as we roll that through in our EPS and what we've factored in going into next year is a level of [$1.55] on the rate, which I think we are little bit lower than that as we sit here today. But that's what we factored into our forward-look.

Slight headwind if it stays at [$1.52]?

Yes, slight.

Got you. Thank you.

Jimmy Bhullar, JPMorgan. Sir, check your mute button. We are not hearing you.

Can you hear me now?

Yes, we've got you.

You reported fairly strong sales across the board. But I was wondering if you could talk a little bit about this competitive condition in US disability markets as you've gone through January renewals and what you're seeing competitors do in terms of pricing.

Thanks Mike?

Sure, certainly remains a competitive landscape. I think that's true in Group insurance voluntary benefits as well.

We certainly see some players out there that are looking to grow share, in some cases actually recover some share using price as a lever. But in balance, and this is similar to what we would have talked about over the last couple of quarters, we have seen, I would say, a gradually hardening in rates in the market.

We had some sizable players that are looking to improve the margins on the books and get their ROEs up from where we think industry averages are in the mid single digits. On balance, it's actually been a more favorable, environment, a competitive one but a bit more favorable.

And then on margins, your results have been fairly stable in the last several years, but as the economy recovers, are you seeing any improvement in claims incidence trends or recovery trends and what your expectations are there?

I would say we worked pretty hard to diversify the book and heading into the downturn of the economic cycle. We didn't see a deterioration in our claims incidence, in recovery rates, offset.

And so I think as things begin to improve, albeit very gradually, I wouldn't anticipate a very big swing towards more favorable outcome. Consistency is probably the best bet.

Okay, and then lastly, a clarification on your EPS guidance. I think you mentioned you are more comfortable with the lower end of the 2% to 5% range given the environment. I was wondering, when you talk about growth, are you talking off the [$3.55] for 2014 that you reported or the lower number given the change in accounting for low income housing credits?

Yes, exactly, Jim, when you look at that it's actually going to be off the adjusted number that we are looking at. But that's going to be recaptured for 2014.

It's going to be around $3.51, you're guessing?

Yes. It's going to be the $0.04. It should be roughly $3.51. We will have that out there shortly for you.

Thanks Jimmy.

Yaron Kinar, Deutsche Bank.

Good morning and congratulations as well from us here at Deutsche. So a couple of quick questions here, one, what led to the uptick in the expense ratio across all the core business segments this quarter?

Actually, the good news story if you look at it, is most of that is compensation given the higher sales levels that we saw. So that's one of those expense lines that we don't mind paying out. We like to see that as part of our higher sales.

Okay. And then could you quantify the variable or miscellaneous investment income, what impact it had?

Certainly, I actually talked about that across a couple of our lines. So just to give you a sense of that, we run roughly in the $15 million a quarter range, at least we have over the last several years. This quarter, we actually saw an uptick of that in the $7 million, $8 million range, something like that.

I will remind you that last quarter we saw a downtick of $7 million, $8 million, so it varies around that $15 million level. So we did see a higher level in the quarter, maybe a little bit north of that $8 million that I mentioned. It is something that we factor into our results, and we will just watch that volatility as it goes through, but nothing new to note there.

Okay, and then one final one, and I apologize if I missed this. Of the $700 million GAAP reserve strengthening in long-term care, how much of that was interest rate related?

The $700 million was virtually all interest-rate related. There were some plus and minuses on the liability side. Some of those -- they went in opposite directions, and they were largely offset. I think you can pretty much assume all of that is an interest-rate charge.

Great, thank you very much.

Randy Binner, FBR Capital Markets.

Good morning and congrats to you on the long-term turnaround there. I just wanted to clean up a question I think from Steve Swartz which was getting into the element of this charged that moved out of GAAP and into stat. I apologize if I missed it. Haven't been able to parse that out from the disclosures.

Was there an element of stat charge? Can you remind us of what that was versus the GAAP items that have been discussed?

Rick.

Maybe I will take a shot at that, Randy. When you look at the $57 million we recorded that I mentioned, there's a lot of moving pieces as we went through that reserve charge process on the GAAP side. We articulated that. And as Jack just said, it's mostly interest rates.

As you move around different pieces as well, you can have some stat impacts fall out of that. They are no more than the amount of movement that happened as part of that charge. The $57 million was very much contemplated as part of our overall capital results in 2014, our capital plan in 2015.

And that $57 million is all in the First Unum, the New York.

That's actually in multiple entities. It's part of the noise that came out of the process with the different entities that moved around.

Similar to the rates. And I think one of the topics that has been discussed in the past is sizing the delta between the GAAP and the stat reserves or capital, either one.

In the long-term care area, is that something you can update us on just to think about what the potential risk would be, if there was another review? And maybe help us understand what the process would be for another comprehensive review on long-term care given that rates are lower than when you went through the planning process on this.

Yes, the stat GAAP difference, we talked about it being in the $700 million range at the investor meeting. That is still applicable. That's where it is.

I would say in general over the last several years, statutory reserves have grown faster than GAAP reserves. And so it's likely over the pursuing years that that would continue to grow.

We looked at the interest rate charge as a long-term charge. We said interest rates would stay low for the next four to five years and then revert to the mean.

The view is it's more of how long that charge lasts given the current interest rate environment, which has moved against us even since. But we still think it's a stable place. It has a lot of factors in it, including where spreads are, opportunities in different asset classes and things.

So we're comfortable. We talked about biting off a three to five year horizon. We're still comfortable with that clearly. The current interest rate environment pushes it to the front of that as opposed to towards the back.

Perfect. Understood. Thank you.

Erik Bass, Citigroup.

One of the factors that I think you mentioned that's been driving sales is additional product sales to existing customers. I was just hoping you could quantify the impact there and maybe talk about how much further opportunity you see.

Mike?

Sure, we see about -- north of 60%. To give you a sense, we actually see in the large end of the market, a number even north of that in terms of the percentage of our sales that come from existing client relationships.

That's important to us for three reasons. One, because we understand the risks a bit better. Two, it tends to come in more favorably priced because they know us and we tend to have a good service relationship. And three, each time that we add additional lines of business to the client relationship, it drives the stickiness of that account up a bit.

If we take 2015 as we talked about low interest rates, certainly a product like LTD we are going to be in there at renewal time with modest increases, our chances of placing those increases in the context of a broad relationship are significantly improved. It's really a key strategic driver for us.

If you think about the runway, it's actually pretty substantial. So we average right around three products per existing client relationship. And we would see a fully integrated client being more like sox or seven different lines of coverage as you think about the different demographics within the employee base. So we feel like we've got a lot of room to continue to grow within that base.

Thank you.

That's one of the variables I think you and your team are focused aggressively on. Other ones would be increased participation, but you can get pretty granular in terms of operational things that we're doing. I think that's pretty much a part of your game plan for 2015.

That's a great point. In addition to additional benefits offered as part of the plan, you actually looked at where do you have employee contrib benefits or voluntary benefits in place. And with the participation level, even without additional cross sell, you can drive premium growth and improve risk outcome as you get a better spread as you drive that participation out.

Okay. Thanks. That's helpful. And then if I could ask one follow-up on long-term care. I was hoping you can go into a little bit more detail on the adjustments you made for mortality and morbidity.

I realize in total that was offset, I think, by assuming the rerates that you achieved. But if you could just talk about the dynamics you're seeing there and how much the adjustments you made are based on actual claims experience.

I would say the vast majority of our current assumptions are based on our own claims experience. We were informed by society studies.

We had bought some risk guidelines from consultants. And so we measured our own experience against those, but we did look at every assumption. And I would say the vast majority of those assumptions are based on our own experience.

Got it. Is it correct that both mortality and morbidity in isolation were slightly negative versus prior assumptions?

Not necessarily actually. Things went in different directions within there, but they offset.

Okay. Thanks. I guess last on that, you've given a sensitivity to GAAP reserves for interest rates. Is there anything similar you could provide for either mortality or morbidity such as a what a 1% change in either of those actors would mean for the GAAP reserve?

Yes, it's clearly the long-term assumption. So there is sensitivity. But I don't have a rule of thumb on 1% change.

Okay, thank you.

Ryan Krueger, Keefe, Bruyette & Woods.

Good morning. Congrats to everyone from us as well. Back to the sales growth in Unum US, can you give some underlying color on if you think in general the market is growing at a substantially higher level than it was, or do you think it is more attributable to you guys gaining market share?

Mike?

Thanks Ryan. Time will tell a little bit because the industry reports lagged obviously the Company level report. It will take a little bit of time to actually see what happened with the market.

I'd say -- actually I'm encouraged, a couple of points on that front. One, we had seen a slowdown in the smallest end of the market, and Tim alluded to this from a Colonial Life perspective as well.

We've seen a persistent drag in the less than 100 employee market, and that over the last couple of quarters has really started to come back. In fact, we saw sales growth over 30% in that less than 100 life group insurance market. And those are often new lines that employer's adding for the first time. You start to see a little bit of market growth on that front.

The second component is we are seeing the addition of additional lines on the voluntary front as health plans, as consumers are buying down health coverage through higher deductible plans. That leaves gaps.

We are taking what might be a traditional life and disability client, and you're in there with accident insurance and other supplemental health products. And that almost always industry growth versus swapping of business amongst carriers.

Got it. Thanks. And then if I could, one on long-term care. Can you give us or remind us what level of future premium rates increases that you guys are projecting within your long-term care reserve?

Yes, we don't have an exact number for you. I would tell you as we did at the investor meeting that we're basing that level on filed rate increases.

The assumption we have going forward is based on filings that we've already made related to rate increases. The assumption is also assuming that we get results on currently filed rate increases that are largely consistent with the results we've had on previously filed rate increases.

Okay, so just to be clear, your reserves did not assume any additional rate increases beyond what you've already filed?

No.

Great, thank you.

Tom Gallagher, Credit Suisse.

Good morning and congrats, Tom. Hey, just a question about how we should be thinking about cash flow generation, if rates remain low here.

The $220 million or so of charges, if we add up the New York sub and fair wind, is that a number that we should expect to be recurring if rates remain at current levels? And have you guys baked that into your capital plan, i.e. can you still do at least a low-end of your buyback assumption even if rates remain low?

Tom, to answer that most succinctly would be to say we factored in the current environment into all of our plans. So as we've updated things and even as I talked about some of the pressure we're seeing in the range inclusive of our capital plans reflects what we're seeing out there today.

But can we assume though, Rick, that we would see similar levels, greater or less of that, call it $200 million or so cumulative for LTC on a stat basis? Is that a number that we should be thinking about as recurring, or is there a reason to think that that might abate or change?

No, I actually expect that will be much lower as we get out towards the end of the year because a lot of what actually came out of what you saw in those results, both the $57 million I mentioned as well as the First Unum moves had to do with the reshaping we did on the overall reserves. And so I think interest rates, their movement down now would be less impactful in terms of what we've seen in First Unum, and I wouldn't expect things to recur in our other entities as well.

Okay, thanks.

Eric Berg, RBC Capital Markets.

Good morning Tom. Thanks very much. I just wanted to clarify. just sharpening our understanding of the difference between the $57 million and what is going on in your New York company.

Should I think of those two numbers, one a charge that went through your statutory income statements and one I gather from an earlier response that went right to surplus. Should I think of those two charges as independent?

Jack?

I'm not sure if they're independent in that they all came out of the same reserve review. But the charge in New York was split, so a piece of it went through the equity line and a smaller piece showed up in statutory earnings.

Okay. The second, my follow-up question, my second question -- not a follow-up but a separate question -- relates to your ability to increase prices and the speed with which you can do it. My understanding is this is not like many businesses in the sense that once you decide that you need a price increase, my understanding is you can't do it the next day.

You have to notify your sales people. You have to notify your customers. You have to notify your intermediaries, your brokers.

And there may be, I'm not sure, maybe you can answer -- include this as part of your response, there may be regulatory things you need to do, there may be IP issues you need to deal with from a price increase. My question, what's involved, and how long does it take to raise prices once it becomes apparent they are needed?

Just to clarify, Eric, are you talking about the group business or are you talking about the long-term care business or both actually?

I'm really talking about Group Disability.

Mike, maybe walk through just the pricing cycle process actually because it's a great question.

It is a really good question. I think it's actually sometimes a little bit misunderstood because I think the ability to place [answers] in your inforce block is actually a competence that has to be built over time.

I think you actually nailed a number of the key pieces. First you have to understand within all of the cells that make up a pretty diverse block of business, where do you want those increases to hit and at what level. There's a fair amount of work that goes into that.

But actually the real work comes once you decide where those increases are going to hit. At starts with, as you said, communication and the ability to effectively communicate with brokers and consultants, ultimately to that end, clients. You want to actually show up with not just a take it or leave it, but you want to have a set of options around changes that they could be making in their planned design that could offset some of those increases.

So the net is the profit improvement. But that you have given the client some options to work with. You want to have clear metrics in place so that you understand the balance between placing increases at various levels and risk of termination. And then you want to have incentive lined up.

So you need to have -- to put a lot of work into ensuring that we have a field force that is properly motivated and understands the importance of placing renewals and having a healthy book of business going forward. So it takes a fair amount of work to build the confidence.

I'd say we look at it, we go through every case say over 500 employees. Every year that it is not in a rate guarantee, it is getting looked at assessed. In the core business under say 500 lives, there's a lot more transactions there.

We're going to go somewhere between 25% and one third of those cases every year. You get a sense for the scale of the program.

As far as new business is concerned, interest rates are now what, 40, 50 basis points lower than they were a few, well, weeks ago. It's apparent I think that you need price increases on new business relative to what you were thinking about charging on new business, just again, two months ago. How long will it be before you can institute price increases on new business relative to what you had planned just a couple of months ago to charge on new business?

You can move actually pretty quickly because you have underwriting guidelines in place that give you some flexibility. So what you do is you need to shoot towards the upper end of that range and effectively you're placing some increase there.

And then twice a year, we go through a thorough review of all of our manual and filed rates and make adjustments. So again, it's not a long cycle, think about it in terms of pretty quickly on underwritten business and actually getting to the full block within six months.

Mike, I think Eric referenced in his question too regulatory involvement. That's not necessarily the case I don't think in the group piece as you think about what needed be responsive to the market.

Certainly it's a big compare and contrast to individual products of the long-term care business where it is much more the regulatory environment is the driver. Within group insurance, you have much more discretion and typically ranges you can operate within.

Right, thank you very much.

Seth Weiss, Bank of America.

Hi, thank you for taking the question. I just wanted to follow-up on the existing sales to current clients. Is there a general pattern of moving from a specific product line to another change Group LTD to traditional entryway, and then you will see that flow through to other product lines, or is it generally give and takes across the board?

I would say it's gives and takes across the board. There's actually -- often there is a voluntary benefit relationship in place that we're bringing group insurance in or an employer paid component. Actually our multi-life Individual Disability, which is disability income protection for higher earners, that tends to be a great place for us to be cross-selling into those relationships as well.

If you look at it, it comes from every direction, but certainly having a very large block of long-term disability, that's the base I think most frequently we're cross-selling into. And I think most frequently we're cross-selling voluntary benefits into those LTD relationships.

Okay, that's helpful. Thank you. And then one question on persistency, and correct me if I am wrong, but I believe the persistency that you reported for 2014, it doesn't account for any renewals that you may have lost on January 1. And then can you quickly discuss the January renewals and how those came through?

Yes, sure, it is correct, so it's not reflected in that. But we look forward, you would've seen premium guidance growth in the 4% to 6% range for Unum US.

And that reflects I think pretty strong continued persistency. We did 90.5%, that's a very high level, but we certainly somewhere in that range which we feel really good about.

Great, thank you very much.

Ken Billingsley, Compass Point.

I wanted to ask a question I don't think I heard the question to if it was asked, have you disclosed what your new interest rate assumption is and what it was before?

I think that's a broad question, Ken. What I would tell you is our assumptions in aggregate across the Company would have been what we saw at investor day and come down now from that time frame 40, 50 basis points.

As you get to different parts of the business, that's all reflected through. You have different impacts in different areas. But I think the best way to look at that is, we are reflective in our outlook for the year based on what we see for current rate.

I guess another way to ask it then, if you don't have an actual percentage, obviously the charge infers that you made some adjustment. Can you tell me about how many basis point adjustments you made from the original long-term expectations to where those expectations are now? Is it 50 basis points, 100 basis points change?

Yes, I think you can back into it. The charge was a $700 million charge. It's largely attributable to interest rates. We've given prior guidance that 25 basis point change in the discount rate was worth about $400 million.

Okay, great. The other question I have is regarding the sales growth and what you saw this quarter and expectations going forward become positive. A lot of large brokers, even one today, talked about their explaining their employee benefit footprint through M&A.

Can you talk about how that is impacting your future growth prospects? It seems like a lot of the growth is coming from existing customers. Is there going be an avenue for even bigger growth in the latter half of 2015 into 2016 as some of these other distributors and brokers are committing to growing that part of their business?

Mike, maybe you could speak to the broker side, but it wouldn't be bad also to talk about the Colonial side of the distribution too because they are very different but very dynamic. Mike?

Sure, Ken, we have seen that consolidation that you are referring to. I wouldn't say it's been a dramatic acceleration, but a good steady increase in firms coming together. I think as they come together, they are able to invest on scale in some of the capabilities that they need around compliance and advisory services and some of the technology components that they are bringing into employers to help them manage.

Generally I don't see a huge impact for us. We tend to have a good broad distribution and certainly strong relationships across all the major brokerage firms. But in general, I would agree with your read that employee benefits in total, but then even outside of healthcare, I'd say the focus among brokers and advisers towards things like voluntary benefits and financial protection products like we're in the business, that level of focus has definitely increased as the uncertainty of healthcare has swirled.

For Colonial Life, about 70% of our sales come from brokers, so 30% are on a direct basis. As we've seen consolidation in the broker industry, we are beginning to see brokers migrating out of the really small end of the market. That gives us a huge opportunity to serve that marketplace on a direct basis.

But again, 77% of our business comes from brokers, we are consistently rated as one of the best businesses for brokers to do business with on the voluntary side. So it's still a very important marketplace for us, but increasingly we see the opportunity to serve the small end on a direct basis.

Did you say it is causing a migration out of the particularly smaller accounts?

Especially the below 50 life market with the ACA minimum loss ratio requirement and the impact that has on broker commissions. We are beginning to see some migration out of that marketplace especially as brokers consolidate.

Okay, that's where I see good growth because your direct sales efforts are quite focused on that part of the marketplace where there's a void that has been created.

Absolutely. Fourth quarter last year in the less than 100 life market, we were up 23%, very strong progress there. A real need in that marketplace too as brokers consider whether they can serve that market place.

As we see some migration, those employees and employers in that segment still need advice. And so we're there to help them with that.

In consolidation on either Unum US or Colonial Life, no one has been able to drive higher commissions or anything else to help have you pay for obviously the compliance and technology that they're bringing to the customer.

No, we are definitely not seeing that.

Not seeing that, no.

And the last question, I may have just missed comments at the beginning when Tom was talking about chairman. I thought he was referring to himself for the next two years, or was that in reference to Mr. Ryan?

No, I will be staying on as chairman for two years, Ken. So again at the annual meeting, I will step up to the chairman role and stay on the board for two years. And our current chairman Bill Ryan will actually step into a lead director role until he retires in at the annual meeting in 2016.

But your expectation is not to be on the board after two years or just not be chairman.

I think that's the thinking right now, yes. It's good governance. For the CEO to stick around on the board too long is one of those things we very much don't want to do.

I can serve a very important role for a couple of years both with the board and with the management in terms of helping ensure continuity. I think right now we're thinking of it as a two year period.

So I did hear that correctly. Thank you for taking my question.

Steven Schwartz, Raymond James.

Hey again, everybody. Just a quickie, looking at the numbers versus my numbers and of course my numbers are guesstimates, I did notice that expense levels did seem high. I was just wondering in general, if you can comment on where expense levels may be higher than normal because of the sales and changes in the [dak] rules that occurred in 2012 and what have you.

We actually -- our sales costs were higher. The growth you would see more sales out there. Dak rules didn't have much to do with that because when we talked about operating expense., we are not factoring the [dakking] process into that. So good sales, pay a little bit more in expenses, it's a good news story.

Okay thanks.

Thank you all for taking the time. I know this call went a little long, but there was obviously a lot of subjects to touch on, so we appreciate your participation. Debbie, if you will complete our fourth quarter 2014 earnings call.

Ladies and gentlemen, this does conclude our conference. Thank you for your participation.