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Unum Group
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Good day, and welcome to the Unum Group 2Q 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Tom White. Please go ahead, sir.
Great. Thank you, Cody. Good morning, everyone, and welcome to the Second 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 the Form 10-K for the fiscal year ended December 31, 2018, as well as our subsequently filed Form 10-Q. 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. And 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, also on the website in the Investors section.
Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; and Chief Financial Officer, Steve Zabel; as well as the CEOs of our core business segments, Mike Simonds for Unum US; Peter O'Donnell for Unum International; and Tim Arnold for Colonial Life.
And now I'll turn the call over to Rick for his comments
Great. Thank you, John. Good morning, everyone. Before we get into the results, I would like to welcome Steve Zabel in his new role as the company's Chief Financial Officer. I couldn't be happier with how the smooth transition has taken place, not only with Steve but more broadly within our financial organization. And I also would recognize Jack and his help in the transition until he retires later this year.
So on to the quarter. We continued to be very pleased with the financial results of the company and the overall business trends we're seeing. Our after-tax adjusted operating income per share for the second quarter increased 4.6% to $1.36, and for the first half of 2019 has increased just over 5%. This lines up well with our outlook range for the full year of 4% to 7% growth.
Looking at second quarter results. One of the biggest highlights was the growth in premium income that we saw in our core business segments, which totaled just under 7%. Unum US premium income increased by 6.2%, benefiting from disciplined sales trends, very strong persistency in our group lines and growth from new product lines, like dental and vision.
Colonial Life has been a consistent source of growth for us over the last several years and the premium growth rate this quarter was 6.4%. This is despite sales being down for the first time in many quarters.
Finally, our Unum International segment produced premium income growth of 14.2% on a U.S. dollar basis, certainly benefiting from the Unum Poland acquisition, but also higher growth within Unum UK. This has been the result of our persistency improving over the past several quarters, while the team has done an excellent job driving renewal premium increases.
Across the company and given our disciplined approach to growth, I believe the value proposition we bring to our markets and our strong focus on customer service are possibly reflected in these growth trends.
Next I'm also pleased with the expense management we are seeing in our core business segments. We're delivering improved expense ratios, while investing in new capabilities and investing in many of the faster growth areas of our business, such as leave services.
Turning to the Closed Block this quarter, this marks the fourth quarter since the long-term care assumption update in the third quarter of last year. Steve will cover this in his comments as well, but I'd highlight that rolling 4 quarter interest adjusted loss ratio was within our long-term target of 85% to 90%. This will play out over a longer-time period, but it's good to see these results in line with our assumptions.
And finally, the disciplined management philosophy we bring to the business continued to generate strong margins in the core businesses this quarter. With those margins, we have continued to deliver strong statutory earnings and cash generation. This has enabled us to maintain strong and stable capital metrics, while consistently returning capital to our shareholders. This quarter that means that along with the $100 million of share repurchases, we also raised our dividend by just under 10%.
To wrap up, we're pleased with our results for the second quarter and the first half of 2019. We are tracking in line with the expectations we set out for the year. Our teams are excited with the growth we're seeing in our business and the opportunity to provide our financial protection products and services to more employees and their families.
Now I'll ask Steve to cover the details of the second quarter results. Steve?
Thank you, Rick, and good morning, everyone. I'm excited to be in my new role and look forward to further building my relationships with our shareholders and the broader financial community. To echo Rick, I'm pleased with the quarter and the overall trends we're seeing in our businesses. In my comments this morning, I'll provide additional detail on the performance of our business segments and provide an update on our capital position and outlook for the year.
Beginning with Unum US. We continue to see very good results from these operations. In the second quarter, adjusted operating income increased 1.3% to $254.3 million. As Rick mentioned, we are pleased with the premium growth we generated in Unum US growing 6.2% over the year ago quarter driven primarily by the excellent persistency levels we're seeing in our group businesses, our recent sales trends and the emergence of our dental and vision business. We continue to see pressure on net investment income for the Unum US segment, down 6.3%, driven by lower miscellaneous investment income as well as the ongoing pressure on portfolio yields.
Miscellaneous investment income for the second quarter for the company in total was in line with our historical trends and consistent with the total in the year ago quarter. However, the impact to adjusted operating income was different for each of our business segments, which I'll point out in my commentary.
Within Unum US, adjusted operating income for group disability increased 2.5% to $83.6 million in the quarter. We continue to experience good premium growth and excellent benefits experience, though net investment income remains under pressure. Premium income showed strong growth, increasing by 6% as the in-force block increased from strong persistency levels, particularly in short-term disability over the past year and our sales of both LTD and STD products in recent quarters. The benefit ratio improved to 74.7% in the second quarter from 76.2% a year ago driven by favorable claim recovery experience in the group long-term disability line partially offset by higher pay claim volumes in the group short-term disability product line.
Consistent with recent trends, net investment income in the quarter declined 9.2% driven by the ongoing trends that reduced assets back in the line and lower portfolio yields on those assets as well as the lower amount in miscellaneous investment income relative to the year ago quarter.
Adjusted operating income for Group Life and AD&D line declined by 6.7% in the second quarter to $62.7 million. Premium growth was favorable in the quarter, increasing 7.4%, primarily from period sales growth and strong persistency trends. However, higher average size of claims elevated the benefit ratio to 72.9% in the second quarter and 70.3% in the year ago quarter. Sales for these group lines of business in Unum US were very strong in the second quarter increasing 16.8% over the year ago quarter. The group disability lines primarily drove this growth, increasing 32%, with strong large key sales growth, while we experienced a slight decline of 1.3% in Group Life.
Persistency in the Unum US group lines remains very strong at 90.7% for the first half of 2019 and remains an important driver of our premium growth. Finally, for Unum US, the supplemental and voluntary lines showed very good results for the second quarter with adjusted operating income of $108 million, an increase of 5.6%. The primary drivers for the quarter were good premium growth and favorable expense management, which did offset lower net investment income and our higher overall benefit ratio. Premium income grew by 5.2%, primarily driven by higher sales in the voluntary benefits and dental and vision product lines.
Looking at benefit experience for each product line. The benefit ratio for individual disability was unfavorable due to unfavorable claims activity and less favorable mortality experience. In the dental and vision line, the benefit ratio was also higher relative to the year ago quarter primarily due to a higher average claim size, but consistent with our expectations for this product line. I'll add that with the continued shift towards the group dental products and discontinued sales for the individual coverages, the benefit ratio for this line will naturally grow higher. Finally, the benefit ratio for the voluntary benefits line improved primarily due to favorable claims experience in our disability and group hospital indemnity products.
Sales for the supplemental and voluntary lines increased by 5.1% for the second quarter with strong growth in dental and vision and voluntary benefits offsetting lower sales in the individual disability product line.
As we discussed on our first quarter conference call, persistency in the voluntary benefits in line will continue to be impacted throughout the year by the high level of terminations experienced in the first quarter. Terminations in the second quarter were consistent with our expectations. Our Unum International segment reported adjusted operating income of $30.7 million for the second quarter, an increase of 11.2%. The increase was driven by higher operating income from the U.K. line of business in local currency as well as the inclusion of the financial results of Unum Poland.
In local currency, the Unum UK line of business produced adjusted operating income of £22.7 million in the second quarter, an increase of 11.3%. Results for the U.K. business included favorable growth in premium income of 7.3% relative to the year ago quarter from higher overall persistency, sales growth and the benefit of rate increases in the group long-term disability product line. The benefit ratio for the U.K. business increased to 85.6% in the second quarter from 76.7% in the year ago quarter. The increase was driven by unfavorable mortality experience and a reduction in the claim reserve discount rate to recognize the impact on future portfolio yields from the unusually high level of bond calls we experienced in the quarter, the benefit ratio was also impacted by inflation-linked movement in benefits related to our group products as inflation was higher in the U.K. in the quarter.
Net investment income in the U.K. was significantly higher in the quarter increasing almost 43%. This was driven by the unusually high level of miscellaneous investment income due to the bond calls I mentioned before and a higher level of invested assets, which was partially offset by a lower yield on fixed rate securities in the investment portfolio. With the rise in inflation in the U.K. this quarter, investment income from inflation-linked securities in the portfolio was also higher as we hold these securities to support the claim reserves associated with our policies that provide increases in benefits linked to inflation.
Unum International sales in U.S. dollars increased 5% in the second quarter with generally flat sales in the U.K. and local currency plus inclusion of the Unum Poland for this period. Persistency for the U.K. business continues to be quite strong even as we have successfully implemented renewal rate increases over the past several quarters.
The Colonial Life segment produced adjusted operating income of $84.4 million for the second quarter, down slightly from the year ago results of $84.6 million. Growth in premium income remained strong at 6.4% for the second quarter, reflecting growth in the in-force block form prior period sales growth, particularly expansion of our dental and vision products. The benefit ratio was unfavorable at 51.4% compared to 51% in the year ago quarter due to higher claims incidence in the cancer and critical illness line of business, partially offset by lower claims incidence in the life line of business. Net investment income declined by 7.5% in the second quarter primarily due to lower miscellaneous investment income, which produced a $4 million negative swing relative to the year ago quarter as well as a lower yield on invested assets.
Also in the quarter, the amortization of deferred acquisition costs increased due to the growth in the level of deferred asset and the impact of the perspective unlocking for future experience relative to assumptions for interest-sensitive voluntary life products. This is the FAS 97 unlocking, which we perform each year in the second quarter. This produced a negative swing of about $3 million relative to the year ago quarter. Overall, we feel good about the underlying trends for Colonial Life and the 17.4% adjusted operating return on equity this business generates. Sales at Colonial Life declined 4.2% in the second quarter compared to the year ago quarter with declines in the large case and core commercial markets in the public sector. The comparison was a challenging one given the strong growth rate we had in the year ago quarter. We are working to build our recruiting pipeline for new agents and are encouraged that we'll return to positive sales growth in the second half of the year.
Moving to the Closed Block. Adjusted operating income was $33.7 million for the quarter, an increase of 13.9% over the year ago quarter. As expected, premium income for the segment continues to decline, down by 4.2% in the second 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 level of miscellaneous investment income.
In the individual disability product line, the interest adjusted loss ratio was 81.3% for the second quarter compared to 82.9% last year. The second quarter of 2018 results included a reduction in the claim reserve discount rate to recognize the impact on future portfolio yields from an increased level of bond calls in the year ago quarter. Partially offsetting the impact was elevated new claims incidence during the second quarter of 2019. The results of the long-term care business line for the second quarter reflect the updated reserve assumptions, which we adopted in the third quarter of 2018. On this updated reserve basis, the interest adjusted loss ratio for long-term care was 87.4% in the quarter, in line with our expected range of 85% to 90%. The interest adjusted loss ratio in the year ago quarter is not comparable given the reserve basis change.
We are now four quarters past the update to our long-term care reserve assumptions we recorded in the third quarter of 2018. Over those 4 quarters, the interest adjusted loss ratio was 86.7%, well within the 85% to 90% long-term range we outlined. In addition, we're making good progress against the assumption for future rate increases, and we've received approvals for just under half of the $1.4 billion assumption. We remain encouraged about our ability to achieve this goal over the coming years.
Also we have exceeded the new money yield target of 5.5% over the past 4 quarters, including the second quarter of 2019. As we have cautioned, we need to take a long-term view of this business given its potential volatility, but we are pleased with how the trends have evolved over the past four quarters. Wrapping up the Corporate segment. The adjusted operating loss was higher in the second quarter at $43.8 million compared to a loss of $35.5 million in the year ago quarter due in large part to lower net investment income from a lower level of invested assets as well as higher expenses, including higher pension cost and a higher level of debt outstanding. This quarter's results are consistent with our expectation of quarterly losses in the mid-$40 million range.
Statutory earnings for our traditional U.S. insurance companies have remained at healthy levels providing support to our plans to maintain a strong steady level of capital to back the growth in our core business lines while also supporting our capital management plans. For the second quarter, statutory after-tax operating earnings totaled $278 million compared to $249 million in the year ago quarter.
Our capital metrics remain in good shape with the risk-based capital ratio for our U.S. traditional life insurance companies at approximately 365% consistent with our plans for the year.
Cash at our holding companies totaled $977 million at the end of the second quarter. The increase from the first quarter largely mirrors the debt issuance we completed in June, which was a $400 million 10-year senior debt issue with a 4% coupon. The first of these have been earmarked for the $400 million maturity we have in 2020. Share buybacks in the second quarter were $100 million consistent with our outlook for the year.
I'll wrap up by reiterating our expectation of growth and adjusted operating income per share in the 4% to 7% range for full year 2019. This is consistent with the view we shared at our outlook meeting back in December.
Now I'll turn the call back to Rick for his closing comments and look forward to your questions.
Great. Thank you, Steve. It was a good overall quarter for the company and one that, I believe, shows the benefits of our strong position with employee benefits and voluntary benefits markets. The team is here and ready to respond to your questions. So I'll ask the operator, Cody, to begin the question-and-answer session. Cody?
[Operator Instructions]. We'll take our first question from Ryan Krueger with KBW.
I had a question on Unum US core market sales. You had -- they've been trending a bit weaker for several quarters. I think you had expressed some caution about the competitive environment. There was some improvement in the quarter. So I was hoping to get an update there. And are you seeing a bit better competitive conditions now?
It was a good quarter, Ryan. Thanks. And Mike, do you want to take that?
Yes. Thanks. Ryan, good quarter overall. Just taking a step back from the quarter looking at 12% growth, which is great. 2Q is not our largest quarter. It's particularly encouraging because it signals some momentum across the majority of the segments, and I would definitely highlight the core. As we look at 1Q, we closed the gap to the prior year. Here in 2Q, we're starting to show a little bit of growth. And I am encouraged as we look forward to the pipeline, as we get towards very significant fourth quarter, when we'll be looking to close January 1 effective date, which as you, is a big part of the sales year for us. So really a combination of continued success cross-selling into existing clients based on the strength of those relationships. Growth in dental has been helpful and doing right, but it also comes packaged quite a bit with other core lines in the small end of the market, employers love the package. So it remains a competitive market for sure, but I am encouraged when I look at the trends in that part of the business.
And then in regards to, I guess, some new claims discount rate in the U.S. and the reduction in interest rates, can you just give us a sense of how that looks at this point? And if there's a risk that you may need to lower the discount rate as we get closer to the end of the year?
Steve, do you want to take that?
Great, yes. Ryan, I'll just kind of take the interest rates from a higher level and then Mike is going to talk just a bit about how it effects our pricing. I guess, we look at interest rates differently across the various product lines. When you look at our U.S. long-term disability, we think about that as having a good level of margin in those discount rates versus what our current portfolio yield is. So we think we have some margin in there that we can work with. We also have the ability to rate that block over time, guaranteed renewal business, so that gives us quite a bit of flexibility there. We look our CDB block, our Closed Block individual disability, very little new money coming into that, so very little cash flow risk. And then for LTC, we look at that over the longer-term horizon. We feel good about the new money rates that we're getting today. We've exceeded our 5.5% and look to be able to do that over the near term. So overall, we think interest rates are manageable in the short term, but I'll let Mike talk a little bit more just about some of the pricing competition and how we think about go-forward pricing.
Yes. Thanks, Steve. Appreciate it. Ryan, you've been following us for a while and know that we've certainly seen lower interest rate environments and fluctuations. And one of the things that we stay very focused on from the actuarial to the underwriting distribution function is being able to take a long-term view, place renewals when we need to, adjust the business pricing when we need to, and we've been pretty successful at maintaining profitability through various interest rate environments. That being said, when we think about pricing, just building on Steve's comments, interest rates and yields are one factor that we work in. When we look at things like claims incidence, recovery offset momentum that we have, things like our expense level, those all go into formulating new business pricing. And from where we sit right now, we don't really see the need to make adjustments from where we're putting business into the market and the renewals that we're going through, but we'll continue to watch it closely, in particular as we go through reserve adequacy and look at things towards the end of the year as we sort of think about 2020 and 2021, but I think we're in a good spot currently.
And then we'll move on to our next question from Humphrey Lee with Dowling & Partners.
Looking at Colonial Life sales, it's definitely weaker this quarter. I think you pointed out that the weaker agent, recruiting was a factor and then also for different -- due to difficult column. But I was just wondering if you can talk a little bit about your current recruiting outlook as well as any other additional factors that may effect the sales growth in the quarter? And then, I guess, lastly is, how -- are you still comfortable in terms of achieving your 2019 sales growth outlook for Colonial Life?
Humphrey, we've got Tim Arnold here. Tim, do you want to take that?
Sure. Yes. Thank you, Humphrey, for the question. There were a few factors that contribute to the sales challenges that we had in the quarter. But before I get those, I know we have 1 or 2 people who are maybe new on this call, and just as a quick reminder, over the last 22 quarters, Colonial Life's average growth rate in sales has been a little bit north of 8% in an industry that's growing 3% to 4%. So a long track record of very, very strong growth. In the quarter, we did experience pressure from some recruiting shortfalls we've seen over the last few quarters beginning in the second half of 2018. We attribute that to a couple of things. First, the very strong growth that we had in 2018 caused our sales team to be very busy, producing sales, helping implement new customers and rolling significant amount of new business. I think that took a little bit of focus away from recruiting when such very strong sales activity was occurring.
And then the second is, in this economy with incredibly low unemployment rates, recruiting can be a challenge. We do expect that recruiting to swing back in the second half of the year. We've made some changes in the way we recruit people and the way we on-board them, and so we do expect that to swing back up. Our a rep -- new rep production is actually not down as much as the recruiting would suggest. So while recruiting is lower, we are seeing somewhat improved productivity on the people that we are bringing on. The environment is still very competitive, especially in large case, and so we see that showing up as pressure a bit. You and Steve both mentioned the challenging comparable from last year. We launched our new dental product on March 25 of last year, that fueled extremely strong growth in the second, third quarters of last year at 13.5% in the second quarter and 13% in the third quarter. And then finally, I would say, in the quarter, we made the decision to restructure and terminate a very small number of high-volume brokerage relationships where the kind of business that we're getting from certain brokers had very low quality, low persistency, and where brokers perhaps valued compensation more than they valued a good strong customer experience and value to the customer. And so that created some headwinds for us as well.
In terms of the outlook, it's going to be a challenge, but our team is highly motivated to do everything we possibly can to try to get to the bottom end of the range, but it will be an uphill battle. The good news is that we feel good about the pipeline we have, including in large case right now. And as a reminder, 40% of our annual sales occur in the fourth quarter. So while it's going to be a pretty steep hill to climb, there are some opportunities for us to close the gap.
Thanks for the color on that. And then shifting gear. I think in Rick's prepared remarks, you talked about kind of this leave service management opportunities. And I think that kind of showed up in Unum US supplemental voluntary this quarter with the other income and expenses a little higher. I guess, maybe at a high level, can you talk about what kind of opportunities you're looking at and in terms of kind of on a P&L impact because I thought that the leave management was more of a service as opposed to an earnings generator, but maybe I was wrong? So any color in terms of how you think about that business going forward.
Sure. I think it's a good question, Humphrey, because leave services is very important to our business, and we've been a leader in that space and been doing it for several years. And I think you're right, it's not in and of itself an earnings generator, but it's an important part of the package as we go and talk to customers that they value those services very much. We do an excellent job at that and had for a long time, and I think we're well known to provide that service very well. So it'll be part of the package. It's part of the reason why you see good core growth across our broad package that we have out there today. You mentioned it can skew the expense ratio a little bit given the fact that those are kind of just expenses that get added on and really get reflected in the margins that we see otherwise. So it's a very good business for us. We're continuing to invest in it. We think it's a real help to the overall value proposition that we bring to our customers. It's widely talked about in the market today, and we think we do a great job of serving our customers, and we look that to help us as part of our overall growth trajectory. Mike, do you want to add anything?
Yes. Just a couple of quick things, Rick. Humphrey, we find that in the group disability segment, the fees that we charge for that business it's not a risk-bearing product, so the expenses plus a small margin gets you to your fees charged. Rick, I think, nailed it really well. And you know just the one thing I would point to is every time that you read about another state or another municipality passing some sort of paid or protected leave law, that means complexity for employers. And so I'd say we're seeing with increasing frequency employers looking to outsource the compliance and the employee experience around those paid and protected leave. It's a complex business, but it's a really good opportunity for us to embed value. And when you look at the growth and the accelerating momentum in our short-term and long-term disability lines, a good amount of that you can attribute back to the strength of the leave offering.
And we'll take our next question from Tom Gallagher with Evercore.
First question is just on, can you comment on, in group disability, how do you see the margins trending just given the mix shift that we're seeing here? You had better top line growth this quarter, but it was mainly large case and it looks like there was a big surge in short-term disability sales. Any thoughts on how you see that changing the margin at all or do you think it's roughly being priced where the book is being priced in aggregate?
Sure. Thanks, Tom. As we just mentioned, the leave business has helped drive short-term disability growth and that does tend to pull long-term disability along as well. We do price to very consistent return target and we've gotten to a place where there's compatibility large case to small case and across products from a return on invested capital point of view. We're pretty bullish about the growth and the accelerating momentum that we're seeing. And when we think about the earnings coming out like for disability segment, a lot of consistency in the loss ratio. When we look at incidence patterns, when we look at the recoveries, when we look at the offset patterns, and I think when we look at opportunities that continue to chip away the expenses, I think there's a lot of reasons to feel like there's sustainability in that segment from an earnings perspective.
And I guess, just to follow-up on that, would there be any major difference in the loss ratio in long-term disability versus short-term disability? Because -- I ask that because I think you've had a very favorable claim recovery trend, which I presume is mainly on the LTD side. So I was just curious if there's like a meaningful difference between those two products and how it would show up?
Yes. So the loss ratio is higher on the long -- on the short-term, sorry. And what I would say is there's less capital behind that short-term disability line, so you don't need as much premium margin to generate the same returns on the capital behind it. The other thing is, I'd say, as we do see some building momentum in the core market, that tends to bring more fully insured long-term disability premium along with it. So I see some encouraging patterns on that front as well.
Got you. And then Steve, I think your comment on new money being better than 5.5%, and near term you felt like there was still pretty good visibility there. Just thinking about that's almost 300 basis points above the 30-year treasury. What are you guys buying to get that kind of yield and to continue to have good visibility on that? And is there a corresponding capital charge based on the type of assets you're buying? Or is it still -- you're still able to get higher-rated paper, higher-rated bonds as you're buying those?
I'll answer the specific question and Rick might just cover kind of how we think more broadly about risk management across our investment portfolio. So I'll start just by saying, we've been very successful over the last 4 quarters in the environment that we're in being able to exceed the 5.5%. When we look at 30-year yield, they've come down, but they haven't come down as much as maybe what we've seen in the 10-year part of the curve. So we still feel pretty good about that and they're not impressive, and then we've navigated through those types of yields before. Just as far as what we're investing in, we do not look to change our investment allocation against this line. We are in a combination of investment grade, fixed maturity, securities as well as high yield. We also sprinkle in some alternative invested -- investment assets and those tend to give us a little bit higher yield. And so the combination of those, we've been able to exceed the 5.5%. With our current allocation, we believe we can continue to do that in the current environment.
As Steve mentioned, I think when you look at the overall enterprise, Tom, our investment strategy and where we are really hasn't changed going back several years. So our credit quality overall pretty stable. We have added the asset class of alternative investments, but it's very small relative to the overall portfolio. We think it's a good asset class. And so when you think of Unum as the overall franchise, our investment portfolio has been very consistent. And we're very happy. And when we see that today in terms of our watchlist and other metrics, I'd say the credit is still very good. So I'll wrap that all around, the work that's being done particularly at the long-term care, and we still feel pretty good about that.
We'll take our next question from Erik Bass with Autonomous Research.
You mentioned the pressure on net investment income in Unum US. Given where new money rates are today, how would you expect this to trend going forward given the underlying growth in the business that you're also seeing?
So miscellaneous income, I think, was the driver of kind of the pure 2Q result and seeing a more significant drop-off in net investment income than we have in prior periods. And so there is volatility too, but it's largely bond call activity back in that line, and we would expect that to revert to the mean over time. And I think right now in today's environment you still see those rates come down, so it still provide a little bit of pressure on the investment income line. But, as Mike said, we've been pricing for that for a while and we have the margin there. So you may see that investment income continue to come down a little bit, but that's factored into our forecast.
Got it. And then you also mentioned the strong premium growth in Unum US this quarter really across the business. How much are employment growth and wage inflation adding to your premiums at this point?
Yes. So I think that overall the natural growth, as we talked about before, has actually been pretty good. The economy in terms of employment levels, you see that in the unemployment rate is good and stable, and we do start to see some wage inflation. So it's probably not as high as we might have historically seen it, but we think it is additive and it's just probably reasonably good in today's environment. So despite many of the headlines you see about the economy, people are hiring people, people are seeing competition in the employment ranks. And as a result, they're having to increase benefits and raise wages. We think that all plays very well for us.
Got it. I think you had historically said that added 1, 2 points annually. Are we sort of at the lower end of that range now? Is that a fair kind of assessment?
I think it's still a good range. I think that the -- it probably pushes toward the upper end of that range right now closer to two.
We'll take our next question from Alex Scott with Goldman Sachs.
First question is just on Unum UK. I know there's little bit of noise in the quarter with bond call, but I was wondering if you could just help us think through with the kind of experience you're seeing and the environment, any update on the impact that you would expect as kind of Brexit closes in?
Yes. Peter, do you want to take that one?
Yes, great, I'm happy to do that. As you pointed out, this quarter's benefit ratio is really an anomaly. There's been a number of things go on. We've had the bond called sort of higher inflation as Steve mentioned and also underlying [indiscernible] we saw just a little bit of lower debt, it does move around a bit. If we look at the year-to-date benefit ratio, it's not that far away from our assumptions. We had a good first quarter. And nothing in the economy is saying there's anything unusual happening there. We rerate all our schemes on an experience basis. We've been doing that over the last 2 years. And we think we're there thereabout in terms of where the schemes are rated now. I think from a Brexit perspective, obviously, most noticeable thing you can see in the quarter results is where the dollar is trading. We obviously went below $1.30 on average for the second quarter, and now we're at $1.21, $1.22 and that is effecting some of the comparatives. And if that continues into the third quarter, that's just a headwind against the numbers we're reporting for the U.K. business, but underlying the business is performing well. We got good premium growth. Sales, as the guys mentioned, were flat year-on-year, but actually we had a pretty difficult comparative. We wrote one very large case last quarter. So when we look again year-to-date, sales were up quarter-on-quarter. We're happy with persistency. So we feel we're in a very resilient position to trade through whatever Brexit throws at us.
Okay. And then my follow-up is just on the FASB accounting rules. I know they got pushed back a year, but just would be interested to hear any kind of update in terms of the way you're thinking about the impact, the timing and when you might be able to shed more light on that, if you're not able to today? And maybe just broadly, how you're thinking about leverage? I know that ticked up a little bit this quarter, and I think it was just a pre-fund maturity, but would be interested, particularly if Steve, you have any views on how to manage leverage around this business?
Yes. So I'll take the LDTI update first. So just to reground on that accounting change for how we handle reserving on our policies for mostly our long-duration contracts. Right now, the interpretation, as we would read, it would say they're probably the active life reserves, which is about 40% of our overall reserve level. And really for us the biggest change is going to be around the discount rate where we're going -- we'll need to go to more of a single A type rate, which doesn't really match up with a lot of our portfolios. We view it as noneconomic. It's not going to impact our statutory cash flows. So overall, feel good about that. So what has happened is there was a preliminary vote to delay and it has been recommended to delay the implementation for a year to 1/1/2022. That is pending a 30-day comment period and then there will be a final vote on that.
So we shouldn't have a kind of final recommendation or, I guess, final vote in the coming month. I'll tell you, we can't really speak yet to the timing of when our evaluation is going to be done because what we believe there's still some important interpretations that need to be made before we really truly understand the scope of the new guidance and are able to evaluate that. So we're really not trying to give any kind of update on when we might be able to give the results of our evaluation. What I'll say is we feel good about the process. There's a lot of process changes that need to be put into play with our evaluation systems. We're making great progress against that. So we feel good about the process, and clearly we're happy that they're going to delay it a year, it will give us that much longer to really work through it and work through the analytics on that. On the leverage side, yes, you're correct. Our leverage went up a couple of percentage points and that was due to the issuance we had in June of the $400 million 10-year note. That is earmarked for the prefunding of our maturity next September. And so we would do that leverage staying at the current rate really until we get through that prefunding. I think we'd want to manage that down over time though.
We'll take the next question from Andrew Kligerman with Crédit Suisse.
I'd like to go back to actually both -- to pricing on both the group markets and voluntary. A few years ago, there were some companies that just weren't performing well and they seem to have cleaned it up and repriced. And performance, in general, in that state space in group seems to be pretty solid. But when we had the new tax legislation at the beginning of 2018, I think, across-the-board companies were saying they're going to have to give back some of that pricing to the consumers. And so on that front, I'm just wondering when that comes back because the benefit ratios look really good at Unum, particularly in your group disability line and at your competitors. So when does that come back? And in the same vein in the voluntary area across the board and your competitors, there is a real push into that product line. So I'm wondering, do you think that pricing across those two broad areas will start to come down as we get into 2020? And if so, how much?
Yes. So maybe I'll start off just on the overall pricing environment and talk a little bit about tax reform and how that has worked its way back into pricing. And I think our view on that and at the time when it was going in, we looked at that and said, it may, but it will take some time, and we'll see how it does. The more we looked at it, I think it's less of a factor. When you think about the tax rate impacts of the margins, what we see, our margins that we're getting today, which are above our competition, it's really not going to work its way back into pricing. Just the sheer level of 10% difference in a federal tax rate relative to our pricing is an immaterial input to that process. So we don't see it because of that. I would also say pricing in our markets today are pretty rational, pretty stable. And I'm talking particularly to the group markets.
There's always a point in time and you reference several years ago where somebody is being more aggressive pushing into the market, disrupting a little bit. We don't see that in a major way today. There's always somebody on the margin or in certain case that we don't -- we scratch our head on a little bit. But I think, overall the pricing environment is pretty good for group across the board. And then on the voluntary side, I think there is much more competition, more people are getting into this market. It's a great market. We've known that for a long time. And as they weighed into it, it's not necessarily price. Prices are pretty standard to the end consumer in terms of what they see there but there are ways they can package it, ways they work with, carriers will work with customers, meaning the employer to entice them into that type of thing. Tim talked a little bit about that in his comments in Colonial Life, but I think that's true in the voluntary market. So there's more competition there. We're holding our own -- holding pricing, getting good margins, and we see that continuing, but it's certainly something we are vigilant for every day.
Great. And then just shifting over in relation to the discount rate, one area that's allowing you to not reduce, it might be the use of alternative assets. And you mentioned that, that asset class was very small. Could you give us a sense of how small it is? And where you'd like to get it? Because I think I've heard a dialogue that you'd like to grow that business. And then also what alternative assets? What specifically are you looking at?
Yes. So talk about the asset class overall, and I think we talked about -- there was a discussion we were having particularly related to long-term care and the alternatives. I think, our current number out there today is somewhere around $400 million on a $40 billion, $50 billion portfolio. So it is a very small percentage, less than 1% of the overall portfolio. We do like the asset class, we'll grow it some. I don't say we'll grow it -- we've been growing it in a very rational way over several years, and I think that's important when you're looking at these type of deals to not load up in any one vintage. And lastly I'd say, these are more credit deals when you look at them out there, more akin to what we're used to investing in that are out in the market. So without getting into specifics, I think it leans more towards the credit side than other alternatives.
I see. And you wouldn't want to double or triple it or something like that, the amount?
If we did so, it will be over a very long period of time. We worked our way into that $400 million position over 4 or 5 years, maybe even a little bit longer than that. So we'll continue to invest in that asset class. I think it's good, but I won't see it doubling over the next year or two.
We'll take our next question from Jimmy Bhullar with JPMorgan.
Just had a question first on the long-term care business. I think the loss ratio has been within your expected range since you took the charge last year. Seems like you're achieving your yield as well. How are the other factors? And have they been -- that go into your reserves, have they been better or worse than assumptions, so things like price hikes, [indiscernible], just trying to assess the likelihood of another reserve charge in the near term.
Jimmy, I'll take that question. So I think just a few grounding topics here. First of all, we go back to last year and the company went through a pretty comprehensive review of all of our assumptions in September and we looked at everything, from interest rates to rate increase strategies to claims incidence, different types of claim terminations, policyholder terminations and reset that based upon our experience that we've been observing over the last several years. So we went through that process. It was rigorous. We had a lot of third-party review of that, and so we feel good about that where we ended up through that process. You did mention that we've had a pretty good loss ratio experience since we reset those assumptions. For the full year kind of roll -- or for the fourth quarter rolling average, we're at 86.7%.
I'd say if you break those components down, you mentioned we feel good about the new money rate that we've been able to get on our portfolio, we've talked about that some. We also feel good about our rate increase strategy. I did mention that we're getting close to 50% of the $1.4 billion that we had in our reserve assumption. I think we had mentioned back in our year-end call that we were around $500 million against that assumption, most of that coming from California, California approval as well as some exempt estates on our group product. Since then, we've continued to see good success. And I am encouraged because we're seeing it both on those pending increases that have already been filed and have been on file for some time when we did our reserve assumption adjustments. We're continuing to see routine incremental approvals on those. But then we have a good mix with some of those that we just filed more recently towards the end of last year into the first part of this year. As I mentioned back then, a lot of those new approvals were going to be on the group side of the business. And again, I am encouraged that we're seeing good approval on those. So all in, we feel good about where we are on the rate strategy. But again, it will play out over multiple years. We have a lot of these approvals that get approved on an incremental basis on an annual basis.
When it comes then to the underlying liability assumptions, again I think a good guide is to look at our overall loss ratio. We've seen fluctuations from quarter-to-quarter on that. If you remember, fourth quarter last year, we had pretty good incidence on that, and we were actually below our expected range of 83.2%. But I just want to reiterate that we don't change our view of long-term assumptions based on just 1 quarter, whether they're very favorable or unfavorable. And I think it's important that the people understand when we think about the range, we're looking at the range of 85% to 90% and anything within that range, we view as satisfactory, and we view as being within our expectations. So we're going to see fluctuations within that range. We may even see a few fluctuations outside of that range, like we saw in the fourth quarter, but we continue to feel pretty good about where our assumption set is and it's played through in our loss ratio.
Okay. On the group disability business, your margins have sort of gradually continued to improve off of already strong levels. What's driving this? Is it incidence or recoveries? And to what extent do you think barring any change in the economic climate to what extent should the margin sustain at these levels?
Thanks, Rick. I'd say all the above. So incidence has been pretty good, but not outstanding. I'd say recoveries continue to be just rock solid and predictable. We have a great team that helps get claimants back to work in a really high quality way. And when we look at where the loss ratio has been, it's been favorable. And when we sort of look forward at the underlying components of that, there's no reason to think that, that is at a sustainable level going forward.
We'll take our next question from John Nadel with UBS.
So I'm interested in the discussion too around sort of exceptional margins, really strong return, and it's not just Unum US, but I'll focus there because that's where, I guess, there's more competitive pressure generally speaking. And I agree with Andrew's comment earlier, a couple of years into it now, it's not just you guys with strong margins and strong returns, pretty much the entire industry is benefiting from this. And so I guess, I'll take a different approach to the question though. Mike or Rick, why not step up on the gas a little bit more, grow a little bit faster? I mean, I recognize this is cyclical business, but if economic conditions remain this good, if the fed is on our side, if all these factors are in place and you're generating high-teens return, that's so far ahead of cost of capital. I don't understand why you wouldn't actually be more aggressive here to grow a little bit more quickly, particularly when you've got the opportunity to re-rate over time?
John, we really appreciate that question, and it's a dialogue we have internally as well because we have seen very good margins. We've also been at this for a while, and so it's important that we talk about discipline because those good margins can go away very quickly in an undisciplined environment. You don't have to go back couple of decades when we were part of that as well. We've seen many carriers do that over the last several years. So we're hesitant to do that, but it doesn't mean that we're not pushing the growth side. And when we're growing premiums, 7% across the board and generating these margins, we think that's a pretty healthy mix. And so although the temptation will be there, I think I give credit to our team who has been doing this for a long time. Discipline is still part of what we do and part of the core of this franchise. And I think we're proud of that. Mike, I don't know if you have anything to add to that?
I think you've got it. The one I would have, Rick, is where we are leaning in, John, is on capabilities. And so we continue to increase the investments that we're making. And we talked on this call and prior calls about the investments that we're making in the leave management business. We are continuing to invest in that and we'll do so over the coming quarters. Another big asset for us is proven to be the technology we've invested to integrate our processes into the cloud-based HR platforms that our clients are increasingly adopting. And we got great success with our integration with Workday and expect to have some more news on that front over the coming quarters, which we think could help, provide a tailwind for us.
Okay. I appreciate the commentary. And then if I could switch gears just to sort of long-term care and the premium rate increases. So in the first half of this year, in the Closed Block, LTC premium growth was about 1% year-over-year maybe slightly less. Can you help us maybe understand what's happening with the actual policy count? Obviously, that's got to be declining. I just don't know how fast. And then how much of these recently approved rate increases were very meaningful amount. Do you think it's already -- earnings grew the premiums that we're seeing in the Closed Block or is that still on the comp largely?
Yes, John, this is Steve. So just from timing, I'll give you a little bit of perspective just on the process of approvals and then the implementation of rate increases. You can usually look at a communication period and implementation period that can stretch anywhere between 4 to 6 to even sometimes 8 months on the individual side. We have certain technology releases and then we make sure that we have good communications upfront to the brokers of record as well as the policyholders so that they can think about choices that they have to make. So as an example, the California increase that was approved at the beginning of the year, that is just in the process of being implemented, and so you would not see any premium in the current financial statements related to California. That will start to come through later this year. And then on the group side, it's even a little bit more extended just because you have the factors that I described as well as the anniversary dates that you're working with, and those are implemented on the anniversary dates of the group. So it takes time, it takes time, and so we've seen kind of steady increases from those that have been approved in past years. A lot of what we've seen so far on the newer program, you wouldn't have seen come through the financials yet.
So then is it fair then if we thought about this from a modeling perspective, Steve, that the Closed Block LTC premium, we should probably see that growing over at least the next 12, if not longer, months given the success you've had on the Premium rate increase side?
Yes. The one thing that I would say there is with certain of these increases, specifically California, we do continue to offer the option on the old individual side, yes, the buydowns. And so we've had a pretty good take-up on that historically with other states. And so I'd caution you to build too much in. We need to see just how that behavior, the policyholder behavior plays through, and that's something, obviously, we're very interested in and we'll track. But I'll just end by saying, we're very encouraged by the approvals that we have received and feel like we're well on our way to the reserve assumption.
We'll take our next question from Suneet Kamath with Citi.
I'll just do two quick ones in the interest of time. So on the Unum UK discount rate change, should we expect any ongoing earnings drag as we think about the next couple of quarters?
This is Steve, I can take this one, and I'll just give a little bit more color around the discount rate change. So we had a pretty significant bond call overall in the quarter, it was about £10 million that came through on that. We took about half of that and took the opportunity to adjust our discount rate and we adjusted that by about 8 basis points. And so we had about $5 million increase in the reserve, so that pretty much resets our claim discount rate at that point. And then how we would view that is just going forward that would pretty much match off with the accretion that we'd have then on that claim reserve versus what we think we're going to yield on our portfolio. So there might be a little bit on the margins, but I wouldn't see it being very material.
Okay. Got it. And then just the second one in terms of capital return. I think we still have maybe $50 million left in terms of carryover buyback from that quarter last year when you didn't buy back stock. Is the plan to execute that in the second half of this year?
Yes. We will continue to evaluate that. And if you recall, we did catch up $50 million of the $100 million that we kind of forgo -- that we forewent in the third quarter of last year. We'll continue to evaluate that. But I think kind of how we're looking at the future, the kind of $100 million a quarter is probably a pretty good expectation.
And we'll now take our final question from Josh Shanker with Deutsche Bank.
One last LTC question before we end. Can you talk about the time lag between applying for a rate increase and receiving it? And if we look at the rate increases that you've been approved for since taking your last charge, how many of them have been sort of processed with a 2% 10-year environment in mind?
I'm not sure I followed the last part of that question.
If you saw the rate increase, you saw the rate increase with whatever the prevailing interest rates were in the market in your interest rate assumptions. I assume your interest rate assumptions may -- we don't know, but may have changed. But if in January you sort of did the math and came to this is the price we need to increase in X state, and now we're 6, 7 months into the year and interest rates have changed. I'm just wondering to what extent have prices that you've asked for been filed for in a very different interest rate environment?
Yes. I guess, I'll look at that just to go back to the process we take to file rate increases. It's a very long-term view of both our liability assumptions as well as interest rates. So if you go back to how we were looking at it when we did our reserve assumption adjustment back in September, that would've been the basis for our rate increase request. So -- and we take a consistent approach nationwide to that. So we would have reset the assumptions set. We would have factored that into rate increase requests, and then we filed those new ones through the last part of last year into the first part of this year. And again, we still feel good about our long-term view of interest rates and they'll feel like we need to reset those at this time. And so we wouldn't adjust those for the rate increase request as well. And just the timing, that varies quite a bit. Some states -- we've have some states that have approved the increases that we filed the latter part of last year and the first part of this year. They are approved, and we'll be implementing those and then there's other states that it takes longer and it may take even several years. They also may face those in over time. So the timing can vary quite a bit. But we factor that all in to how we think about the value that we can get from those.
And with long-term care, are there any filed in new states that you can start charging and the state will get to your approval at some point?
Yes. We mentioned back in the first part of the year, there are, I'll say, a couple states that there is an exemption from filing group, long-term care rates. So if you have a nationwide program, you can just begin charging those nationwide rates. But it's pretty limited and there is very few just file a new states, most of them will go through pretty comprehensive process.
And we'll take our final question from Alex Scott with Goldman Sachs.
I just had a quick follow-up on the California rate increase. I think it's the way profits before losses accounting works, sometimes the premiums, they come in from a premium rate increase are necessarily used to build reserves the way your typical premiums would. So I was just interested in, like, do I have that right, will those premiums kind of -- they come in from that increase fall to the bottom line more so than premiums ex rate increases?
Yes. I would say you'd get different answers depending on the accounting basis. So when you look at GAAP accounting, we factored those increases into our reserve assumptions. So there is a point where those reserves assume that you're getting the increased premium. Now the timing of that may not always match up perfectly because there is an assumption of the timing of implementation. But by and large, over time, those premiums are anticipated by the reserve itself. So there's less of that, that will fall through. On a statutory basis, your statutory reserves kind of work independent of the actual premium collected. It's -- those are kind of more locked in assumptions, and so more of that may fall through to the bottom line.
Thanks, Alex. So I'd like to thank everybody for taking the time to join us this morning. Cody, I think, that now completes our call for the second quarter of 2019. Thanks, very much.
That does conclude today's conference. Thank you all for your participation. You may now disconnect.