Unum Group

NYSE:UNM

Earnings Call Transcript 2019-Q4

[Operator]

Good day and welcome to the Unum Fourth Quarter 2019 Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the conference over to Mr. Tom White of Investor Relations. Please go ahead.

[Tom White, SVP, IR]

Great, thank you, Kevin. Good morning everyone and welcome to the fourth quarter 2019 earnings conference call for Unum. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements.

Information concerning factors that could cause results to differ, appears in our filings with the Securities and Exchange Commission and are also 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, 2019, as well as our subsequently filed Form 10-Qs. Our SEC filings can be found in the Investors section of our website.

I remind you that 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 and our website also in the Investors section.

Yesterday afternoon, Unum reported fourth quarter 2019 net income of $296.2 or $1.44 per diluted common share compared to $249.1 million or $1.15 per diluted common share in the fourth quarter of 2018.

Net income for the fourth quarter of 2019 included a net after-tax realized investment gain of $7.2 million and after-tax costs related to the early retirement of debt of $1.7 million. Net income in the year ago fourth quarter included a net realized after-tax investment loss of $32.6 million excluding these items after-tax adjusted operating income in the fourth quarter of 2019 was $290.7 million or $1.41 per diluted common share compare to $281.7 million or $1.30 per diluted common share in year ago quarter.

Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; Chief Financial Officer, Steve Zabel and Chief Operating Officer, Mike Simonds as well as Peter O'Donnell who heads our International; and Tim Arnold who heads our Colonial Life business.

And now, I'll turn the call over to Rick McKenney for his opening comments.

[Rick McKenney, President, CEO & Director]

Thank you, Tom and good morning everyone. We close out 2019 with a good fourth quarter. Our after-tax operating earnings per share increased 8.5% over the year ago quarter to $1.41. This puts us our operating earnings per share of $5.44 and a growth rate of just under 5%. In the fourth quarter, we had a good mix of growth with after-tax operating earnings growth of 3% complimented by the additional benefits from share buybacks producing the 8.5% overall increase.

The business environment, we operate in, remains mixed with headwinds from lower interest rates and the economic impacts of Brexit on our UK business offset somewhat by the favorable employment trends and a strong consumer in the U.S. All-in-all, we are pleased with our performance in 2019 and optimistic as we move into 2020.

Looking at our business trends, I'm pleased with the premium growth we saw in our core business lines, which are approximately 5% overall for the fourth quarter and for the full year. Sales trends however were more volatile in this quarter and sales for Unum U.S. were lower on the quarter, impacted by the competitive conditions and the employee benefits market and our desire to maintain discipline with our pricing and risk selection.

I feel it's important to remember that because of our focus on discipline, Unum U.S. sales can vary from year-to-year, but I'll put that in a context that our compound average growth rate has been 5.6% since 2016, and sales in total have exceeded $1.1 billion for each of the past three years. We saw favorable growth trends in our international lines and an improved rate of growth in Colonial Life the fourth quarter, which helped us to generate a slight increase in sales for the full year for Colonial Life.

Total sales for the Company for the full year were $1.8 billion. And persistency levels in our U.S. group lines and international business lines remained steady at very favorable levels, reflecting the strong value proposition we bring to our in-force customers and our distribution partners. Next, we continued very favorable overall margin trends across our core business lines. Benefit ratios remained within our expectations, particularly in our U.S. based businesses. This reflected disciplined approach we bring to product pricing and underwriting as well as in-force block management through renewals.

While adding new customers in our core business segments is a driving force of our strategy, we know that sustainable growth requires us to maintain our focus on protecting the strong profitability of these businesses. Expense management trends also continued to be favorable in our core business segments. We're maintaining our focus on effectively managing our expense base while freeing up the capacity to invest in new capabilities.

I'll come back to this in a moment, but we see significant opportunities for growth and efficiency as it is important element of success and will be continuing this focus on productivity, expense ratios and the profitability of our business. Taking in aggregate, these favorable operating trends in our core business segments continue to drive strong margins and capital generation. As a result our adjusted operating return on equity was 17.2% for the fourth quarter.

Our core businesses also generated healthy statutory after-tax operating earnings of over $1 billion in 2019, with a resulting cash flow funding our growth and supporting our capital deployment initiatives. Wrapping up on our financial results, Closed Block had an excellent fourth quarter, with historically low loss ratio in the Closed Disability Block. We also saw favorable overall results in the long-term care business, which has remained within our expectations since we updated assumption 18 months ago. Steve will cover all these results in more detail in his comments.

So to conclude my remarks, we are quite pleased with the results for the fourth quarter and full year 2019. We enter 2020 with a strong sense of optimism. You also saw a few weeks ago, we named Mike Simonds as our Chief Operating Officer, recognition of his past success and a well-deserved expansion of responsibilities should drive growth.

We know that delivering consistent long-term success is a constantly evolving market for benefits, and through all of this new product introductions and business acquisitions we have made requires us to continually challenge our approach to how we do business, and Mike's new role will be instrumental in this process. Our team is excited about the opportunities we had ahead of us and for continued growth and success.

Now, I'll ask Steve to cover the details of the fourth quarter results. Steve?

[Steven Zabel, CFO]

Great. Thank you, Rick, and good morning everyone. I'm very pleased with the fourth quarter results. It was a good quarter overall with solid results in our Unum U.S. and Colonial Life businesses, both of which came in consistent with our expectations. The Closed Block had excellent results while the international business had a separate quarter, reflecting the challenges we face in the UK business environment. Our fourth quarter tax rate was slightly higher than expected in the quarter but was in line with our expectations for the full year, A result of normal volatility we expect to see over the course of the year.

Miscellaneous investment income rebounded in the fourth quarter from an unusually low amount in the third quarter, but remained below our expectations and historical trends for the full year. All in all, we ended the year in good shape with after-tax adjusted operating earnings per share of $5.44, within our growth expectation of 4% to 7% that we established a year ago. Now I'd like to dig more deeply into the results.

Starting with Unum U.S., we continue to see solid underlying results in the fourth quarter as adjusted operating income increased 5.8% to $263.1 million, with each of our three reporting lines showing positive year over year results. Premium growth remained healthy at 5.1% year-over-year driven primarily by continued strong group persistency. Net investment income increased slightly less than 1%, helped in part by an increase in miscellaneous investment income over the year ago quarter.

Benefits we experienced in the segment were generally favorable with the benefit ratio declining slightly to 67.3% in the quarter. The adjusted operating return on equity for Unum U.S. remained quite strong at over 18% in the quarter. Then within Unum U.S., adjusted operating income for group disability increased 2.9% to $83 million in the fourth quarter. We continue to see good premium growth and strong benefits experience as well as slightly higher net investment income. Premium income increased by 5.7% as the in-force block increase from prior period sales growth and continued strong persistency in our group insurance lines.

The benefit ratio improved to 74% in the fourth quarter and 76.2% a year ago, driven primarily by favorable claim recovery experience in our group long-term disability product lines, which was partially offset by higher claims incidents. Net investment income in the quarter was slightly higher as higher miscellaneous investment income offset the effects of reduced assets back in the line and lower portfolio yields on those assets.

The increase in the other expense ratio compared to the year ago quarter was primarily driven by the rapid growth of our lead services. Keep in mind that the fee income related to those services is included in the other income line. Excluding the service business, we saw a slight improvement in the operating expense ratio on the fourth quarter relative to a year ago. Adjusted operating income for the Group Life and A&D line increased by 6.1% in the fourth quarter to $68.2 million, premium fee income increased 4.8% primarily from prior period's sales growth.

The benefit ratio of 71.7% was generally consistent with the year ago quarter of 71.6%. The expense ratio declined slightly due to the ongoing focus on expense management and operating efficiencies. To the more volatile quarter for sales in our Unum U.S. group lines of business declining 9.4% from the year ago quarter. Full year sales, however, were declined by less than 1%. Persistency in our group lines in aggregate continue to be a bright spot for us, at 90.5% for full year 2019, compared to 90.3% in 2018.

Finally, the supplemental and voluntary line, adjusted operating income was $111.9 million for the fourth quarter, an increase of 7.9% relative to the year ago quarter. Premium income grew by 4.5%, primarily driven by prior period sales and the growth in our dental and vision product lines, partially offset by unfavorable persistency across all businesses. Looking at benefits experienced for each product line, the benefit ratio for individual disability was slightly lower relative to last year due to a lower average claim size and favorable claim recoveries. The benefit ratio for the voluntary benefits line was higher, primarily due to unfavorable claims experienced across all products finally.

Finally, in the dental and vision line, the benefit ratio was higher relative to the year ago quarter, due to higher utilization. Expense ratio for the supplemental and voluntary line improved relative to the year ago quarter from our focus on expense management and operating efficiencies. Sales for the supplemental voluntary line were lower by 5% for the fourth quarter with declines in both the individual disability and voluntary benefits product line, offsetting the growth in the dental and vision product line. For full year 2019, sales in our supplemental and voluntary line were flat.

Our Unum International segment reported adjusted operating income of $23.9 million for the fourth quarter, a decline 21.4% from a year ago quarter. The decline was driven primarily by lower operating income from the UK line of business in local currency. In local currency, the Unum UK line of business reported adjusted operating income of £17.4 million in the fourth quarter, a decline of 21.6%. These results reflect growth in premium income of 8.6% relative to the year ago quarter from higher persistency, sales growth and the benefit of rate increases in the group long-term disability product line.

Net investment income for the Unum UK declined 8.7% to £20.9 million in the fourth quarter, due in part to lower investment income from inflation index-linked bonds that we hold to support the claim reserves associated with our group policies that provides for inflation-linked increases and benefits and also lower yield on fixed rate bonds. The benefit ratio for the UK business increased to 77.3% in the fourth quarter compared to 74.6% a year ago, primarily due to unfavorable claims experience in both the group long-term disability and group life product line, partially offset by lower inflation-linked increases in benefits.

Unum International sales in U.S. dollars increased 13.8% in the fourth quarter with sales in the UK and local currency increasing 13.9% and sales in Unum Poland increasing 8.8% on a dollar basis. Persistency for the UK business continued to be favorable in the face of successfully implementing renewal rate increases over the past two years, as we look to offset the interest rate pressures.

While our Unum UK results are facing continued headwinds from Brexit, we are pleased with the execution of our strategies, which are centered on implementing rate increases, maintaining strong persistency and discipline on new sales pricing and actively rerating underperforming cases. In addition, we are very pleased with performance of the Unum Poland business, which produced strong premium growth of 8.6% this quarter on a dollar basis. We continue to expect our 2020 operating income to be relatively consistent with our results for full year 2019.

Moving on, the Colonial Life segment produced adjusted operating income of $87.7 million for the fourth quarter an increase to 2.7% for the year ago quarter. Premium income increased 3.6% for the fourth quarter, primarily driven by prior period sales growth, including the expansion of the dental and vision products offset in part by a lower level of persistency. The benefit ratio of 51.5% was generally consistent with the year ago quarter of 51.6%. So, the Colonial Life continued to rebuild momentum with a year over year increase of 2.6% in the fourth quarter, which brings the full year sales to an increase of almost 1%.

In the quarter, we saw positive trends in the public sector markets where new sales increase over 41%. Persistency for full year 2019 declined to 77% and 78.1% in 2018, but we believe that persistency will level out in 2014 and current levels. We are confident in the actions we've been taken to rebuild our sales momentum and expect improved sales growth levels in 2020.

Now moving onto the Closed Block, adjusted EBITDA operating income was very strong at $46.1 million, compared to 34.8 million in the year ago quarter. As expected, premium income for this segment continues to decline, down by 4.5% in the fourth quarter, which is primarily due to the ongoing policies terminations and maturities for the individual disability lines, which is partially offset by premium rate increases within the LTC products.

Net investment income increased 3.1% in the quarter, driven by an increase in the level of invested assets, backing the LTC line, which is partially offset by a lower yield. In the individual disability product line, the interest for adjusted loss ratio was 74.7% for the fourth quarter compared to 81.2% last year, which is primarily driven by favorable claims experience. This quarter’s loss ratio was the lowest that we've experienced in over 10 years, but going forward, we expect the loss ratio to be in the low 80s.

In the long-term care business line, the interest adjusted loss ratio was 86.7% for the fourth quarter and remains within our expectations and the loss ratio in 85% to 90% range. Over the past four quarters which we feel is a more appropriate time to measure of alpha line like LTC, the interest adjusted loss ratio for LTC is 88.1%, again in line with our expected range.

I'll then round out the Closed Block discussion with three other important topics related to LTC. First, we made incremental progress with premium rate approvals in the fourth quarter with several new approvals on our group LTC rate filing. We are pleased with the rate of progress we are making to our $1.4 billion assumption and believe we can achieve this goal in the coming years.

Second, we have exceeded the new money yield target of 5.5% since the third quarter of 2018. And we've often cautioned the assumptions back in this business line need to be analyzed over a long term time horizon given the potential for quarterly volatility, but remain satisfied with how the trends have evolved since reserve update in 2018. And third LTC related cash contributions to subsidiaries for the full year 2019 for our first Unum subsidiary totaled $100 million and for the Fairwind captive totaled 268.

Looking at over the next couple of years, our capital plans anticipate these tax contributions suddenly back to a previous historical average of around 200 million, combined as we work through the impacts of low interest rates and tax reform. Wrapping up with a corporate segment, the adjusted operating loss which excludes $2.1 million of before tax costs, related to the early retirement of debt, with higher in the fourth quarter $50.5 million, compared to a loss of $48.2 million in the year ago quarter. This was driven by lower net investment income and higher interest expense, which was offset by lower offering incentives.

Statuary earnings for our traditional U.S. insurance companies were quite strong in the fourth quarter with statutory after-tax operating earnings totaling $266 million, compared to $215 million in the year ago quarter, and totaled $1.03 billion for the full year. Our capital metrics remain in good shape with a weighted average risk-based capital ratio for our U.S. traditional life insurance companies at approximately 365% consistent with our plans for the year.

Also consistent with our expectations, cash at our holding companies totaled $863 million a year end in 2019. Early in the fourth quarter, we completed the tender and redemption transactions that we began late in the third quarter, which generated the small debt extinguishment costs reported in the fourth quarter. In addition, share buy backs in the fourth quarter were $100 million and totaled $400 million for the full year of 2019. It also highlights a book value per common share excluding AOCI, as of December 31, 2019 was $48.92, which was an increase of 11.2% over 2018.

So for full year 2019, after-tax adjusted operating income per share was $5.44, an increase of 4.6% over full year 2018. Looking at 2020, we continue to expect growth in after-tax adjusted operating income per share in the 4% to 7%, which is consistent with the outlook we provided at our outlook meeting in the December.

Now, I'll turn the call back to Rick for his closing comments and look forward to your questions.

[Rick McKenney, President, CEO & Director]

Thank you, Steve. And again, we're very pleased with the fourth quarter, and we're in full swing for the New Year in 2020. Team is here to respond to your question. So, I'll ask Kevin to begin the question-and-answer session. Kevin?

[Operator]

[Operator Instructions] Our first question comes from Ryan Krueger of KBW. Please go ahead.

[Ryan Krueger, KBW]

On disability, can you give a little bit more color on the benefit ratio? I guess it improved despite absorbing the lower discount rate. So just hoping you give some incremental color on what you sought to offset that and drive further improvements?

[Rick McKenney, President, CEO & Director]

Yes. Sure. So, as you've noted good solid loss ratio and the group disability line at 74%, I'd say to your question specifically, strong recoveries and offsets in the quarter, more than help offset a moderate increase in new claim incidents. And as you noted and as we had talked about at Investor Day, we did go ahead and lower the new claim discount rate on new incremental curve by 25 basis points in the quarter.

[Ryan Krueger, KBW]

And then on competition, you've made a number of comments in December about seeing more voluntary competition. You also had softer traditional group sales. Are you seeing more competition in traditional group as well? Or do you view the quarter as more volatility as more combined to voluntary?

[Rick McKenney, President, CEO & Director]

Ryan, it's Rick. Let me just step back and talk a little bit about, how the competitive landscape has changed over the last several years. You would note a number of players that have sold businesses to others that are incumbent in our space. And so, that's been a dynamic that we have seen out there and that has covered across the group stays. On the voluntary space, you would have heard us talk about new entrants, people getting into the voluntary space that would not have necessarily historically been in that space. And so, we're seeing how that's playing out over time.

I actually talked a little bit more about fourth quarter. I feel very good about the sales we saw in our UK operations, Colonial Life from a better trend that we saw in the first half of the year. And then we did see Unum U.S. down a little bit on the quarter, but when you look at a fourth quarter, I'd go back to the greater than 1.1 billion in sales and are maintaining our pricing discipline, which you see year in and year out, we will continue to pursue that.

I think the recognition of the competitive landscape changing, are a number players that really like this space. I think that bodes well for us that we're in front of the pack, and as we go through and come to the space and go through integration, we're focused on growth in the future. So, I'm very satisfied with where we are, but also looking forward to where it is. Competition will come and go. We've been talking that for many, many years. We don't necessarily see the irrational competitor, which is one thing you can't do much about. But we expect competition and we think it's actually god for us business in a longer-term. Maybe, Mike, do want to add anything on, what you're seeing particular to our lines in fourth quarter?

[Mike Simonds, COO]

I think it summed it up in the fourth quarter, maybe just a little bit color. We did see a decrease of about 8% overall. But if you unpack it a little bit, sales to our existing clients were actually up about 7% and that's really important to us. Those tend to build stickier, longer-term relationships, and they come in more favorably priced. And what you have to do is go out and win in new client relationship. I think that's where we felt, Ryan, the most competition is in the new client market and that's not terribly different than what we had seen emerged over the full second half of the year and pretty consistent with prior cycles in the past.

I guess I'll just close by saying. As we look out in 2020, there is a lot of reasons for optimism, we're certainly going to maintain that pricing discipline that you have known and seeing from us pretty consistently, but new capabilities going up particularly in that core market where we have struggled to get some growth within our targeted underwriting margins with, the rollout of our new digital platform will not be taking core clients from on-boarding all the way through the administration of their benefits completely, digitally.

And we think that's going to help set us apart. As well as a new investment in sales reps in the core, where we have now built out a dedicated team to target the small under core market where we will see a lot of opportunity to grow. And maybe, Tim, I think you might have a couple of comments about the market on the voluntary side.

[Tim Arnold, Head of Colonial Life]

Yes, sure. Thanks Mike. I think about the results that Colonial Life has in 2019. Certainly, the competitive environment was one factor. But just as a reminder, some of these as we talk about in December, we make changes in our recruiting model that had an impact on our sales, that has nothing to do with competitive environment. We also made changes in a number of key distribution relationships. We've made some changes in migrating towards the higher persistency industries and perhaps away from some lower persistency industries. So, we feel great about the quality of the sales we had in 2019.

The public sector growth as Steve talked about earlier, with that being the highest persistency industry in our book, we feel very good about that. And we feel great about the continued contribution of dental in our book, and we had a strong year against selling to our existing customers. So, that's also helpful, and as we look forward, maybe at the risk of slightly over answering, but as we look forward, I agree with Rick, the market opportunities are tremendous. There are still 6 million businesses out there that have more than one employee and less than 100.

Those businesses to be tend to be underserved. Their employees are certainly underserved with less than half of America's workers having adequate life or disability insurance. We've had a strong value profit in all markets and all segments. With our current footprint, we can reach over 80% of America's workers within a 1-hour drive with one of our primary offices. We have 6,000 people who do benefits education and counseling, which is desperately needed in this environment.

And on the recruiting front after a challenging second and third quarter, we've rebounded nicely in the fourth quarter and are back to the levels that we saw before we made this strategic shift in our recruiting approach. So, we remain pretty optimistic and we still feel comfortable with the guidance.

[Operator]

Our next question comes from Suneet Kamath of Citi. Please go ahead.

[Suneet Kamath, Citi]

Thanks. Just first question on pricing, particularly in UK and U.S., when the interest rates are down, a decent amount so far this year. So how do you feel about the level of pricing that you're putting out in the market? And do you have to maybe some more price through to contend with where rates are today?

[Mike Simonds, COO]

It's Mike. Actually, it's pretty consistent with where we're in December. I think we talked about in the past. Certainly, yields are one factor that we're going to put into new business and renewal policy claim trends and expense levels are also getting factors. In fact, there's some puts and takes. And like we talked about in December, I think we had a really good spot given current returns, to probably, nudge rates up a couple of points, certainly low single digits across most products and segments. But I think one of the things we work really hard to do is, deliver consistency to clients in terms of predictability, so acquire clients at a sustainable range and then where we need to make adjustments are going to be pretty, pretty modest.

[Suneet Kamath, Citi]

And then, Rick, in your opening comments, you've talked a little bit more about expense efficiencies and some of the actions you guys might be taking. Can you just provide a little bit more color on, what some of those actions would be and sort of how materially they could be in terms of driving growth?

[Rick McKenney, President, CEO & Director]

Thanks Suneet. It is a big part of our commentary, but it's a part of the actions that we're focused on right now. It comes in two fronts, maintaining the efficiency that you've heard year in year out, maintaining a very good expense ratio. It's not outsized, we do it. On every year, we look at how we can maintain efficiency. I think we're leaning into a little bit harder these days, and the goal is to actually be able to channel our investments into these growth opportunities we see.

You hear the optimism that we have, but we got to make sure that we're putting the money behind these opportunities to go after. So, the expense efficiency that you see will really be applied, most of it, back into our capabilities as we go forward. So, that's why you hear about a little bit more about it, because we're a little bit more focused on, but it really will be going back more towards the opportunities and the capabilities that we see in the next several years.

[Operator]

Our next question comes from Thomas Gallagher of Evercore ISI. Please go ahead.

[Thomas Gallagher, Evercore ISI]

Just the follow-up on the competition in group. Would you say and I heard your comment about the 7% increase in sales to existing clients, so most of the competition is coming from new declining sales. Would you say that you're close on a lot of these cases that you're not winning? And the reason I asked is, if you’re really losing on price by a larger, wider margin. Just curious if you would have optimism that sales would recover in 2020? Or is it not that far forward on pricing to the point where you can kind of recover from a sales standpoint?

[Mike Simonds, COO]

Tom, it's Mike. Thanks for the question. I would actually say, not that far off in general. There's going to be some volatility process to prospect, so one does not apply to all. But I think Rick said it earlier in the call, where we really don't see an irrational competitor to which we have seen at times in the past where you might be significantly out. I'd say we've got pretty healthy market out there.

I'd say in general we're in the hunt and that bodes well as we -- we already put some new tools into our sales people's hands here in 2020 and I think that does bode well. And few of the optimism around the guidance we put out there for continued steady top line growth. I'd say the other piece is, there's just -- there's less churn in the market and that's my observation certainly reflected in our persistency. And as we've looked at our 1.1 renewal cycle, there's just less of business moving in the traditional group side.

[Thomas Gallagher, Evercore ISI]

And then, just the question on IDI Closed Block performance is very favorable. Was that mainly just increased mortality in the quarter? And I guess just relatedly, just given that you've had several years of good performance there, does that -- would you say that improves the possibility or optionality of you doing something with backlog to free up capital or where do you stand on thoughts regarding that?

[Steven Zabel, CFO]

Yes, good morning, Tom. This is Steve. I'll take that one. So just related to the quarter around our Closed Block individual disability income business, I'd say over the combination, probably the main driver was just lower incident. It was a bit of an anomaly for us. We had lower incidents on that block. We did also see strong mortality but probably not that was outsize what we would normally see in the fourth quarter.

So I would say, it was mostly driven by incidents, definitely would not see that sustainable into the future. And my comments, I guided back down to the low eighties and that's still where we are. But I do have to say we feel good about how that blocks, perform if you go back that block, the majority of that block is in a special purpose vehicle. It was securitized with nonrecourse debt and debt has performed very, very well.

So I think that's really speaks to the consistency of the profits coming off of that block. That's actually going to be paid off going into the middle part of next year. So, we feel good about it, but again if you're thinking about kind of forward looking, the low 80% loss ratio is probably a more normal rectal level. When it comes to just the block itself and how we're thinking about opportunities, we continually test the market and continually explore the market in a variety of ways.

One, we definitely look at reinsurance. Obviously, we'll look at potentially re-levering that block, once that debt's paid off. But it also is generating some nice distributable cash flows and so we also have the option just let that come through and have it be available for holding companies. So, we'll continue to explore all three of those options as we see. But whenever we do, it's going to be for the benefit of shareholders. And so, we'll make sure that economically it makes sense for the Company and the shareholders.

[Thomas Gallagher, Evercore ISI]

Okay, thanks. And if I could just sneak one more in. Just the 365 RBC, do you have a pro forma estimate of what that RBC would be? If you recaptured the long term per captive, what adjustment we should make to RBC?

[Steven Zabel, CFO]

Yes, I would just go back to how we think about our targets for risk-based capital. We try to keep it in aggregate of 350 and that's what we guide towards as far as our traditional insurance companies. We don't really publicly disclose what that would look like, but I think we'd still be around that 350 range, if we were to do that.

[Operator]

Our next question comes from Humphrey Lee of Dowling & Partners. Please go ahead.

[Humphrey Lee, Dowling & Partners]

Looking at Unum UK, you've pointed out there is the impact of Brexit and interest rates and also you have some unfavorable underwriting in the quarter, but I think the profit margin is one of the lowest as I can recall. But given some of the ongoing impact, how should we think about the profit margin for that line of business going forward?

[Rick McKenney, President, CEO & Director]

Maybe I'll just turn it over to Peter. I mean, one of the things I would remind you, Humphrey, that when you look at our line of business, it's still a mid teens ROE business. So, it has a little bit lower we talked about that in our comments, in the quarter and in the world of Brexit, having a still a mid teens ROE business is very good. Now, let me turn it over to Peter to give some more details in terms of margins stand.

[Peter O'Donnell, Head of International Bussiness]

Yes. Thanks Humphrey. Maybe be I'll just a step back and sort of give my view where the business is. So, yes, we have experienced a challenging environment recently with the significant uncertainty around Brexit. And as you guys mentioned it, interest rate and the exchange rate, I would say, are sort of most visible indicator of that with interest rate down below 10-year, down below 1%, and the exchange rate being under $1.30 for most of the year. Good news, it's not a $1.30 since it's pretty stable around that.

Very positive about the election results in December, it's really good. I think for business in the UK, we spoke to most business leaders they want to see a stable government for at least 5 years. However in 2020, we expect the external environment to be very similar to 2019, as the UK debates its future relationship with EU.

As Steve mentioned in his remarks, I feel good about the focus we're making in many areas. We've seen good growth in products that are sensitive to interest rates, good expense, good core growth, and persistency is being good given the renewal program. However, it's on our long-term visibility product, we have seen the most pressure, both from interest rate and higher claims incidents and severity, moving away from a long-term averages. But we've been responding to again over the last two years with our rate program, which will restore margin and we are being very disciplined on pricing of business.

We do see volatility by quarter, and in 2018 we've averaged around 20 million, higher in the first half and lower in second half. I wouldn't worry too much about that trend in the second half. It does tend us to move around a lot. But basically, we landed about 80 million for the year; and as Rick mentioned, an ROE of just under 14%.

In 2020, we will continue to rerate the book and work on clients to improve claims and grow those non-interest rate sensitive products. And we expect BTOE to be broadly in line with 2019, but it can move around that $20 million NIM by quarter. It's difficult to call it by quarter. So overall, very positive about the positioning and prospect of the business over the medium term, given the actions we have and are taking, and particularly as we see returns to more normal political environment as we clear Brexit.

[Humphrey Lee, Dowling & Partners]

That's helpful. And then shifting gears back to U.S., so you've talked about the efficiency and I think I appreciate the color that you provided. But just looking at group visibility, the expenses kind of came up, I think part of it is because of the lead management that you have in there and you are spending more to grow that business. So just how should we think about the general expenses for good visibility going forward, as we think about your efficiency gain for your underwriting business, but at the same time while growing your lead management?

[Mike Simonds, COO]

Good morning, it's Mike. So, in that group visibility segment is where we have our fee-based services business primarily lead management, which increasingly becoming not just FMLA at the Federal level, but state level and municipal level as well as corporate fees. So that in combination with the sizable disability fee-based services that we provide is growing. We see that as a very attractive business for us over time and one of our biggest areas of the investment.

So, the overall profile of the Company that Rick was talking about, we're going to continue drive efficiencies at the macro level and that is one primary place that we're reinvesting funds back into this business. We see that as a real problem that we can solve for clients in a differentiated way. And so as we do that in the segment, as you're computing kind of an OE ratio with premium as your denominator and fee-based business are going to continue to see that OE ratio continue to drift off.

But I would tell you that, if you pull the fee-based businesses out of the segment, we actually saw about 50 basis points decline in the traditional operating expense ratio there. So, in some ways, you kind of look out for that segment, I would continue to expect some modest growth in that expense ratio because of the growth in fee, but you should know that underneath that, we're continuing to sort of drive efficiency on the insurance side.

[Humphrey Lee, Dowling & Partners]

So, should we expect that kind of expenses for group visibility to maybe at least in the near-term much growing faster than your top line?

[Mike Simonds, COO]

I think it's going to grow slightly faster, but probably reasonable. We'll see that in that ratio.

[Operator]

Our next question comes from Andrew Kligerman of Credit Suisse. Please go ahead.

[Andrew Kligerman, Credit Suisse]

I just wanted to know a little bit on some your earlier questions. So, if Unum U.S. in the group disability area, this year you had a full year benefit ratio of 74.4%. Last year, I mean in 2018, it was 76.1%. So, as I think about an earlier comment you made about being able to get low single digit rate increases. Maybe you could give some color on where that benefit ratio could stabilize? It sounds like some 75% is doable. I know you had favorable claim recoveries this quarter, but it seems like 75% or lower is doable going forward. And maybe you talk a little bit about that?

[Mike Simonds, COO]

Yes, Andrew, thanks for the question. It's Mike. So, I think it's reasonable to have that sort of 74% to 75% range in mind. I would think just in general, that is pretty tight when you think about business like this, but that can overtime particularly at a quarter-to-quarter level have some volatility. But as we look out and look at the returns on the major drivers of that benefit ratio. That seems like a reasonable range.

[Andrew Kligerman, Credit Suisse]

I'm still trying to reconcile your ability to grow sales and the balance in markets. I mean, if you look at given the essence volume kind of business is down to 12% year over year. And it looks like in Colonial overall is 3% profit versus 5% to 7% guidance. Maybe you could, I mean, maybe focused specifically on the pricing there, is pricing coming down?

[Rick McKenney, President, CEO & Director]

Yes, Andrew. Thanks for the question. Pricing on a voluntary side really isn't an issue. Almost all of the products that are sold in the voluntary side are separated and prices not negotiating points. So, the negotiating points tend to be around what type of participation you’re thinking might be based on the enrollment conditions, what compensation looks like whether there are technology companies that would need to share some of the compensation et cetera. So those are the negotiating points and we don't see those being any particularly real threat to us.

[Andrew Kligerman, Credit Suisse]

Mike on U.S.?

[Mike Simonds, COO]

Yes. I'd say, we talked about it a little bit, but I'd say in the market, it is much less priced point and its around underwriting the product features and we talked a little bit about that we have rolled out some new products there I think really wanted to creating additional consumer level value. There is less expense both to cover administration because the OE expenses that we have had but also through the challenge and the commission level out. We see there actually pretty nice growth on that subset of new product and about 25% of all of our new sales in the quarter came on those two products categories and just looking at new products is about 50%. So, I think it will take some time, but as we look at the pipeline for voluntary under Unum branded side of the business, I think that's really optimism.

[Operator]

Our next question comes from Eric Bass of Autonomous Research. Please go ahead.

[Eric Bass, Autonomous Research]

Do you expect New York Life's acquisition of Cigna's Group business have much impact on the market? And historically, have you seen mutual companies approached the market much differently from a pricing or target margin perspective?

[Rick McKenney, President, CEO & Director]

Thanks for the question, Eric. I mean, I think I would step back and I made some comments about how the market changes well. Prior to that acquisition, you have had consolidation in the benefits space. For a different reason and different players, you've also seeing some acquisitions done from foreign players that have come into the space as well. So, there is a lot of dynamics adding a new competitor in there that is in the mutual space. This business still needs to be well managed and work through the business. So, I don't -- we haven't seen the dynamics yet, but I think that, it should be similar to other competition that we have seen in government space. Mike do you want to add?

[Mike Simonds, COO]

I think also specific to the question. We've had a couple of long-term mutual competitors in the space and have not seen a materially different sort of orientation to other competitors.

[Eric Bass, Autonomous Research]

And you have had some good success with the lead management services products. Are there other opportunities to add ancillary to fee-based services or products to drive growth in the future?

[Rick McKenney, President, CEO & Director]

Sure. We also think that, that is the case. I think the lease service gives us a point of interception in a pretty meaningful way down to a level about worksite, and we can see a lot of potential services branching off from that as well. So, that is one of things as we kind of look forward as a company, we've got a very strong insurance and benefits footprint across the U.S. and UK and we see increasingly that there's opportunities to introduce new primarily digital backed by people services alongside insurance products.

[Operator]

Our next question comes from Jimmy Bhullar of JP Morgan. Please go ahead.

[Jimmy Bhullar, JP Morgan]

First, there is a question on loss trends in the disability business. Obviously, it's been very favorable and I guess the labor market is helping as well. Do you see anything that would suggest that margins are not going to hold up at the recent levels? I know, you're guidance is a little bit more conservative than what you've been reporting. And are you pricing based on what you've seen in terms of lost trends over the past year or so or more based on longer term averages?

[Mike Simonds, COO]

Sure. Yes. So, on group disability I'll take it back to the commentary earlier. I think 74 to 75 on the loss ration and it is very reasonable and what our expectations are looking out, as I was saying earlier, you look sort of the major factors that would sort of impact loss trends that we don't see, things that would materially impact that. But as I say every time, it's an insurance business, it involves taking some risk. And they're certainly can be, particularly, when you look at it on a quarterly basis, some volatility there.

But our approach is about being really smart and disciplined upfront about the risks that we take on and then just investing heavily in remarkably talented group of professionals. That handles the claims process from the clinicians to the book, rehabs to the disability benefit specialists. It is a really impressive machine and quite effective that helping support people, return to work in a very consistent way.

[Jimmy Bhullar, JP Morgan]

And just on, like the changes, upcoming changes in long duration contracts in terms of accounting. Do you have any better insight you'll be effective? I guess the LTC and IDI business are there you have the most exposure, but when do you think you'll be able to give some idea on what the impact on your book value would be?

[Steven Zabel, CFO]

This is Steve. I'll take that one. So, I'll step back just a little bit just on the new accounting guidance. This is a GAAP only accounting guidance. How we view it will have to change our reporting and our disclosures for GAAP basis financial reports. From a statutory cash flow, from a capital deployment perspective, we see this as a bit of a non-event. It was delayed a year out. So, the effective date is in 2020.

And so, the team's working through it and the recent change was adding the scope claim reserve liabilities, so we're working through that. The majority of the impact will be around discount rates, things that we talked about before. So, as we look out, we're planning for the 2022 implementations. The team's working hard at it and, as we get more information, we will disclose it as it makes sense, but really nothing new to talk about right now.

[Operator]

We have no further questions at this time.

[Rick McKenney, President, CEO & Director]

Thank you, Kevin. And I'd like to thank everybody for joining us on the call this morning. Kevin that now completes our fourth quarter 2019 earnings call. Thanks everyone.

[Operator]

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.