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Unum Group
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Good day, everyone, and welcome to the Unum Group First Quarter 2019 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Tom White. Please go ahead, sir.
Great. Thank you, Lisa. Good morning, everyone, and welcome to the First 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, 2018. And 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. Also 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, which is also on the website in the Investors section.
Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; our CFO, Jack McGarry; as well as the CEOs of our business segments, Mike Simonds for Unum US; 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 day, everyone. We started 2019 with good first quarter results. Our after-tax adjusted operating income per share increased approximately 5.5% to $1.31, right in line with our outlook range for the year, 4% to 7% growth. We're pleased that the first quarter repeated many of the positive operating trends we have consistently experienced over the past several quarters. We'll cover these trends throughout our comments this morning.
To begin, the growth trends in our core businesses remain quite healthy. We continue to see good levels of premium growth, including 4% growth in Unum US, 5% growth in Colonial Life and 10% growth in the international segment. This stable pattern is a result of our disciplined approach to sales growth and our ongoing focus on our current customers.
In addition to solid premium growth, we continue to see stable benefits experience across our operating businesses. This provides very healthy margins with strong cash generation and financial flexibility for the overall company.
Also in the first quarter, our Closed Block segment results were in line with our long-term outlook. We're encouraged that, over the three quarters since our reserve assumption update last year, the interest-adjusted loss ratio for the long-term care block has been 86.4%. This is in line with our expectations of 85% to 90%. Jack will provide additional detail on these results as well as updates on other important aspects of the LTC business.
With this good financial performance, our capital metrics remained on track. The RBC ratio for our traditional U.S. insurance companies was on our expectations, and holding company cash remains above our targeted level. We bought back $100 million of our shares as we consistently return a portion of this capital to our shareholders.
Speaking about our business in the aggregate, we continue to believe that the workplace is the all channel to reach and serve the financial protection needs of our consumers. We will continue to use our strong cash generation to execute on our long-term strategy of investing in the growth of this business. You have seen us strategically expand our portfolio products and services over the last several years with the largest example being the dental business. By scaling our acquisition through our distribution teams at Unum US and Colonial Life, we have created a meaningful position in the dental business in a short time.
In addition, we are investing not only [indiscernible] but in the ways we deliver them to consumers. We're doing this to streamline integrated ways of working with our distribution partners and easy-to-use digital tools to assist customers as they access and manage their benefits. Investments can also come in the form of expanding our reach. Last year saw our expansion into Poland, which is small relative to our U.K. business but is a good platform and has real potential along [indiscernible] term. Distribution expansion in the U.S. is also a focus as we see opportunity in developing our Colonial Life footprint with geographic expansion in the U.S. These activities underscore our purpose of providing essential financial protection to millions of workers and families. All of these position us very well to drive continued growth in the future.
We're off to a good start in 2019. You can see that reflected in our results. I would also share there's a high level of enthusiasm that our teams bring to serving our customers every day. It solidifies the great position we have in our markets today and provides the energy to pursue the growth opportunities ahead of us.
Now I'll ask Jack to cover the details of the first quarter results. Jack?
Thank you, Rick, and good morning, everyone. To reiterate Rick's opening comments, we feel very good about the operating results for the first quarter and the momentum this gives us in 2019. I'll provide additional detail on the performance of our business segments and provide an update on our capital position.
Beginning with Unum US. It was a good start for 2019 with adjusted operating income increasing 3.4% for the first quarter. The positive operating trends we've seen in this segment over the past several quarters continued into the first quarter with solid growth in premium income, very good persistency in our group product lines and stable risk results across our major business lines. These strong operating trends were offset somewhat by the ongoing decline in net investment income for the segment, which was driven by lower miscellaneous investment income as well as the ongoing pressure on portfolio yields. In fact, miscellaneous investment income for the first quarter was lower for the total company relative to the year ago quarter and relative to our historical quarterly average. This shortfall had a dampening effect on a number of our business lines.
Within Unum US, adjusted operating income for group disability declined by 0.5% to $82.6 million in the quarter. Continued good premium growth and excellent benefits experience were offset this quarter by lowering net investment income.
Premium income grew by 3.9% as the in-force block increased strong persistency levels and higher sales. The benefit ratio improved to 74.7% in the first quarter from 75.6% a year ago, driven by favorable new claims incidents and recoveries in our long-term disability line, which offset higher-paid claim volumes in the group's short-term disability product line.
Similar to recent trends, net investment income in the quarter declined by 7.6%, driven by a very low level of miscellaneous investment income and the continuing trend to produce assets back in the line and lower portfolio yields on those assets.
With an average level of miscellaneous investment income, we would expect the group disability lines to generate quarterly adjusted operating income in the mid-$80 million range. This quarter's risk results were consistent with that expectation. The Group Life and AD&D line also had a good quarter with adjusted operating income of $67.4 million, an increase of 4.3%. The primary driver of the performance was an increase in premium income of 4%, resulting from prior period sales growth in very good persistency trends. The benefit ratio was generally consistent with the year ago quarter.
Sales for the Group Lines of business in Unum US were very good in the first quarter, increasing 8% over the year ago quarter. The group disability lines primarily drove this growth, increasing 24.6%, while we saw a decline of 9% in Group Life. Persistency in the Unum US Group lines remains a highlight for us, an important driver of premium growth. Total group persistency for the first quarter of 2019 was 90.9%, up from 89.4% for the first quarter of 2018. Finally for Unum US, the supplemental and voluntary line showed strong results for the quarter with adjusted operating income of $102.3 million, an increase of 6.2%.
The primary drivers for the quarter were good premium growth and overall favorable risk experience, which offset lower net investment income and higher amortization as deferred acquisition cost related to the impact of a higher level of policy terminations, particularly in the voluntary benefit product lines. Premium income grew by 5.6% primarily from prior period sales growth with increases in all three primary product lines, particularly in dental and vision as we expanded distribution.
Focusing on risk experience, the benefit ratio for individual disability was lower due to favorable claims incidents and a lower average size of new claims. In the dental and vision line, the benefit ratio was also lower due to lower claims utilization. For the voluntary benefits business, the benefit ratio benefited from favorable underlying risk experience as well as the release of active life reserves resulting from a higher level of policy terminations. The active life reserve release is largely offset by accelerated amortization in the deferred acquisition cost, so the earnings impact is muted.
Sales for the supplemental and voluntary lines declined by 2% for the quarter with lower sales in individual disability and voluntary benefits partly offset by an increase in the dental and vision line. Persistency in the supplemental and voluntary lines was lower in the quarter relative to the year ago quarter. Our Unum International segment reported adjusted operating income of $29.1 million for the quarter, a decline of 2.3%. The decline is largely due to unfavorable U.K. currency exchange rate relative to the prior year.
In local currency, Unum UK produced adjusted operating income of GBP 21.6 million in the quarter, an increase of just under 1%. Results for the U.K. business were driven by an increase in premium income of 4.7% from favorable persistency in sales growth, partially offset by a decline in net investment income due to a lower yield on both fixed-rate bonds as well as inflation index-linked bonds.
In addition, the benefits experience was favorable due primarily to the impact of inflation-linked increases in the benefits related to our group products. Our international segment also includes the earnings contribution from Unum Poland, which we acquired in the fourth quarter of last year. Unum International sales in U.S. dollars increased 32% in the first quarter, driven by strong growth of 19.5% from Unum UK in local currency and the inclusion of Unum Poland. Persistency for the U.K. business increased over a strong 2018 level, a very positive sign given the high single-digit rate increases we're achieving for renewals on the group disability block.
The Colonial Life segment produced another strong quarter with adjusted operating income of $85.2 million, an increase of 5.2% from the year ago quarter. The drivers of this performance continued to be very good premium growth of 5.3% and steady benefits experience. The benefit ratio from the first quarter was generally consistent with the year ago quarter with favorable experience in the life business partially offset by less-favorable results in the cancer and critical illness lines.
Sales at Colonial Life increased 4.9% in the first quarter compared to the year ago quarter. The growth was primarily driven by favorable sales trends in the core commercial market in public sector.
Moving to the Closed Block. Adjusted operating income was $31 million for the quarter, an increase of 7.3% over the year ago quarter. As expected, premium income declined to -- in this segment, declining by 3.6% in the first quarter primarily due to the ongoing policy terminations and maturities for the individual disability line.
Net investment income increased by 2.6% in the quarter, driven by an increase in the level of invested assets, which was partially offset by lower miscellaneous investment income. In the individual disability product lines, the interest-adjusted loss ratio was 80.1% for the first quarter compared to the very favorable 77.1% last year, driven by less favorable mortality experience and a higher average client size.
The results of the long-term care business line for the first quarter reflected new reserve assumptions we adopted in the third quarter of 2018. On this updated reserve basis, the interest-adjusted loss ratio for long-term care was 88.5% in the quarter, which is in line with the range we outlined for your of 85% to 90%. The interest-adjusted loss ratio in the year ago quarter is not comparable given the reserve basis change.
For the three quarters since the reserve assumption update last year, the interest-adjusted loss ratio for long-term care was 86.4%. While the results of this block should be measured over a long time frame, we're pleased that the performance thus far has been solidly within the targeted range. Since we updated the reserve assumptions in third quarter of 2018, we continue to make good progress related to our long-term care premium rate increase assumption. And we're encouraged about the conversations within the NAIC to grant actuarily justified rate increases. In addition, the new money yield for long-term care investments in the first quarter exceeded the 5.5% new money yield assumption embedded in our updated reserve assumptions. For our other U.S. businesses, new money yields for the first quarter were in line with the fourth quarter but remain below our portfolio yields, so we expect to continue to see some pressure on the portfolio yield and overall net investment income.
Wrapping up with the Corporate segment, the adjusted operating loss was higher in the first quarter at $45.4 million compared to a loss of $40.3 million in the year ago quarter due in large part to a higher level of outstanding debt, a higher rate of interest and higher pension cost. This quarter's results are consistent with our expectations of quarterly losses in the mid-$40 million range. That's toward earnings for our traditional U.S. insurance companies remain at healthy levels and adequately support our capital management plans. In the first quarter, statutory asset hats operating earnings totaled $223 million compared to $242 million in the year ago quarter. [indiscernible] you may recall that last year's results benefited from an IBNR update for the group long-term disability line.
We closed the first quarter with a strong capital position. The risk-based capital ratio for our U.S. traditional life insurance companies was approximately 360%, which was in line with our expectations. Cash at our holding companies totaled $594 million at the end of the quarter, comfortably above our projected 2019 fixed cost estimate of approximately $390 million. Share buybacks in the first quarter were $100 million, consistent with our outlook for the year.
I'll conclude my comments this morning by reiterating the expectation of growth and adjusted operating income per share in the range of 4% to 7% for full year 2019. The base of adjusted operating earnings from 2018 is $5.20 per share, which excludes net realized investment losses in the reserve increase for long-term care from our 2018 net income. This is consistent with the view we shared with you at our outlook meeting in December.
Now I'll turn the call back to Rick for his closing comments.
So thank you, Jack and -- to wrap up our comments, it was a solid quarter for the company and a solid start to the year. We're pleased with the reporting trends we're seeing in the core businesses, and they are driving strong operating earnings and cash flow for the company. We're happy to move your questions now, so I'll ask Lisa to begin the question-and-answer session. Lisa?
[Operator Instructions]. We'll take our first question from Jimmy Bhullar with JPMorgan.
I had a question first just under long-term care business. The interest-adjusted loss ratio, it was within your guidance, but it has picked up a little bit. So is it normal sort of volatility in the business? And if it is, what did you see? Or are you seeing a slight deterioration in claims trends?
Yes. Jimmy, I'd say that's normal volatility. If you look at what's happened since we did the reserve update in that third quarter, the third quarter, the loss ratio was at 87.5%, so spot on the middle of the range. This quarter, it was slightly above that but still low within the range. And we noted when we did the reserve update that we would see volatility in the loss ratio. Fortunately, that volatility was positive this time. So I would look at the [indiscernible] fourth quarter 2018 as kind of the aberration in that a little bit of unusual positive volatility there, but overall, we're really pleased with where the loss ratio is. We're pleased with how experience is unfolding, and it's really positive that, that three quarter loss ratio if we look at it is in the low end of our 85% to 90% range.
And you sort of review your -- or do a more detailed adjustment to your assumptions every few years. If the loss ratio were to get to the high end of the range a little bit higher than the range in a given quarter, would that the sort of drive you to maybe reassess your reserves again? Or are you more -- are you going to look more at sort of more at it on an annual basis or a longer-term basis?
We're looking at it at a longer-term basis. By way of example, when we have a 3.4% loss ratio in the fourth quarter, we didn't revise our assumptions downward. If we had a 90-plus percent loss ratio in the quarter, we wouldn't revise our assumptions upward. So we're looking at the overall loss ratio accumulatively. It would take even better than a year actually to cause us to reevaluate those assumptions and -- unless something markedly happens that we could point to the higher loss ratio.
Okay. And then just lastly, any comments on what you're seeing in terms of competition in the U.S. disability markets? Seems like there's more interest among competitors in that -- in the group benefits business in general?
Mike, you want to take that?
Sure. Jimmy, I appreciate it. So, first quarter not a huge one for the group insurance business, and your question was specific to group disability, but we were pleased with sales results, strong growth quarter-over-quarter, which is good. Probably as or more importantly, persistency for the group disability business was over 90% and really good there. And I'd say, in the mid- to large end of the market the capabilities that we've built and actually continued to invest in around helping our clients, manage their leaves, protected pay on integrated basis with disability has been a strong differentiator for us in the market, and that paired with our investments to deeply integrate with the HR technology that our clients are increasingly adopting on a cloud basis, I think it's put us in a really good spot going forward. The smaller end of the market, I'd say, is where we've got off to a slower start overall, and we've already taken some actions at the margin from an uphill force marketing and underwriting point of view because this is a profitable and important market to us and probably even more important as I look at some of the digital capabilities that we have to ease the administrative's role of the employer that we will be rolling out the second half of the year. I felt confident that momentum will build in the core market as we head towards the all-important fourth quarter in the 1/1 cycle.
Yes, what I was trying to get more to was pricing because we've seen very good loss ratios by most companies. Have you seen that flow-through to sort of -- like have you seen that cause an uptick in competition in price cuts perhaps by competitors?
Jimmy, I got it. So I would say it remains a very competitive market but I would say a rational market from a pricing point of view. And so our best data points are looking at things like our ability to police increases through the renewal cycle. We had a really good 1/1 in terms of profit improvement and that persistency number overall. Again, there's some pockets where, like I said, we've taken a few actions because those are important and profitable segments for us. It is competitive, no doubt about it. But I'd say I've seen significantly worse.
We will take our next question from Humphrey Lee with Dowling & Partners.
Looking at Unum US supplemental and voluntary as well as Colonial Life, premium growth was good, 5%, but probably a little lighter than what you have been having and then also kind of relative to your guidance. I believe there were some nuances like the exit of the individual dental business running through the numbers. But I was just wondering if you can provide some additional color in terms of the moving pieces on the premium and the sales growth in both segments? And then in terms of your outlook for both of them, do you feel like that you're outlook remain intact?
We will start in the U.S., Michael, and head over to Tim in [indiscernible].
Humphrey, and yes, you did -- I'm going to start with dental. You cited a tough comp because we made the decision to exit a relatively small direct-to-consumer business. We're focused entirely on the worksite [indiscernible] unique about Unum here in the U.S. Then still, we don't have the individual sales for dental in the current quarter number to compare to. So if you kind of peel that back and look at what we're taking forward, which is the group dental and vision business, we saw sales growth over 45% in the quarter so really strong and I'd say exciting momentum building for group dental and group vision going forward, and we anticipate -- liked we talked at the outlook day that, that'll be a meaningful contributor to our overall Unum US, not just something involved but overall Unum US sales results here in 2019 and a pretty significant premium contributor in 2020.
So feel very good about that. On the voluntary benefits front, I guess, what was the primary dampener on premium growth was we did see a poor quarter from VB persistencies. So we reported 73% versus 77% a year ago 1Q. That's a tough comparable. 77% is at the high end of what we've seen historically, which is in the 75% to 77% range. As we dig into it, I'd say it's an average case size issue, so if you took the relatively comparable number of terms and you applied historical averages for the average size of the term, that's worth about 2 points and that puts us into the bottom edge of the range. So I wouldn't say it's as bad as it looks, but I would highlight the large case voluntary benefits market as one that is competitive. We've seen some existing competitors get more aggressive there. We've seen some new entrants. And hopefully you've come to know and expect of us is we're going to be disciplined about our approach there in terms of our underwriting and our expense profile. So I do remain optimistic in the long term about voluntary benefits. But in that large-case market, I think there's probably a little bit of weathering that we're going to have to do.
Good. Tim, you want to hit Colonial Life?
Yes. Humphrey, thank you for the question. I'll start with the overall level of premium and persistency, and we are seeing some of the same trends that Mike talk about. Our persistency this year was lighter than last year and a little lighter than our plan, and a big part of that is the large case component. And we do see some seasonality and volatility there. The first quarter typically has the largest percentage of clients who had their medical client renewals, and so much of their voluntary benefits also up for renewal in the first quarter, and so we see some volatility there. From a sales perspective, this is the 22nd consecutive quarter that Colonial Life has producing year-over-year growth in sales. So we feel good about the sales results overall, a little bit lighter than we had projected, but we saw very strong growth in our core commercial market, in the Public Sector market and from 3 of our 4 sales regions. There was pressure in large case there from a sales perspective as well, which that large-case market can be a little bit more volatile. I will just remind everyone that first quarter for Colonial Life is typically our lowest sales volume quarter of the year. So we feel good about our prospects of recovering from a little bit of a shortfall here.
Appreciate the color. That's helpful. And then shifting gear to net investment income. Jack talked about prepayments being low. I was just wondering do you see that as a timing issue or one-off issue as opposed to a slowdown in overall prepayment activities? And maybe talk about your outlook for prepayments in the coming quarters?
Yes. Prepayments have been volatile, and we expect them to continue to be -- so I view that as volatility. I think prepayments will be -- we're not changing our expectation for payments going forward. So I think we feel good about where it is. The flip side of prepayments is that, although it hurts you a little bit in earnings, it actually helps you maintain discount rates going forward. And so, although it did cost somewhat in the quarterly earnings. It's -- from a long-term perspective, it's still a decent outcome.
We'll take our next question from John Nadel with UBS.
So I don't want to be overly nitpicky here. I have a general question about sort of the pace of operating expense growth relative to revenue growth. There's really only two segments where revenue growth exceeded operating expense growth this quarter, Group Life and the Closed Block. But otherwise, operating expenses are growing faster than your revenues in the Other segment. And I'm wondering what you think is the overarching driver of that? Is that more investments in technology and digital and things of that sort that are sort of table stakes for the overall business these days? Or is it really just more about the fact that sales growth was pretty strong this quarter and maybe you've got some higher nondeferable?
Yes. John, let me hit it from the high level, and then we'll dig in a little bit in each of our business segments. Overall, nothing has changed really relative to how we manage expenses, the discipline that we have. We've been making investments all long, so there's nothing incremental on the investment sides with some of these digital footprints that we're talking about. So I think that's all pretty steady. You may be seeing somethings quarter-to-quarter relative to that. You mentioned a couple of things that our sales growth is higher or lower. But we feel very good about the expense management side. We think about it. Just not you're talking about it. Operating expense ratio, that's how we manage the businesses. So we want to invest. We want to be efficient. And I think our mode around being efficient hasn't changed at all. So maybe I'll let Mike and Tim talk a little bit about how they're managing it and thinking about it, but I would tell you from a macro prospective, we're still discipline when it comes to how our expenses are managed. Mike?
Sure. Thanks, Rick. Yes. Looking at expenses across the segments, the group dis, Group Life and [indiscernible]. They're relatively flat year-over-year, 20.4 in the quarter as an OE ratio versus 20.6 a year ago. So a little bit of improvement there, I would say. And maybe one's that helpful, John, is to highlight group disability. So I mentioned it earlier as one of the drivers of success in group disability, but we are growing our lead management business. And that's a fee-based business, so that's going to put natural pressure upward on your operating expense ratio as a percentage of insured premium. But we look at the really favorable loss ratio in group disability, John, and the really favorable persistency. That fee-based business is a big driver of sticky and productive client relationships. So we feel pretty good about that. And the last thing to do, if you take a bigger step back, to Rick's point, it bounces around a little quarter-to-quarter, but over the last four years, Unum US overall has seen the OE ratio come down by about 200 basis points. And I'd say nothing dramatic but a continued gradual improvement there expected over the coming years as we continue to invest, like he said, in digital capabilities.
Tim, you want to talk about expenses at Colonial Life.
Sure, yes. So we see some seasonality in our expenses last year, and the first half of the year, our OE was a little bit higher than we had. For the full year 2018, we think that same pattern will emerge. We usually incur a number of nonrecurring expenses in the first quarter of 2019 but also the continued investment for making end growth, and the customer experience and digital and technology are investments that we think make sense for the long term to put a little bit of pressure on the near-term expense ratio.
I think one thing to add too, John -- Yes, John, one thing too, I'd say, we look at it relative to premium, too. One of the things you got in there is NII has been coming down, so that will cause a lot of pressure, which we really think about in managing relative to premium.
Yes. No, I appreciate that. NII was definitely pressured. And there's a couple of places where your other income, which I assume that's -- especially in disability, that's where Mike talked about fee revenue. The growth there was pretty strong. Just a second and unrelated question, I was just hoping, Jack, you might be able to give us an update. Last quarter, you had really positive news as it related to LTC premium rate increase approvals? I think you had mentioned that, something in order of magnitude $500 million of the assumed rate increase had been approved. Any further progress there? I know it's only been 90 days, but any further progress toward that full assumption that's embedded in your reserves?
John, we've got Steve Zabel here who can talk about that.
Yes, great. Thanks for the question, John. And you're right. We announced earlier in the year, we had really nice success coming out of the gate on our new program. Just to go back and ground, we had about $1.4 billion of present value of premiums in our current reserve assumption. About half of that was related to filings or pending with the states, and about 1/2 of that was on new filings that we're going to be making from that point going forward. We continue to have good progress and really building off of the California approval that we received earlier as well as some of the group exempt states that we were able to implement. We did make continued progress.
We have several strong approvals since that point in time, and I think one of the important things about those approvals, we are starting to get approvals on the new filings that we made the latter part of last year and the earlier part of this year. So that's a positive sign for us as well. And then I just close it off by saying we're encouraged by what's going on at the NAIC. We've had a lot of discussions over the years with the actuarial teams and some of the staff at the states around consistency of approving actuarial justified rate increases. And that conversation is starting to get elevated up to the commissioner level. And so we're very happy about the executive task force that they announced at the last meeting in Orlando. We think that's positive. We'll get the commissioners actually talking about their approaches and drive consistency. But we feel good about our program, and we continue to make progress against our target.
Steve, just a quick follow-up on the NAIC and the movement there. Is it your expectation that ultimately what that results in is a more standardized or consistent premium rate increase filing and process for determining yes or no?
Yes. I think the simple answer is yes. We would hope that, that would drive better consistency. The actual calculation and the math that used to support those rate increases, it's fairly consistent state to state. Really, where we find inconsistencies are around things like arbitrary caps [indiscernible] or types of caps. And that happened more at the commissioner level and sometimes even at the governor level. So that's really where we think it can be positive for the commissioners to talk to each other about what's the right thing for the states to do to really balance protecting consumers but also protecting the financial stability of caregivers. So yes, so we think, all things being equal that it should increase the consistency, and that should be a positive thing.
We'll take our next question from Erik Bass with Autonomous Research.
With the year-to-date decline in interest rates, does this change how you think about discount rates for new business in group disability at all? And if you do make an adjustment, do you think you'll be able to pass that through in pricing? Or will it be more difficult given the favorable claims experience and margins across the industry?
Yes, Jack, why don't you talk about our interest view on [indiscernible]
Yes. Yes. So I mean, there's been a recent decline in interest rates. It's actually rebounded a bit for a while. But they're not lower than they've been over the last several years. We feel pretty good about where our discount rates are. In terms of -- we've lowered our discount rate. We're still comfortable that, at new money rates today, we're earning a decent margin over our discount rate, particularly on group disability. So we're comfortable there. Given our investment strategy, we continue to exceed the 5.5% hurdle for long-term care. Certainly, we'd love to see interest rates go higher. We'd like to see spreads widen, but I don't think there's -- we're not feeling a ton of immediate pressure as a result of some of these fluctuations in interest rates.
Got it. And then, I think you had previously talked about potentially completing the $400 million of buybacks that you had originally planned to do in 2018. I guess this quarter, you did the $100 million kind of in line with your 2019 outlook. Guys, can you talk about what drove that decision and, bigger picture, how you're thinking about future capital return?
Yes. So I'd say we originally thought about it. We did repurchase the $115 million in fourth quarter of 2018. I'd say that's not necessarily off the table at this point. But just our sense around what's in the best interest of our shareholders, where our stock price was and the reaction that the stock price has been having to share repurchase. We thought just returning to our normal kind of $400 million a year rate was a very reasonable thing to do.
Okay. So no change then in terms of kind of the level of liquidity or other targets you're planning to maintain, just to -- more of a tactical timing issue?
No. Yes, I don't think any of the metrics changed. That would cause us to -- that was not what drove us one way or the other. It more the market.
Our next question comes from Alex Scott with Goldman Sachs.
First question I had was just on -- I think you guys had earmarked cash for the C1 changes to risk weights on assets. And just in light of it looking like that's, I guess, not happening this year. Have you given any consideration to the prioritization of what you do with it, whether it's capital return, deleveraging, building RBC, et cetera?
Yes. So first, I'd say that, we did have it in our cash plans. That was the contribution to subsidiaries. Most of the capital was going to come out of RBC and our traditional insurance companies. It's not happening this year, but we still expect it to happen in 2020. So it's a timing difference. I don't think we will do anything different other than to hold higher RBC ratios than we originally anticipated in the insurance companies until it gets implemented next year. And probably -- but we'll clearly hold the cash to fund that when it happens.
Got it. So the follow-up question I had was just thinking higher level about risk-based capital and appropriate targets. I mean, my understanding of long-term care risk-based capital is that it's based, I think, on premiums. And some of the commentary we've heard from, I guess, peers and reinsurers and so forth, it's suggested that maybe RBC isn't the best measure of capital adequacy as it relates to LTC specifically. And we see similar situations and things like variable annuities where it's not a great reflection. And sometimes companies run with materially higher RBC to reflect that because their internal capital models show greater risk relative to like what RBC would suggest. So I'd just be interested to hear your take on how RBC reflects LTC risk and why you're comfortable being able to target, I guess, an RBC ratio that's materially lower than peers?
Yes. So, my response to that is we look at capital adequacy of the company, not at a single line. There are lines like maybe the LTC, the RBC. Ratios don't reflect the risk in long-term care, but I'll guarantee you those same RBC ratios are way overstated for the things like Colonial Life's business. They don't reflect or overstate the capital needs of the group businesses, which are way less volatile than that -- those ratios would assume. And even within long-term care, so a piece of the RBC ratio is that premium. But you're also holding risk-based capital in the reserves. You're holding risk-based capital on the assets underlying the long-term care business. So I -- so we look at it in an aggregate basis. When we look at economic capital, it reflects the fact that we are a very profitable company that we generate a lot of free cash flow, and we feel more than adequately capitalized at our current levels.
Our next question comes from Tom Gallagher with Evercore.
First question just on group disability. The loss ratio was pretty favorable this quarter. Can you talk a bit about whether we should -- is there any reason I think that's not sustainable based on the trends you're seeing, meaning like was there any favorable prior year development? Or -- can you just provide some color for, a, what drove it; and b, do you think that's sustainable at around this level?
Mike?
Sure. Thanks for the question, Thomas. As you said, favorable quarter from group disability point of view. And to your question about drivers, I'd say, it's encouraging in that the drivers are pretty widespread across LTC. Civilian incidents behaved and I would say that it is probably a little bit even move favorable than our expectations but not dramatically. So recoveries continue to be very good and right in line despite the favorable we've had. Good experience with Social Security offsets. Our settlement practices are right in line with expectations. So pretty much across the board, it's [indiscernible] a pretty good spot. It would only cost -- but it is insurance. So I wouldn't say anything is going to stick, exactly, but I wouldn't -- there's no reason to think that at the current level that we we're at, 74.7% is very reasonable and in the range. Also within group segment, group disability segment, in the short-term disability business, they don't actually say. We saw a little bit of the opposite in terms of the lack of favorability. And so that's something that we continue to watch pretty closely and are addressing through the normal renewal process. So that may be a little bit of a tailwind to the loss ratio over the next four quarters or so.
Yes. Tom, the underlying fundamentals were good and pretty consistent, but I'd say it's never a good idea to take the best loss ratio you've ever had and assume it will last forever just as it's never a good idea to take the worst loss ratio you've ever had and assume it lasts forever. So I would say, a good quarter. We're glad it happened, but I think our kind of the old raw level of where the disability business has been running for the last several quarters is kind of a level I would peg it at.
Got you. And then a question on long-term care. Can -- Jack, can you put the 88.5% benefit ratio in some context. It was higher than 4Q, but it's still within your range. But when I think about 1Q trends, normally, there's a seasonal favorable claim termination consideration. And -- so just curious. Did you see the favorability of claim terminations in the quarter? And also, can you provide some color -- what are you seeing kind of beneath the surface on what's driving that ratio as it relates to frequency, severity or claim terminations?
Yes. So let me put it in the context of fourth quarter and first quarter. We did see favorable claim terminations kind of relative to like the summer months. We intend to have less mortality driving claim recoveries. It wasn't markedly favorable. We don't have the same virulent flu season this year that we had last year. But we saw favorable mortality in both that fourth quarter and the first quarter. We saw extremely favorable new-claim volumes in the first quarter. We saw unfavorable new-claim volumes in the first quarter. If you take those two quarters combined, they look like pretty average around that 86.4% long-term trend. So there was nothing other than volatility. I think the best perspective I could give you on the long-term care loss ratio is to remember that we have $10 billion of active life reserves that are funding claims, and we have $150 million of annual -- of quarterly premium that's generating the loss ratio. And so anytime you have a situation like that where the reserves are funding claims and premiums are relatively small relative to that reserve funding, you're going to have volatility.
Got you. And then my final question, just on the 5.5% new-money yield for LTC in the quarter. You said that came in above your bogey. Just given where rates are, where credit spreads are, how do you feel about that playing out for the rest of the year? And do you have some flexibility within reserving assumptions where, even if you're below it, it's manageable?
Yes. First of all, we take a long-term view of this. This is a 30-, 40-year time horizon. So we're not going to react to things that happen quarter-by-quarter. First three quarters were positive, so there's some build-up of margin in there. I think that even if you had a couple of quarters below it, I don't think we'd be compelled to react to that given the time horizon that we're thinking about here. So -- we're not overly -- we'd love to see interest rates higher, but we're not overly concerned with where they are, at least in the short term.
Our next question comes from Josh Shanker with Deutsche Bank.
I wanted to follow up on something that Humphrey was asking about. You made the comments about the competitive conditions of the S&V market, such that you might weather things out for a few years. I was hoping you might be able to talk about a little bit what are the competitive tools, maybe technologies that can make a winner in the supplemental marketplace over the next five years, let's call it? And two, are the -- I don't want to use the word losers, but let's say the, the nonwinners, are they going to be businesses that sell to the winners? And therefore, are they repositories of accounts that won't be one but will be transferred?
So Mike, you want to take the first piece. I'll talk about the [indiscernible]
Yes. So appreciate the follow-up question. And so -- I think -- I couldn't speak to the entire set of weathers that are going to make for winners versus, I think, your term is nonwinners. But I could tell you what our strategy is, and that is to compete on the delivery of the benefits and particularly when we're talking about employee pay and voluntary, I think, what stands out over time is making life simple for the employer and for the end consumer. So our strategy is about investing, as I mentioned, and continuing to invest in integrating our product and process into the capital management, HR technologies that our clients are increasingly adopting. And they move to those cloud-based software. It gives you the ability to integrate really once and then carry that instance across because people stay on version when Software-as-a-Service. So we see that as a long-term trend where our focus on the benefits market and on that integration gives us a competitive advantage first. And then the second piece is -- and this is an important one for us, is increasingly integrating with our group insurance business because if you think about the things that drive a leave of absence or a disability, those are very often the same sicknesses, and accidents in health-related events that are going to trigger volatility benefits. And so we're seeing the majority of our growth coming when we integrate with the group insurance, and we see a pretty significantly uptick -- significant uptick in persistency on the voluntary side when it's integrated with group insurance. So that'll be the path which, I think, over time we're going to play to win.
Yes, and I think, Josh, it's an important point you make that, over time, if you look to the history of it, this is the business that we're in. We invest heavily to make sure we have a lead in this business. It is a very good business. So it attracts competitors, nontraditional competitors that have come in over time, that haven't done this business. Oftentimes, they find out it's a little bit harder than they might think it is, and so we're able to work through. And whether these different periods of times of competition do so in a disciplined way and what you've seen, particularly in the group space, was some of those people end up selling because they don't have the scale. They don't have the capabilities. And it doesn't fit with their business model. Will that be what the future looks like? Hard to tell, but this will be the business that we're in. And competition sometimes makes us better as well, and we'll continue to look to lead.
And how long do you expect this period of "weathering" to be before competitive advantages show themselves?
Yes, it's Mike. I would say it is very difficult to say. And so we saw first for taking care of our existing clients and then making sure that we can deliver a consistent and manageable margin on the business and then take the growth when the opportunity presents it. And so I deal -- optimistic that the weathering is not going to be multiple years, and that things will punch through quicker than that. But just having seen some of the cycles before, sometimes it takes a little bit of time, so I would just signal is, when we think about, for Unum, you ask guidance of sales growth between 6% and 8%. That's what we rate at Investor Day. That continues to be my best estimate of where the year is going to come in. That being message number one. Message number two would be, we're going to remain disciplined, and whether it's a disability market, the life market, the voluntary market, we're going to be a disciplined underwriter.
And I think, as Mike articulated, those growth targets that we have, that's -- when you talk about its weathering, we're still doing well. We're still growing well at very high margins. And so as much as we will look at it and be disciplined, I wouldn't really consider that weathering. That's us growing. And we want to grow faster. We want to protect more people, but we'll do so in just different way.
Our next question comes from Ryan Krueger with KBW.
I have a question on the investment portfolio. We've seen some life insurers take some derisking actions just given that we're late in the cycle. Just curious, if you change to anything about the investment portfolio at this point or if you're considering changes going forward?
Thanks, Ryan, for the question. I think when you think about how we manage our investment portfolio, we're a liability driven investor. And so we have been very consistent through periods of time to think about backing up our liabilities, our products with a consistent portfolio, both from a risk mix perspective and making sure that we're matched up from an asset perspective. So I think we feel good that we're a team that invests the way that we have. No elements that we -- we don't take risk in higher levels of -- in cycles or derisk. We think we're a very steady investor over a longer period of time.
Our next question comes from Suneet Kamath with Citi.
Jack, I wanted to start with the Closed Block, IDI block. I think when we chatted with you earlier in the year, you seemed a little bit more open to perhaps freeing some capital there, at least that was our read. So just want to get an update, particularly given the amount of capital that seems to be interested in these types of mortality-based blocks?
Yes. I mean I would tell you that we are always connected to the capital markets. We're always looking for ways to optimize our use of capital, so we will continue to aggressively seek solutions to do that.
Okay. Got it. And then in terms -- I just want to go back to the supplemental and voluntary business. Again, I just want to get a sense of -- is -- so is something really changing here in terms of the lapsation activity that we saw? Or is this sort of normal volatility? And it was just a couple of cases here and there, just incremental competition? Just kind of want a get sense of -- if this is something that we should be expecting in terms of higher lapses over the next couple quarters?
I'll take that one. Suneet, it's Mike. I would say, just going back to it. Average size volatility is what the driver of it is if we've seen pretty typical average size returns, we'd be right in the bottom end of the range of what we would have anticipated. So the short answer is, no. I don't see a fundamental shift in the voluntary benefits business. I would say that the way the metric is constructed is a 12-month rolling average and 1/1 effect is -- tend to be pretty dominant. So this -- the actual metric will stay depressed over the next few quarters. That's not representative of anything that's actually occurring in the next couple of quarters. But again, not a fundamental shift. I think it's just a watch area for us around competition.
And did you cite whether or not the increased competition is coming from some of the more traditional players or some of the companies that are maybe new entrants that have entered through acquisition in recent years. Any color on that?
A little bit of both, actually. So we've seen some nontraditional that have not been in the group employee benefits space enter in through voluntary. And then we've seen some well-established voluntary players that I think have gotten a bit more aggressive in trying to grow share.
We'll take our next question from Mark Hughes with SunTrust.
This is Michael Ramirez on for Mark. So how did Unum Poland itself do on an organic foot basis in the quarter? And can you please give us a sense of how they would do organically this year? And what is the rough outlook for next year after you've owned them for a while?
Thanks, Michael. It's a good question. I think I mentioned in our comments, our Unum Poland business is small today. We're looking to grow it over time. They had a great quarter. So they continue to grow the business. It's small relative to our U.K. business and our international segment and small relative to the enterprise. But we're still very optimistic about it. So you won't see those numbers materially moving anything in the company, but this is one for longer-term growth. We like the market. Our team is doing a great job, and I'm sure we'll keep talking about it for a longer period of time.
Okay. Great. And then, maybe one follow-up. What was the net bottom line impact of the lower persistency in voluntary benefits, which, I guess, reduced the benefit ratio but presumably had a offsetting increase in DAC amortization?
It was very immaterial. The DAC amortization and the active life reserve release almost offset each other dollar-for-dollar.
Thanks, Michael. That's actually all the questions we've got. So I would thank you all for taking the time to join us this morning. We look forward to seeing many of you at the various conferences and investor meetings over the course of spring and summer. So operator, now completes our first quarter 2019 call.
Thank you, sir. And that does conclude today's presentation. Thank you for your participation, and you may now disconnect.