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Unum Group
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Good day and welcome to the Unum Group 1Q 2018 Earnings Conference Call. Today’s call is being recorded. At this time, I now like to turn the conference over to Mr. Tom White. Please go ahead.
Great. Thank you, Derrick. Good morning, everyone, and welcome to the first quarter 2018 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 these 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, 2017. Our SEC filings can be found in the Investors 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 Investors section.
Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; CFO, Jack McGarry; as well as the CEOs of our business segments, Mike Simonds for Unum U.S.; Peter O'Donnell for Unum UK; Tim Arnold for Colonial Life; and Steve Zabel for the Closed Block.
And now I'll turn the call over to Rick for his comments.
Great. Thank you, Tom, and good morning, everyone. We had a solid start to 2018 with net income per share increasing 23% in the first quarter to $1.23. Adjusting for net realized investment gains and losses and the guarantee fund assessment from last year, our after-tax adjusted operating income per share increased 21.6% in the first quarter to $1.24, well within our range of expected growth of 17% to 23% for 2018. And that’s over the base of adjusted operating earnings from 2017 of $4.24.
In the first quarter, we saw a continuation of many of the favorable operating trends we’ve experienced in our core business segments over the past several quarters. Premium income grew 6.5% for our core businesses, while overall benefits experience showed a slight improvement. Our expense ratios remained in-line with the year ago quarter and they reflect the productivity and investments in our business to generate stronger growth and leading customer experience.
These investments are paying off and for example we’ve seen strong growth from our recent acquisitions in the dental business in both the U.S. and U.K. We continue to look to acquisitions to supplement growth for our core business lines, which we executed on in Europe with our intended acquisition of a Polish operation and in the U.S. in a small leave management company.
Our Unum U.S. segment posted very good results in the quarter with premium income increasing nearly 6% and the benefit ratio continuing to improve year-over-year. Colonial Life's adjusted operating earnings were slightly lower relative to last year, but I remain encouraged by the growth we’re seeing, plus the long-term value we’re creating with the investments we’re making to expand our geographic footprint. Unum UK continues to feel the effects of the sluggish UK economy and before tax earnings remained flat on a local currency basis.
Overall, I’m pleased with the consistency of our performance in these leading businesses and it is a tremendous franchise that is executing well and driving strong returns and cash flow for our company. In the Closed Block, results continue to be volatile on a quarter-to-quarter basis. In the first quarter, we saw very good performance in our closed disability block. This was offset by weaker performance in long-term care, which you can see in an elevated loss ratio.
The impacts from lower mortality in the fourth quarter settled down, but we did see a much higher level of claims in the quarter. This block can see volatility in this quarter was no exception. We will have to watch how these trends continue just as we did in the fourth quarter, but historically going forward we’re taking the actions necessary to manage these businesses over their longer-term duration.
I would reiterate that we feel very good about the strategic direction of our business and our strong position in each of our markets. The performance of our core business segments creates significant financial flexibility for the company with strong statutory earnings yielding strong cash flow. This flexibility will allow us to continue to seek opportunities to expand our presence in our markets, find ways to better serve the needs of both employers and their employees, and return capital to our shareholders. This focus will enable us to continue to drive long-term value for our shareholders.
Now, let me turn it over to Jack to cover the details of the first quarter. Jack?
Thank you, Rick and good morning everyone. Following on Rick's comments, 2018 is off to a solid start with earnings per share growth in-line with our expectations for the year. Now, I will provide detail on our financial performance. Beginning with Unum U.S., we saw another good quarter with continued positive growth trends in premium income and overall sales, very good persistency, and favorable benefit ratio trends across our major business lines.
Within Unum U.S., adjusted operating income for the group disability declined by 6.4% to $83 million in the first quarter, primarily due to lower net investment income resulting from a lower level of assets backing this line in a lower portfolio yield. The update of statutory reserves in the third quarter 2017 in the IBNR reserve update this quarter have resulted in less capital back in the line. This trend along with the steady pressure on portfolio yields puts pressure on the net investment income generated to this line of business.
Lower assets and yield pressures are expected to continue for the next several quarters. However, these lower capital levels are accreted to the adjusted ROE for the group disability line. We saw encouraging trends with premium income for the group disability line increasing by 4.3% given past sales trends in improved persistency, and also further improvement in the benefit ratio.
For the first quarter of 2018, the good disability benefit ratio improved to 75.6% from 76.6% in the year ago quarter with favorable claim recovery experience in the group LTD line more than offsetting the increase in claims incidence in the group STD line. The expense ratio for group disability increased slightly to 25% in the first quarter from 24.5% a year ago, primarily due to additional operating investments in our business that we believe can generate more positive customer experiences.
The group life and ADND line had a very strong first quarter with adjusted operating income of $64.6 million, an increase of 15.4% from the year ago quarter. Premium income increased 8.3%, driven by good sales trends and improved overall persistency. The benefit ratio improved to 70.7% in the first quarter from 71.9% in the year ago quarter, due primarily to improved waver of premium experience in the group life product line. The supplemental and voluntary lines produced another solid consistent quarter with adjusted operating income increasing by 2% to $96.3 million in the first quarter.
Premium income continued to grow at a healthy pace increasing 5.4% for the first quarter, due to growth in our voluntary benefits business in the rapid growth we’re seeing in the dental and vision product line. These increases were partially offset by a slight decline in the individual disability line. Risk experience was favorable in the first quarter in our individual disability and dental and vision lines, while the benefit ratio for voluntary benefits line was generally stable year-over-year.
Sales for Unum U.S. in the first quarter increased by 4.2% over the year ago quarter, driven in large part by the growth in our voluntary benefits in dental and vision lines. Sales in our group lines were mixed, group life and ADND news sales increased 19.9% for the first quarter, while sales in our group disability line were lower relative to the year ago quarter. It’s worth noting that our first quarter sales for our group lines are typically the lowest of the year and therefore the most subject to volatility.
We’re especially pleased to see the stronger levels of persistency in our group lines to start the year. With group LTD persistency increasing from 88.1% in the year ago quarter to 90.8% this quarter, while group life improved from 87.4% last year to 89.3% in the first quarter. Unum U.K. continues to be impacted by the sluggish economic and business environment in the U.K. In the first quarter, adjusted operating earnings remained flat year-over-year at £21.4 million.
Premium income increased 2.5% on a local currency basis this quarter, generated largely by favorable persistency we saw at 87% for the first quarter of 2018, compared to 84.5% last year. The Unum UK benefit ratio was 71.9% for the first quarter of 2018, up slightly from the 71.4% last year. While we saw an uptick in claims experience in the group life and critical illness product lines we were encouraged to see more favorable experience in the group disability business in the first quarter of 2018, relative to 2017.
Unum UK sales for the first quarter declined 22.6% in local currency, driven primarily by one very large LTD case sold last year that made for a difficult comparison. Excluding that single case, we saw improved sales trends in the core LTD market and across the group life and supplemental lines. Colonial Life again produced solid adjusted operating income for the first quarter of $81 million though this quarter was 1.7% below the first quarter of 2017. Top line growth trends remain very encouraging at Colonial with premium income increasing by 6.4% for the first quarter.
Benefits experience was slightly elevated in the first quarter at 51.6% relative to the favorable 50.8% in the year ago quarter as we saw unfavorable experience and the life line of business partially offset by favorable experience in the accident, sickness, and disability line. In addition, the operating expense ratio for colonial life was unfavorable for the first quarter, primarily due to the timing of expenses in the cost related to our territory expansion efforts.
Sales momentum for Colonial Life continues to be quite strong increasing 7.6% in the first quarter. Sales growth was evident across the board with growth in all product categories and market sectors. We look for continued momentum with our sales growth as we accelerate our investments in territory expansion and initiate the rollout of the dental and vision products to our Colonial Life distribution system.
For our core business segments, Unum U.S., Unum UK and Colonial Life we remain encouraged by the consistency of the trends we are generating over the past several quarters, highlighted by favorable growth trends through disciplined sales management and strong persistency levels, well-managed expenses as we make strategic investments in our future growth in overall stable risk experience. These businesses are generating strong returns for us with an adjusted operating return on equity of 17.5% for the first quarter of 2018.
Moving to the Closed Block, adjusted operating income declined to $28.9 million in the first quarter of 2018 from $31.6 million in the year ago quarter. In the individual disability product line, the interest adjusted loss ratio improved significantly to 77.1% in the first quarter, compared to 83.6% in the year ago quarter, due to the benefit of lower average size in new claims. The long-term care business line had a more challenging quarter as the interest adjusted benefit ratio increased to 96.6% in the first quarter this year, compared to the favorable year ago first quarter of 88.6%. Benefits experience this quarter was driven by new claim maintenance that ran much higher than expected, which was partially offset by favorable claim resolutions due to mortality.
In addition, the higher loss ratio this quarter was negatively impacted by lower level of policy terminations. We continue to experience a high level of volatility in this line and expect it will continue in the future. I’m confident that we have the appropriate strategies in place to manage these businesses. We continue to see good overall trends with our long-term care rate increase program, which we believe is the most effective way to manage the long-term care block over the long term. The new money yields we are realizing for the long-term care portfolio continues to exceed the expectations we have embedded in our reserves.
However, we're getting closer to the time when these new money yield assumptions will begin to grade higher. Interest rates in bond spreads were more favorable for us in the first quarter, but this remains a watch area. We continue to feel good about our progress to date in obtaining approvals of long-term care premium rate increases with state regulators. We monitor this progress in two ways, both of which relate to the actual approvals received, compared to those assumptions we included in our 2014 assumption revision for GAAP reserves.
First, we quantify the present value of additional premiums and lending spot elections we will realize in the future based on actual approvals received. For this measure, we are on track with the estimates in our 2014 assumption set. However, it is important to note that the timing of implementation and the number of years over which increases may be faced in as a minimal impact on the total value we recognize over the life of the block. The second measure is the actual premium we will recognize in any specific year for approval rate increases, compared to the premium pattern incorporated into the GAAP reserve expectation.
For that measure, we have not received approvals as quickly as originally estimated and those approvals received have been phased in over a longer-time period than originally anticipated. This has had the effect of increasing our reported loss ratio in the recent past by 3% to 4%. Based on our current best estimate for the implementation of improved premium increases and our forecast of approvals in the near future we believe this loss ratio pressure from rate increase timing will reverse over the next 3 years to 5 years. We remain optimistic that regulators understand the need for actuarially justified premium increases and we will work with carriers to manage these blocks prudently.
So, in total, we view the first quarter as one consistent with the results we have seen over the past several quarters. Our core business lines continue to operate well, while our Closed Block results, particularly the long-term care line remain volatile. Moving on, we continue to deliver healthy levels of statutory earnings from our traditional U.S. insurance companies. For the first quarter, statutory after-tax adjusted operating earnings totaled $242 million, compared to $180.1 million in the year ago quarter. This year's results benefited from lower tax rate and an IBNR update and long-term disability, while last year was impacted by the guaranteed fund assessment, but overall, it was a solid start to the year from a statutory earnings perspective.
Our capital position remains in very good shape. At quarter end, the risk-based capital ratio for our U.S. traditional life insurance companies was slightly above 380%, while cash at our holding company's totaled $887 million. Our annual need for interest expense and shareholder dividends is approximately $360 million. So, we continue to maintain very strong coverage ratios. Our return on of capital to shareholders of remained on pace as we repurchased another 100 million of stock in the quarter.
Our board will be considering an increase to the common stock dividend at the upcoming annual meeting. There is a lot of interest in RBC ratios and target levels going forward given the potential impact of tax reform. We have had good dialogue with the rating agencies on this topic since year-end on what we believe the appropriate RBC levels are for our company. We and they continue to wait final decisions from the NAIC on any changes over revisions to the formulas and remain closely engaged in those discussion.
I will remind you that most of the agencies often use their own model for capital adequacy that typically use pretax rather than after tax assumptions. In which case, the proposed factor changes will not materially impact their views of our capital adequacy. In short, we really have a strong capital level and enhance capability to recover from stress scenarios given our stronger projected cash flows, due to tax reform benefits and healthy financial metrics, which will enable us to maintain our targeted financial strength rating of A. I’ll wrap up by reiterating our expectations of growth and adjusted operating earnings per share in the 17% to 23% range for the year. I’ll also remind you that the base of adjusted operating earnings from 2017 is $4.24 per share.
Now, I’ll turn the call back to Rick for his closing comments.
Great. Thank you, Jack. All-in-all, it was a solid first quarter for the company. We’re encouraged by the operating trends we are producing in our core businesses and we’re excited by the growth opportunities we see in our markets and are confident in strategies we have in place to continue to be successful.
We will move now to your questions. So, I’ll ask the operator to begin the question-and-answer period.
Thank you. [Operator Instructions] And we will now to our first question from Eric Bass with Autonomous Research. Please go ahead.
Hi, thank you. I had a couple of questions on the long-term care side. Guess first you provided some sensitivities for long-term care reserves to changes in interest rates, I was just hoping you could provide some similar sensitivities to changes and claims trends or changes in mortality or morbidity to just give us a sense as how things change there, what the impact could be on reserves?
Yes. We do sensitivity testing. We have not come out with the same, a lot of it depends not only on the level of persistency and mortality and morbidity, but also on the shape of it. So, it is a significantly more complicated question in the interest rate change and we have not publicly disclosed those.
Got it. I may be thinking about it a different way. I mean you've disclosed I think a cushion of about $1.1 billion between your GAAP and statutory LTC reserves, which seems pretty large, given the size of your total reserves, so what I'm trying to gauge is what would have change in your assumptions to exhaust that question, and if claims, incidence remained elevated levels like you saw in the first quarter, mortality experience was consistent with what you saw in 2017 and rates were kind of trending the way they are, is that still only a GAAP issue do you think?
I mean we need to go through the work, so it’s a process we’re going through. We’ve started our annual process. We will be doing a thorough review of experience and assumptions. I want to look at the first quarter as being indicative or overly material. I mean there was volatility in both directions. We actually had very favorable mortality results in the first quarter for particularly our claim mortality, our on-claim mortality results. We had a very unfavorable new claim volumes in the first quarter both of those were aberrations that went in different directions and I certainly wanted to draw a line through the first quarter and say that is where the world is forever.
We do have significant margins between our statutory reserves and our GAAP reserves, we would expect those to build to the $1.3 million to $1.4 billion range by the end of the year. I’d also point out that over the last couple of years we’ve exceeded our investment bogey’s which is based on current assumptions has built additional margin in to our GAAP reserves. And the third point I would point out is that we still have room from a rate increase perspective. We would expect – we're pretty much on plan with the approvals we’ve seen historically, as well as what we anticipate from those states that give regular ongoing small approvals.
We still have a lot of outstanding rate increase request in that original 2014 stage filing. We expect to get additional benefits from those filed and as we update assumptions we will be looking at another round of rate increase request. So, there is a lot of room there. So, I feel there is a gap [ph] between where the reserves are, rate increase opportunities, and our stat to GAAP margin there is a very good margin in there, but we got to go through the work before we can solidify where we end up.
Thank you. And just on the last point you made on the rate increase side, can you just provide an update on sort of how far through the approval process are, are you on the round of rate increases that has been filed for?
This is Steve Zabel. We’re just over 90% kind of the way through what we had originally anticipated in our 2014 program, measured by kind of the present value of the additional premium and any benefit adjustments that we may receive. So, we feel pretty good about that and that’s about what we had assumed, how far we would be through on the approval process in the original reserve construct.
Yes, I’d note though on the top of that there is still probably 0.5 billion plus outstanding request that we are yet to receive word on.
Okay, thank you.
Thanks Eric.
Our next question comes from Jimmy Bhullar with JPMorgan.
Hi good morning. First, just a question again on long-term care, if you think about the uptick in the loss ratio given your comments on the pace of getting the price hikes, do you expect that this the stay, is it more reasonable to expect that to stay around of the current level versus the 91-ish percent level that you saw over the past couple of years?
Yes, I think we expect, given the impact of the rate increase timing that probably in the, higher than that 91 level, frankly it is so volatile at this point that I would have ventured that predict exactly where it is going to be. The thing I would remind you though is what happens in one quarter or two quarters is really muted relative to what happens on a reserve assumptions basis and what that means for reserves.
Okay, but more likely it showed sort of track higher than where it was last year, just given the pace of price hikes on those, like obviously the number moves around every quarter and [indiscernible].
Yes, I think it would track higher and we have seen an uptick. I would expect that probably to continue.
And then you are achieving your assumptions for the investment deal and actually I think you have been doing a little bit better than that even recently, but the assumptions do grade up a decent amount over the next few years beyond this year, how are you thinking about maybe adjusting your assumptions or at least adjusting the steepness in which your assuming yields will go up, and if you are thinking about it when would we see you adjust those?
You know, I mean that would be part of our annual review process. You know that would be one of the last things we lock in because it will have a lot to do with where interest rates are at the end of the year and where credit rates are and what we view the future to be. It is encouraging that interest rates have been rising, credit spreads have shown some signs of returning to more normal levels with which has helped us, but again that’s going to be one of the last things we peg because it will depend on the environment.
And then just lastly on, if you could talk about just market conditions and competitive trends in the disability market, a lot of companies have been raising prices the last few years, it seems like they are done with their repricing cycles, but what are you seeing in terms of competitive behavior in the market?
Yeah, Jimmy, let me turn it over to Mike to talk a little bit about the market?
Thanks Rick. Good morning, Jimmy appreciate the question and I would agree it is competitive market out there though I would say our value proposition continues to resonate, I’d take you to first the persistency and the increases that both Rick and Jack highlighted, also the 4% sales growth that we saw in the quarter, which is good to see, but as you cited, do you think it is a competitive market?
If I had to pick a spot, I’d say that middle market mid-sized employers and two data points there, that’s certainly where we saw the most group insurance sales pressure was that midmarket, as you know we're not going to chase new business, we don't think that is in our best interest of frankly in the best interest of our clients where they are looking for stability and predictability in cost. And also, where we did have terms and lost clients we saw high single digit loss on the business that we lost in that mid-market.
So, we are probably feeling most acutely there, but overall, I would say, our outlook is one of cautious optimism. 1Q is our light sales quarter for us in the group insurance line. We're really encouraged with the growth in our dental and vision business. That’s really helping us as we package in the smaller end of the employer market and we’ve rolled out some new capabilities in the large case market as well and the pipeline there looks quite encouraging. So, competitive market, but I think we’re more than holding our own.
Yes, I think one thing I would say Jimmy is, it is always competitive market, but you don't see anybody that’s way outside of the norm in terms of being overly competitive or too aggressive in the market. That’s a good place for us, I think given the value proposition that Mike highlights, we do very well and we’re within a range of pricing and that’s, I think that’s where we are today.
Thank you.
Thank you. Our next question comes from Humphrey Lee with Dowling & Partners.
Good morning and thank you for taking my question. Just to follow up on long-term care. Jack, in your prepared remarks you talked about the elevated loss ratio will reverse over the next 3 years to 5 years. So, do you mean that the loss ratio will kind of remain above your 85% to 90% range over the next 3 years to 5 years as you implement these rate increases?
Actually, what I was talking about is that 3% to 4% pressure on the loss ratio that we’re feeling now from the lag and which we’re actually seeing the premium from approved rate increases, that would dissipate over the next 3 years to 5 years. So, it is 3% or 4% pressure.
So, the 3% to 4% pressure to your loss ratio, I guess above your 85% to 90% target, so do you mean it will remain above 90% over the next 3 years to 5 years?
Yes. You know, again, we're going to look at assumptions, we're going to look at reserves. I mean, we will see where the loss ratio goes. I am not going to try and predict a specific range that will be in, but no matter what the loss ratio is the underlying pins of it will be 3% to 4% better, 3 years to 5 years from now because of the catch up and rate increases.
I think Humphrey we’re trying to isolate that one issue where we’re getting the value that we expected, it’s just a little bit of a lag and that lag comes through a media loss ratio, but from an overall long-term value perspective it will be there, and I think that’s a little pressure now and we will get that back over the next couple of years, but it is just isolating that one aspect that most people would know.
Okay. Got it. And then shifting gears to expenses you talked about in the quarter there is some high investment-related expenses in group visibility and Colonial Life as well as supplementary and voluntary, how should we think about these expenses like what would be, I guess as an ongoing basis as opposed to a one-time nature, I guess in general just how much of the elevated expenses in the quarter would remain in the near-term?
So, what we’re trying to highlight Humphrey is looking at the overall expenses we’re investing in our business and so that’s an important part. That will continue. So, when we look at the opportunities we have out there, the ability to spend money to grow the business to run it more effectively to serve our customers, we will continue to invest money there. So, I will highlight that at the macro level. On a very specific level, we’re investing and maybe we will go around to each of our businesses and talk about the areas of investment because I think it’s interesting in terms of how we’re continuing to grow the company. Mike, maybe you start with Unum U.S.
Yes, thanks Rick, appreciate it. Good morning Humphrey, and from an expense perspective for Unum U.S. you are seeing sort of a gradual improvement over the last several years. I think in the quarter here we were flat year-over-year, and I actually feel very good about that given the level of investments that we're putting back into the business and I take you to the continued investment and expanding the dental and vision business we’ve gone from about half the country two of our sales regions to the full country rollout, we continue to invest aggressively in our network of provider build out strategy, which is great you see that kind of surfacing in our sub-fall expense ratio. And then in group disability, you continue to invest in the client experience, particularly around the services we provide for helping to plan and manage leaves, as well as sort of relive the administrative burden on employer, and I think both of those are sort of good solid ongoing investments that we see sort of the benefits of already starting to materialize in our position in the market and our growth pipeline. And I know Tim Arnold that Colonial Life is making some similar investments around the client experience, so maybe Tim I’ll flip it to you.
Yes, great, thank you Mike. We are making investments in the client experience and investments and technology to support that. We're really pleased with investments that we're making in our distribution expansion, we’re seeing nice results flowing from that, and then in the first quarter we had a number of expenses related to the ramp up of the dental offering, which we kicked off in late first quarter seeing very good market adoption thoroughly for the dental product, but very good market adoption there. So, we also think first quarter was influenced a little bit by some timing issues and we would expect our expense ratio to moderate over the balance of the year.
Great thanks Tim and Peter in the U.K.
Yes. I like my colleagues obviously from the core business perspective continuing to perform strongly and we are investing for the future, so we have a number of initiatives running looking at both efficiency and growth. Actually, our expense ratio performed very strongly in the quarter. We actually have a little bit of the opposite of what Tim talked about, little bit of positive timing, so we expect that to be a bit of a low point come back a little bit in-line with expectations but continuing to invest prudently I guess given the economy out here.
Thanks Peter. I think overall Humphrey to answer your question, I think we're talking about all the investments, but you're seeing us pay for those with a lot of efficiencies, so you're not seeing the loss ratios move they’ve been coming down for most of our businesses, all of our businesses over the last several years that may moderate a little bit, but efficiency is still a big part of creating that room for investment that we're going to continue to make.
Got it. Thanks.
Thanks Humphrey.
Next, we will move to Randy Binner with B. Riley FBR.
Hi thanks. I have a couple of follow-ups in the long-term care area. First of all, there's a comment earlier that the mortality and new claims trends were an aberration in the first quarter. So, mortalities understood you've have been unusually high, due to flu in the first quarter. But what about the claims trends? Would that make you characterize those as an aberration in the first quarter?
Yes, so I would say first of all the claim aberration didn't come in levelly over the quarter. It was highly concentrated in the month of February. Our new claims submissions in the month of February were outside of two standard deviations from the main, so less than 100% chance of being there. They actually settle down. It is still above the May but settled down in March. And it continued to settle down since. So, that you would spike and in fact most of that spike happened in a two-week period in the middle of February. That would be the thing that would make me say it’s an aberration as opposed to a trend.
Okay. but there's no – you don't know why? It was just an unusual two-week period?
No. And you can speculate that just as the flu improved mortality, people at the margin and they have – it had tipped the scales there, but we will never be able to. So, it is already there with certain [indiscernible].
It is hard to pinpoint Randy, I mean if you look at history we have seen spikes in the past. Sometimes those spikes and we were speculating at that time too can be caused by rate increases and what comes through and things in the news, there’s a lot of things it’s hard to pinpoint it, but as Jack said, it was a spike, we saw a tick-up and it has come down a little bit since then.
But flu, may be on the margin flu pushed some folks in?
Could be.
Okay. And I just, I wanted to, I think Jimmy mentioned the kind of the yield assumption on the LTC block that was set in the fourth quarter of 2014, I think it was, if you look back to the fourth quarter 2014, the 30-year treasury yield was pretty similar level, maybe it was a little bit lower than it is right now. So, you know if we use that as a risk-free rate and then you would earn something higher. When would that need to start inflicting higher, because if you fast forward to kind of the end of this year that would be four years and then it would be five years and at the end of 2019, is it, you know, do you need to have like one-year visibility on that trending up or can you wait for that to start trending up in year five?
I think Randy Jack answered in kind of the path we picked back in 2014, and that we would stay flat and move up, we exceeded that. We started to see interest rates move up 30 years similar credit spreads or wider, but you certainly see in the 10-year and so you have a very tight 10-30 [ph] spread, which should change over time hopefully. And so, we have to stand here today and look forward, and so it is not beholden to that path in 2014 that we picked. It says we sit here and look forward and what’s the path that we choose for the future, and so I think that’s what goes into our assumptions every year as we go through it, we kind of give you a track as to what we saw then, what we're seeing now that would stay flat for a period of time, and then we will start to trend up and we’re hopeful that we will, but we continually look at that as we do every year in terms of what a go forward path might look like.
So, is this 30, minus 10, something to think about there or probably then just 30?
No, I think it is very still a right number. I am just indicating that that 10-30 spread is unusual in terms of how tight it is. So, if that 10 continues to move up, you might expect the 30 will actually gain some spread as well and out of the 30 you might see a little bit wider credit spread then you see in the 10 as well. So, it’s still very much a 30-year treasury view that would be.
Okay. Thank you very much. Got it.
We’ll next move to Tom Gallagher with Evercore. Please go ahead.
Good morning. Can you comment on the favorable mortality in the quarter on the long-term care benefit ratio? Can you quantify at least ballpark how much of a benefit you thought that was for the quarter?
Yes. I mean we are not going to get into talking about specific assumptions by quarter and how far they benefitted or didn’t. You know as a partial offset to what we saw around incidence in policy hold the terminations.
But I guess Jack my question is, if the elevated claims submission continues for little bit here and we see normal seasonal mortality and the - I think you described this very favorable, if that goes away in 2Q, are we looking at a loss ratio north of 100 or do you think it’s still below that?
I mean, I’m not going to speculate on that. It’s, it’s hard to think that bad things stay forever and the good things go away. So, we’ve had volatility around bunches of assumptions by quarter and would expect that to continue?
Okay. And then just from a rate increase standpoint, would you say based on what you’re seeing right now, would this prompt you guys can consider a big new fresh round or where, I know you are still in the process of completing the bigger 2014, 2015 plan, but what are you thinking right now, is it still kind of wait and see to see how this plays out before you consider strategy with rate increases or are you considering accelerating something there?
Yes, Tom, this is Steve. It is just part of our assumption review, we go through, we look at all of our action to expected, compare that frankly back to previous filings that we made with the states to understand what has changed against those because they do need to be actuarily justified with the states and so we would not develop a new strategy until we have that whole picture, because it may influence what part of the block we may want to rate, as well as any potential magnitude of those rate increases. So, I would say it’s wait-and-see and if there is another round, we will finalize that in conjunction with our assumption review.
Yes, I would reiterate that Tom that to the extent that assumption review creates a situation that’s adverse to where we are currently, I would expect there would be refreshed ground of rate increases to go along with the new assumptions.
Got you. And just in terms of the holding company cash that is it a strong level, just curious what you're thinking there, is that, you know considering your options and your alternatives here, is that would you say you are taking more of a wait and see approach or, you know is there any contemplation that you could do something more aggressive on capital return depending on how the rest of the year shakes out with given how much holdco cash you have?
Yes, it’s great to have the cash that puts us in a very good position with a lot of flexibility. You know given the uncertainty in the environment around, you know particularly around what’s happening with risk-based capital factors, what the NAIC is going to do, how the rating agencies across the board are likely to react to that. My feeling is, this year probably isn't the year that would be more aggressive on returning capital, but it’s great to have it and it puts us in a good position to respond to whatever happens from a capital perspective with the rating agencies.
I think the buildup of all the company cash is more a factor. We’ve seen really good statutory earnings. Our capital return to shareholders has been pretty consistent on the share repurchase side, and we’ve been increasing dividends on the common stock dividend side and so it’s more a factor of that and watching our core businesses generate that cash. It has built-up. I think Jack articulates it right as, it is good to have that flexibility and as things move throughout the year we will maintain some of that.
That all makes sense. Thanks, and just one last one if I could sneak it in. The, just curious if you could comment on just looking through the 2017 long-term care supplements, for Unum and several others, looks like incurred claims went up a lot in 2017 both for Unum and for the industry. It was like a double-digit delta year-over-year. 2016 was much less of an increase and then for whatever reason incurred claims just went up a lot in 2017, any thoughts about what’s driving that in terms of underlying factors, anything anomalous or any help you can give on that?
Yes, if you look at those forms and you look at the annual periods, 2016 is the outlier. 2016 for us was I think like a 99% actual to expected. It has been running around that 110%, 115% pretty consistently for the years before 2016 it returned to that in 2017. So, when I look at the stat forms, I would pick out 2016 as being the outlier. I wouldn't really pay too much attention to the increase of over 2016 because if you look at the trendline we were pretty consistent with that. I would say a couple of other things on the statutory forms.
First of all, the run out of our disabled claim reserves, that run out over the entire period was about 330 million, negative. We also increased strength and reserves by 340 million during that same period, and so if you offset those two based on our current reserve level for claim reserves, things are working out pretty good and very steady.
I think the other thing on those forms you can see the impact of rate increases are gross to net ratios. Show a 42% increase. So, we’re running in a kind of 70% range on gross to net. And so, I think if you look at, I mean and you take 2016 into consideration with things have been pretty steady.
Got you. That’s helpful color. Thanks.
Thanks.
Next, we’ll go to Alex Scott with Goldman Sachs.
Good morning, Alex.
Thanks. Good morning. First question is just on the LTC premium rate increase environment, could you discuss just how the regulators look at, I guess the long term care business and in the context of the legal entity and some of the other businesses that you have in there, are you finding that they are looking at a purely isolated to the long-term care and sort of what’s going on in the [indiscernible] captive, or is there any pressure to potentially offset some of it with the very positive results you have had in some of your other core businesses?
Yes, this is Steve and thanks for the question Alex. I think a very positive aspect of the conversations we’ve had with the regulators is they stuck to the letter of the contract and the regulations, which really says you need to look at this on a standalone basis from a product perspective. The products need to stand on their own, you need premiums that are sufficient for those products. So, sometimes we will hear comments from consumers around that, a little bit more around some of our more favorable profitable businesses and how that might influence these rate increases, but the regulators strictly look at how is a long-term care block performing, how do we project that to perform, what does that mean to lifetime loss ratios and what does that mean to premiums efficiencies.
So, I think conversations by and large have been very constructive around looking at it on a standalone basis. I do think generally the environment with regulators has improved over say the last 3 to 5 years, where regulators are very engaged in the discussion around long-term care and understand the need to approve significant rate increases for this line of business.
And the second question I had was just on the individual long-term care, I think you are getting sort of deeper into sort of the lifetime of the block and getting closer to where you have peak claim levels, so could you just discuss the level of statistical significance that you have with new claim activity that’s coming in relative to when you're looking at in 2014 or could you, is the experience much greater, the amount of data you have much greater now than it was a few years ago?
I mean certainly the data is greater now than it was a few years ago. I think there is still a long way to go. You know particularly when you talk about claims experience and trends in the 80s and 90s, there’s not as much known about that either on the claim side nor on the active life reserve side around what mortality will actually be in those later durations. So, credibility in the long-term care business is building, but it’s a long haul. And particularly at the very old ages.
Thanks. And maybe if I could sneak one more in on just the group disability, when I think about the benefit ratios and how favorable they have been, can you characterize at all the amount of that that’s sort of coming from favorable development on the claims reserves as opposed to current period claims and how that’s trended and sort of if you have any visibility on when you would expect some of the favorability from the claims deserve to slow down?
Yes, I mean, I think particularly kind of historically there was some favorability and claim development, claims assumptions have pretty much caught up with that. So, I think we are well in-line in terms of where our loss ratio is, and where our reserve assumptions are. So, I wouldn't expect it to reverse, but I don't expect it to get any better either.
I would add one thing to that. The team is, we have talked about the last several years is also and a low rate environment has been taking price, and so that has come through and working closely with our customers to justify that, but we have been increasing prices. Over the last several years, and I think what you are pointing now we're very happy were those prices are.
Thank you very much.
Thanks Alex.
Our next question comes from John Nadel with UBS.
Hi, good morning. So, I guess more of a big picture question, last quarter Jack I feel like you were really specific about all of the reasons why Unum’s approach to the long-term care business was still vastly different from GE and what occurred at GE in terms of more than doubling of their long-term care reserves is just not something that we should think could happen for Unum this quarter, you know we're seeing some elevated near-term loss ratio on higher claims instance and I don't know may be that cost you guys a couple of pennies, versus expectations, but the stock is down 15%. I don't think that has anything to do with a couple of pennies. I think investors are adopting, your reserve adequacy and so far, my sense is that you are not exhibiting that same level of confidence with the quality of your reserves that you did last quarter. So, with that as the back drop like what underlying reserve assumptions are you currently most concerned about as you start this annual review or robust review process and clearly it sounds like premium rate increases are coming in a bit slower, but where else are you seeing things diverge from your underlying assumptions?
Yes, as I said John, my position on this has not changed at all, the marketplace's position may have, but I think still think there is a vast difference between us and GE, difference between being a direct writer and a reinsurer, the difference between the age of our business, the fact that were more than half of our business in increasing share of our business is in the group long-term care space as opposed to the individual long-term care space. And even on the group side we’re unique and that the bulk of that business is employer funded, paid premiums has a very different lapse expectation, it has very conservative plan designs, you know in terms of the history of how we’ve managed it.
We’ve put more than 4 billion of margin into our long-term care block between rate increases and reserve charges, you know GE came out with this one-time review, we’ve done two comprehensive reviews in 2011 and in 2014 we keep after it on an annual basis, and we actively manage the block both from a rate increase perspective from a reserve margin and investment perspective, as well as we’re continually talking about our long-term care block, we bring you up to speed on it on a quarterly basis and our expectation is that we will continue to do that over the life of the block.
Okay. I appreciate the response, I really do. If I could just ask one more specific question on LTC reserving, you know can you tell us whether you assume morbidity improvement weather in your cash flow testing or premium deficiency testing, and if you do assume morbidity improvement, how much improvement do you assume and for how long?
I’m not going to get into those specifics of what we assume for morbidity improvement. We actually assume both morbidity improvement and mortality improvement, which goes against us and our reserve assumptions, but I'm not going to get into the particulars on it.
Okay. So, would it be fair to assume that if you're reflecting mortality improvement then you’re also reflecting morbidity improvement that the two might generally or they might wash out over time?
It’s not a washout, but they go in different directions.
Yes, understood. Okay thanks.
[Operator Instructions] We will next move to Suneet Kamath with Citi. Please go ahead.
Hi, thanks good morning. I just want to follow up on Humphrey's question first. The 3 points to 4 points related to the timing of the premiums that should reverse, was that, I’m assuming that you knew about this so that was embedded in your kind of low 90% loss ratio that you gave, I guess at the outlook Investor Day, is that correct?
Yes, you know I think a low 90s was more around a historical trend of where they have been of parsing of what the drivers were. We knew about, you know there was some pressure, I think we have done more work to quantify that both in terms of what the level of that pressure is and how we would expect that to wind out over the next coming years.
Okay. All right. So, then just to go back to the Investor Day, I think you were making two points if I recall. I think one point that you’ve made and I know this is all fluid, but one point you made Jack I think was that, if you were to take a charge this year, next year, it would be sort of similar to what you have kind of taken in the past, order of magnitude, which I believe you said was around 450 million on an after-tax basis, and then relatedly I am pretty sure you were suggesting that if you took a charge it would be on a GAAP basis only and then it wouldn't be any kind of statutory impact. So, I just want us, and we are a few months away from that, but just want to make sure that, a, I’m right about those two statements; and b, that you're still kind of stand by them?
I made those statements, you know we're going to have to go through the work, what I would reiterate is there is good margin between where our GAAP reserves are right now in the statutory front and that comes from three different places. One, we’ve exceeded our interest rate assumption. So, our portfolio rate today is well above where we expected it to be in our reserve assumptions at this point that creates margin. The second one is, we have, we still have room in our rate increase assumptions both in terms of expectations of the rate increases that have already been filed as well as the opportunity to refresh and refile new rate increases based on any new set of assumptions that we might come up with.
And we have, you know expected at year-end $1.3 billion to $1.4 billion difference between our stat reserves and GAAP results. So, I can’t tell you right now what the answer is because we’ve got to go through the work, but I would reiterate that there is a lot of margin between where our current GAAP reserves are and where our stat reserves are.
Okay, and then maybe just one last question to think about it, and again, I know these things are moving around, but if we think about that extra margin that you’ve built because you’ve been investing over your 5% bogey, and we kind of think about the investment return assumption kind of grading up, if rates don't grade up, how long would it take to sort of all else equal, how long would it take for that additional investment margin that you have on the balance sheet to get eroded, is it two years, is it five years, I mean just any sense of time it would be helpful?
Yes, I mean I would say that’s difficult to say. So, the margins there, those investments are there. They will continue to be there. It’s the impact of new money rates and cash flow that will have an impact, I mean that’s one of the things that we will consider, but you know it has been meaningful and has created a decent margin that we have to work with on interest rates.
Okay. I mean, I think just to John's point on the stock, I mean, I think any additional color that you could give on some of the trajectory of these assumptions, I think would certainly be helpful.
Understood.
And we’ll next move to Ryan Krueger with Keefe, Bruyette & Woods.
Hi, thanks good morning. I guess I have somewhat of a similar question. As John and maybe Suneet, but in the past you pretty confidently said that any changes to long-term care reserves over time given the margin you built upon a statutory basis would not be affected to have any impact to your capital management plans going forward, I guess I just want to confirm that you're still confident in that view going forward?
Again, we're going to need to react to the experience that we’ve been seen emerging. We would reiterate that there is a lot of space for our reserve for assumption fine tuning between where we are right now and where we will be, but again we need to go through the work before we can define the answer.
Okay, understood. Thank you.
And we have no further questions in the queue at this time. I’d like to turn the conference back over to our speakers for any additional or closing remarks.
Yes, thank you. It is Rick. I just want to thank everybody for joining us this morning. We hear your questions on long-term care. We have, we’re working through it as Jack has said. We will articulate best we can, all of the factors that we see out there, the trends that we see and just as we’ve done in the past we will continue to do that. We're going to be out and about number of insurance conferences and make sure we’re answering your – continue to answer your questions at those as well. So, thanks for your time this morning and that will complete our 2018 earnings call.
And once again that does conclude today's call. We thank everyone for their participation. You may now disconnect.