普登 (UNM) 2018 Q1 法說會逐字稿

Good day, and welcome to the Unum Group 1Q 2018 Earnings Conference Call. Today's call is being recorded.

At this time, I'd now like to turn the conference over to Mr. Tom White. Please go ahead, sir.

Great. Thank you, Derrick. Good morning, everyone, and welcome to the first quarter 2018 earnings conference call for Unum.

Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from these results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the sections titled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2017. Our SEC filings can be found in the Investors section of our website. I remind you that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements.

A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found in our statistical supplement on our website, also in the Investors section. Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; CFO, Jack McGarry; as well as the CEOs of our business segments, Mike Simonds for Unum US; Peter O'Donnell for Unum UK; Tim Arnold for Colonial Life; and Steve Zabel for the Closed Block.

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

Great. Thank you, Tom, and good morning, everyone. We had a solid start to 2018, with net income per share increasing 23% in the first quarter to $1.23. Adjusting for net realized investment gains and losses and the guarantee fund assessment from last year, our after-tax adjusted operating income per share increased 21.6% in the first quarter to $1.24, well within our range of expected growth of 17% to 23% for 2018. And that's over the base of adjusted operating earnings from 2017 of $4.24.

In the first quarter, we saw a continuation of many of the favorable operating trends we have experienced in our core business segments over the past several quarters. Premium income grew 6.5% for our core businesses, while overall benefits experience showed a slight improvement. Our expense ratios remained in line with the year-ago quarter, and they reflect the productivity and investments in our business to generate stronger growth and leading customer experience.

These investments are paying off, and for example, we've seen strong growth from our recent acquisitions in the dental business in both the U.S. and U.K. We continue to look to acquisitions to supplement growth for our core business lines, which we executed on in Europe with our intended acquisition of a Polish operation, and in the U.S., in a small leave management company.

Our Unum US segment posted very good results in the quarter, with premium income increasing nearly 6%, and the benefit ratio continuing to improve year-over-year. Colonial Life's adjusted operating earnings were slightly lower relative to last year, but I remain encouraged by the growth we're seeing, plus the long-term value we're creating with the investments we're making to expand our geographic footprint.

Unum UK continues to feel the effects of a sluggish U.K. economy, and before tax, earnings remained flat on a local-currency basis. Overall, I'm pleased with the consistency of our performance in these leading businesses, and it is a tremendous franchise that is executing well and driving strong returns and cash flow for our company.

In the Closed Block, results continued to be volatile on a quarter-to-quarter basis. In the first quarter, we saw a very good performance in our closed disability block. This was offset by a weaker performance in long-term care, which you can see is in an elevated loss ratio. The impacts from lower mortality in the fourth quarter settled down, but we did see a much higher level of claims in the quarter. This block can see volatility, and this quarter was no exception. We'll have to watch how these trends continue just as we did in the fourth quarter. But historically and going forward, we're taking the actions necessary to manage these businesses over their longer-term duration.

I would reiterate that we feel very good about the strategic direction of our business and our strong position in each of our markets. The performance of our core business segments create significant financial flexibility for the company with strong statutory earnings yielding strong cash flow. This flexibility will allow us to continue to seek opportunities to expand our presence in our markets, find ways to better serve the needs of both employers and their employees and return capital to our shareholders. This focus will enable us to continue to drive long-term value for our shareholders.

Now let me turn it over to Jack to cover the details of the first quarter. Jack?

Thank you, Rick, and good morning, everyone. Following on Rick's comments, 2018 is off to a solid start, with earnings per share growth in line with our expectations for the year.

Now I'll provide detail on our financial performance. Beginning with Unum US, we saw another good quarter with continued positive growth trends in premium income and overall sales, very good persistency and favorable benefit ratio trends across our major business lines. Within Unum US, adjusted operating income for the group disability declined by 6.4% to $83 million in the first quarter, primarily due to lower net investment income, resulting from a lower level of assets backing this line and a lower portfolio yield.

The update of statutory reserves in the third quarter of 2017 in the IBNR reserve update this quarter have resulted in less capital back in the line. This trend, along with the steady pressure on portfolio yields, puts pressure on the net investment income generated to this line of business. Lower assets and yield pressures are expected to continue for the next several quarters. However, these lower capital levels are accretive to the adjusted ROE for the group disability line.

We saw encouraging trends with premium income for the group disability line, increasing by 4.3%, given past sales trends and improved persistency, and also further improvement in the benefit ratio. For the first quarter of 2018, the group disability benefit ratio improved to 75.6% from 76.6% in the year-ago quarter, with favorable claim recovery experienced in the group LTD line, more than offsetting the increase in claims incidence in the group STD line.

The expense ratio for group disability increased slightly to 25% in the first quarter from 24.5% a year ago, primarily due to additional operating investments in our business that we believe can generate more positive customer experiences.

The Group Life and AD&D line had a very strong first quarter, with adjusted operating income of $64.6 million, an increase of 15.4% from the year-ago quarter. Premium income increased 8.3%, driven by good sales trends and an improved overall persistency. The benefit ratio improved to 70.7% in the first quarter from 71.9% in the year-ago quarter, due primarily to improved waiver of premium experience in the group life product line.

The supplemental and voluntary lines produced another solid consistent quarter, with adjusted operating income increasing by 2% to $96.3 million in the first quarter. Premium income continued to grow at a healthy pace, increasing 5.4% for the first quarter, due to growth in our voluntary benefits business and the rapid growth we're seeing in the dental and vision product line. These increases were partially offset by a slight decline in the individual disability line.

Risk experience was favorable in the first quarter in our individual disability and dental and vision lines, while the benefit ratio for voluntary benefit line was generally stable year-over-year.

Sales for Unum US in the first quarter increased by 4.2% over the year-ago quarter, driven in large part by the growth in our voluntary benefits and dental and vision lines. Sales in our group lines were mixed, Group Life and AD&D new sales increased 19.9% for the first quarter, while sales in our group disability line were lower relative to the year-ago quarter.

It's worth noting that our first quarter sales for our group lines are typically the lowest of the year, and therefore, the most subject to volatility. We're especially pleased to see the stronger levels of persistency in our group lines to start the year, with group LTD persistency increasing from 88.1% in the year-ago quarter to 90.8% this quarter, while Group Life improved from 87.4% last year to 89.3% in the first quarter.

Unum UK continues to be impacted by the sluggish economic and business environment in the U.K. In the first quarter, adjusted operating earnings remained flat year-over-year at GBP 21.4 million. Premium income increased 2.5% on a local-currency basis this quarter, generated largely by favorable persistency we saw at 87% for the first quarter of 2018 compared to 84.5% last year.

The Unum UK benefit ratio was 71.9% for the first quarter of 2018, up slightly from the 71.4% last year. While we saw an uptick in claims experience in the group life and critical illness product lines, we were encouraged to see more favorable experience in the group disability business in the first quarter of 2018 relative to 2017.

Unum UK sales for the first quarter declined 22.6% in local currency, driven primarily by 1 very large LTD case sold last year that made for a difficult comparison. Excluding that single case, we saw improved sales trends in the core LTD market and across the group life and supplemental lines.

Colonial Life again produced solid adjusted operating income for the first quarter of $81 million, though this quarter was 1.7% below the first quarter of 2017. Top line growth tends -- growth trends remained very encouraging at Colonial, with premium income increasing by 6.4% for the first quarter.

Benefits experience was slightly elevated in the first quarter at 51.6% relative to the favorable 50.8% in the year-ago quarter as we saw unfavorable experience in the life line of business, partially offset by favorable experience in the accident, sickness and disability lines. In addition, the operating expense ratio for Colonial Life was unfavorable for the first quarter, primarily due to timing of expenses and the cost related to our territory expansion efforts.

Sales momentum for Colonial Life continues to be quite strong, increasing 7.6% in the first quarter. Sales growth was evident across the board with growth in all product categories and market sectors. We look for a continued momentum with our sales growth as we accelerate our investments and territory expansion and initiate the rollout of that dental and vision products to our Colonial Life distribution system.

For our core business segments, Unum US, Unum UK and Colonial Life, we remain encouraged by the consistency the trends we're generating over the past several quarters, highlighted by favorable growth trends through disciplined sales management and strong persistency levels, well-managed expenses as we make strategic investments in our future growth and overall stable risk experience. These businesses are generating strong returns for us, with an adjusted operating return on equity of 17.5% for the first quarter of 2018.

Moving to the Closed Block, adjusted operating income declined to $28.9 million in the first quarter of 2018 from $31.6 million in the year-ago quarter. In the individual disability product line, the interest adjusted loss ratio improved significantly to 77.1% in the first quarter compared to 83.6% in the year-ago quarter due to the benefit of lower average size and new claims.

The long-term care business line had a more challenging quarter, as the interest adjusted benefit ratio increased to 96.6% in the first quarter this year compared to the favorable year-ago first quarter of 88.6%. Benefits experienced this quarter was driven by new claim incidence that ran much higher than expected, which was partially offset by favorable claim resolutions due to mortality. In addition, the higher loss ratio this quarter was negatively impacted by a lower level of policy terminations. We continue to experience a high level of volatility in this line and expect it will continue in the future.

I'm confident that we have the appropriate strategies in place to manage these businesses. We continue to see good overall trends with our long-term care rate increase program, which we believe is the most effective way to manage the long-term care block over the long term.

The new money yields we are realizing for the long-term care portfolio continue to exceed the expectations we have embedded in our reserves. However, we're getting closer to the time when these new money yield assumptions will begin to grade higher. Interest rates and bond spreads were more favorable for us in the first quarter, but this remains a watch area.

We continue to feel good about our progress to date in obtaining approvals of long-term care premium rate increases with state regulators. We monitor this progress in 2 ways, both of which relate to the actual approvals received, compared to those assumptions we included in our 2014 assumption revision for GAAP reserves.

First, we quantify the present value of additional premiums in (inaudible) elections we will realize in the future based on actual approvals received. For this measure, we are on track with the estimates in our 2014 assumption set. However, it's important to note that the timing of implementation in the number of years over which increases may be phased-in has a minimal impact on the total value we recognize over the life of the block.

The second measure is the actual premium we will recognize in any specific year for approved rate increases compared to the premium pattern incorporated into the GAAP reserve expectation. For that measure, we have not received approvals as quickly as originally estimated, and those approvals received have been phased-in over a longer time period than originally anticipated. This has had the effect of increasing our reported loss ratio in the recent past by 3% to 4%.

Based on our current best estimate for the implementation of approved premium increases and our forecast of approvals in the near future, we believe this loss ratio pressure from rate increase timing will reverse over the next 3 to 5 years. We remain optimistic that regulators understand the need for actuarially justified premium increases and will work with carriers to manage these blocks prudently.

So in total, we view the first quarter as one consistent with that results we've seen over the past several quarters. Our core business lines continue to operate well, while our Closed Block results, particularly the long-term care line, remain volatile.

Moving on, we continue to deliver healthy levels of statutory earnings from our traditional U.S. insurance companies. For the first quarter, statutory after-tax adjusted operating earnings totaled $242 million compared to $180.1 million in the year-ago quarter. This year's results benefited from the lower tax rate and an IBNR update in long-term disability while last year was impacted by the guaranteed fund assessment. But overall, it was a solid start to the year from a statutory earnings perspective.

Our capital position remains in very good shape. At quarter end, the risk-based capital ratio for our U.S. traditional life insurance companies was slightly above 380%, while cash at our holding companies totaled $887 million. Our annual need for interest expense and shareholder dividends is approximately $360 million, so we continue to maintain very strong coverage ratios.

Our return of capital to shareholders remained on pace, as we repurchased another $100 million of stock in the quarter. Our board will be considering an increase to the common stock dividend at the upcoming annual meeting.

There's a lot of interest in RBC ratios and target levels going forward given the potential impacts of tax reform. We've had good dialogue with the rating agencies on this topic since year-end on what we believe the appropriate RBC levels are for our company. We and they continue to wait final decisions from the NAIC on any changes or revisions to the formulas and remain closely engaged in those discussions.

I will remind you that most of the agencies often use their own model for capital adequacy that typically use pretax rather than after-tax assumptions. In which case, the proposed factor changes would not materially impact their views of our capital adequacy.

In short, we feel we have a strong capital level and enhanced capability to recover from stress scenarios given our stronger projected cash flows due to tax reform benefits, and healthy financial metrics, which will enable us to maintain our targeted financial strength rating of A.

I'll wrap up by reiterating our expectations of growth in adjusted operating earnings per share in the 17% to 23% range for the year. I will also remind you that the base of adjusted operating earnings from 2017 is $4.24 per share.

Now I'll turn the call back to Rick for his closing comments.

Great. Thank you, Jack. All in all, it was a solid first quarter for the company. We're encouraged by the operating trends we're producing in our core businesses, and we're excited by the growth opportunities we see in our markets and are confident in the strategies we have in place to continue to be successful.

We'll move now to your questions, so I'll ask the operator to begin the question-and-answer period.

(Operator Instructions) And we'll move to our first question from Erik Bass with Autonomous Research.

I had a couple of questions on the long-term care side. Just first, you provided some sensitivities for long-term care reserves to changes in interest rates. I was just hoping you could provide some similar sensitivities to changes and claims trends or changes in mortality or morbidity to just give us a sense of how things change there, what the impact could be on reserves.

Jack?

Yes. We do sensitivity testing. We had not come out with the same. A lot of it depends not only on the level of persistency in mortality and morbidity but also on the shape of it. So it's a significantly more complicated question than the interest rate change, and we have not publicly disclosed those.

Got it. And maybe thinking about it in a different way. I mean, you've disclosed, I think, a cushion of about $1.1 billion between your GAAP and statutory LTC reserves, which seems pretty large given the size of your total reserves. But -- so what I'm trying to gauge is what would have to change in your assumptions to exhaust that cushion? And if claims incidence remains elevated at levels like you saw in the first quarter, mortality experience was consistent with what you saw in 2017 and rates were kind of trending the way they are, is that still only a GAAP issue, do you think?

I mean, we need to go through the works. So it's a process we're going through. We've started our annual process. We'll be doing a thorough review of the experience and assumptions. I wouldn't look at the first quarter as being indicative or overly material. I mean, there was volatility in both directions. We actually had very favorable mortality results in the first quarter, particularly our claim mortality -- on claim mortality results, we had very unfavorable new claim volumes in the first quarter. Both of those were aberrations that went in different directions, and I certainly wouldn't draw our line through the first quarter and say, "That's where the world is forever." We do have significant margins between our statutory reserves and our GAAP reserves. We'd expect those to build to the $1.3 billion to $1.4 billion range by the end of the year. I'd also point out that over the last couple of years, we've exceeded our investment bogeys, which is based on current assumptions has built additional margin into our GAAP reserves. And the third point I would point out is that we still have room from a rate increase perspective. We would expect -- we're pretty much on plan with the approvals we've seen historically as well as what we can anticipate from those states that give regular ongoing small approvals. We still have a lot of outstanding rate increase request in that original 2014 stage filing. We expect to get additional benefits from those filed. And as we update assumptions, we will be looking at another round of rate increase requests. So there's a lot of room there. So I feel there's a -- between where the reserves are, rate increase opportunities and our stat to GAAP margin, there's a very good margin in there. But we got to go through the work before we can solidify where we end up.

And just on the last point you made on the rate increase side, can you just provide an update on sort of how far through the approval process are you on the round of rate increases that has been filed for?

Yes. The -- go ahead, Steve.

Yes. This is Steve Zabel. Yes, we're just over 90% kind of the way through what we had originally anticipated in our 2014 program, measured by kind of the present value of the additional premium and any benefit adjustments that we may receive. So we feel pretty good about that, and that's about what we had assumed how far we'd be through on the approval process in the original reserve construct.

Yes. I'd note though, on top of that, there's still probably $0.5 billion-plus of outstanding requests that we've yet to receive word on.

Our next question comes from Jimmy Bhullar with JPMorgan.

First, just a question again on long-term care. If you think about the uptick in the loss ratio, given your comments on the pace of getting the price hikes, do you expect that to stay? Is it more reasonable to expect that to stay around the current level versus the around 91-ish percent level that you saw over the past couple of years?

Yes. I think we expect it given the impact of the rate increase timing but probably in the higher than that 91 level. Frankly, it is so volatile at this point that I wouldn't venture to predict exactly where it's going to be. The thing I'd remind you though is what happens in 1 quarter, 2 quarters is really muted relative to what happens on a reserve assumption basis and what that means for reserves.

Okay. But more likely, it should sort of track higher than where it was the last year just given the pace of price hikes on those, like obviously, the number moves around every quarter, and a quarter is too short to (inaudible).

Yes, I think it will track higher. And we've seen an uptick. I would expect that probably to continue.

And then you're achieving your assumptions for the investment yield. And actually, I think you have been doing a little bit better than that, even recently. But the assumptions do grade up a decent amount over the next few years, beyond this year. How are you thinking about maybe adjusting your assumptions or at least adjusting the steepness that you're assuming yields will go up? And if you are thinking about it, when would we see you adjust those?

I mean, that will be part of our annual review process. That will be one of the last things we lock in because it will have a lot to do with where interest rates are at the end of the year and where credits rates are and what we view the future to be. It's encouraging that interest rates have been rising, credit spreads have shown some signs of returning to more normal levels, which has helped us. But again, that's going to be one of the last things we peg because it will depend on the environment.

And then just lastly on if you could talk about just market conditions and competitive trends in the disability market. A lot of companies have been raising prices in the last few years. It seems like they're done with their repricing cycles. But what are you seeing in terms of competitor behavior in the market?

Yes, Jimmy, let me turn that over to Mike to talk a little bit about the market.

Thanks, Rick. Jimmy, I appreciate the question. And I would agree it is a competitive market out there, though I would say our value proposition continues to resonate. I'd take you to, first, the persistency in the increases that both Rick and Jack highlighted. Also, the 4% sales growth that we saw in the quarter, which is good to see. But as you cite, I do think it is a competitive market. If I had to pick a spot, I'd say that middle-market midsized employers and 2 data points there. That's certainly where we saw the most group insurance sales pressure was that mid-market -- as you know, we're not going to chase new business. We don't think that's in our best interest or frankly, in the best interest of our clients, where they're looking for stability and predictability of cost. And also, where we did have terms and loss clients, we saw high single-digit loss on the business that we lost in that mid-market. So we'll probably feel it most acutely there, but overall, I'd say our outlook is one of cautious optimism. 1Q is a light sales quarter for us in the group insurance line. We are really encouraged with the growth in our dental and vision business. That's really helping us as we package in the smaller end of the employer market, and we rolled out some new capabilities in the large case market as well. And the pipeline there looks quite encouraging. So competitive market, but I think we're more than holding our own.

And I think, one thing I'd add, Jimmy, is it is always a competitive market, but you don't see anybody that's way outside of the norm in terms of being overly competitive or too aggressive in the market. That's a good place for us, I think, given the value proposition that Mike highlights. We do very well when we're within the range of pricing. And that's -- I think that's where we are today.

Our next question comes from Humphrey Lee with Dowling & Partners.

Just a follow-up on long-term care. Jack, in your prepared remarks, you talked about the elevated loss ratio will reverse over the next 3 to 5 years. So do you mean that the loss ratio will kind of remain about -- above your 95 -- I'm sorry, 85% to 90% range over the next 3 to 5 years as you implement these rate increases?

Actually, what I was talking about is that 3% to 4% pressure on the loss ratio that we're feeling now from the lag and -- at which we're actually seeing the premium from approved rate increases. That will dissipate over the next 3 to 5 years.

But -- so if you're saying (inaudible).

So it's the 3% to 4% pressure.

Yes. So the 3% to 4% pressure to your loss ratio, I guess, above your kind of 85% to 90% target. So does it -- so do you mean that it will remain above 90% over the next 3 to 5 years?

Yes. Again, we're going to look at assumptions, we're going to look at reserves. I mean, we'll see where the loss ratio goes. I'm not going to try and predict a specific range that, that will be in. But no matter what the loss ratio is, the underlying pings of it will be 3% to 4% better 3 years -- 3 to 5 years from now because of the catch up and rate increases.

I think, Humphrey, we're trying to isolate that one issue, where we're getting the value that we expected. It's just a little bit of a lag, and that lag comes through immediate loss ratio. But from an overall long-term value perspective, it will be there. And I think that's a little pressure now. We'll get that back over the next couple of years. But it is just isolating that one aspect that most people wouldn't know.

Okay. Got it. And then shifting gears to expenses. You talked about in the quarter, there are some high investment-related expenses in group disability and Colonial Life as well as supplemental and voluntary. How should we think about these expenses? Like what would be, I guess, as an ongoing basis as opposed to a onetime nature? I guess, in general, just how much of the elevated expenses in the quarter would remain in the near term?

So what we're trying to highlight, Humphrey, is looking at the overall expenses, we're investing in our business, and so that's an important part. That will continue. So when you look at the opportunities that we have out there, the ability to spend money to grow the business, to run it more effectively, to serve our customers, we'll continue to invest money there. So I'll highlight that at the macro level. On a very specific level, we're investing and maybe we'll go around to each of our businesses and talk about the areas of investment because I think it's interesting in terms of how we're continuing to grow the company. Mike, maybe you'll start in Unum US?

Yes. Thanks, Rick. Appreciate it. And from an expense perspective for Unum US, you would have seen sort of a gradual improvement over the last several years. I think in the quarter here, we were flat year-over-year. And I actually feel very good about that given the level of investment that we're putting back into the business. And I'd take you to the continued investment in expanding the dental and vision business. We've gone from about half the country, 2 of our sales regions to the full country rollout. We continue to invest aggressively in our network, our provider buildout strategy, which is great. So you see that kind of surfacing in our [sub-fall] expense ratio. And then in group disability, we continue to invest in the client experience, particularly around the services we provide for helping to plan and manage leaves as well as sort of relieve the administrative burden on employer. And I think both of those are sort of good, solid ongoing investments that we are -- see sort of the benefits have already started to materialize in our position in the market and our growth pipeline. And I know Tim Arnold at Colonial Life is making some similar investments around the client experience, so maybe, Tim, I'll flip it to you.

Yes. Great. Thank you, Mike. We are making investments in the client experience and investments in technology to support that. We're really pleased with the investments that we're making in our distributional expansion. We're seeing nice results flowing from that. And then in the first quarter, we had a number of expenses related to the ramp up of the dental offering, which we kicked off in late first quarter, seeing very good market adoptions early for the dental product but very good market adoption there. So we also think first quarter was influenced a little bit by some timing issues, and we would expect our expense ratio to moderate over the balance of the year.

Yes. Great. Thanks, Tim. And Peter, in the U.K.?

Yes, like the -- my colleagues, obviously, from the core business perspective, continuing to perform strongly. And we are investing for the future. So we have a number of initiatives running, looking at both efficiency and growth. Actually, our expense ratio performed very strongly in the quarter. We actually had a little bit of the opposite of what Tim talked about. A little bit of positive timing, so we expect that to be a bit of a low point, come back a little bit in line with expectations. But continuing to invest prudently, I guess, given the economy out here.

Yes. Thanks, Peter. And I think, overall, Humphrey, to answer your question, I think we're talking about all the investments. But you've seen us pay for those with a lot of efficiencies. So you are not seeing the loss ratios move and then coming down for most of our business, all of our businesses over the last several years. They may moderate a little bit. But efficiency is still a big part of creating that room for investment that we're going to continue to make.

Next we move to Randy Binner with B. Riley FBR.

I had a couple of follow-ups in the long-term care area. First of all, there was a comment earlier that the mortality and new claims trends were an aberration in the first quarter. So mortality is understood to have been unusually high due to flu in the first quarter. But what about the claims trends would make you characterize those as an aberration in the first quarter?

Yes. So I'd say, first of all, that the claim aberration didn't come in levelly over the quarter. It was highly concentrated in the month of February. Our new claims submissions in the month of February were outside of 2 standard deviations from the mean, so less than a 1 in 100 chance of being there. They actually settled down. It's still above the mean but settled down in March, and it continued to settle down since. So that huge spike -- and in fact, most of that spike happened in a 2-week period in the middle of February. That would be the thing, that would make me say it's an aberration as opposed to a trend.

Okay. But there's no -- you don't know -- there's no -- you don't know why? It just -- it was just an unusual 2-week period?

No. And you can speculate that just as the flu improved mortality, people at the margin that may have tipped the scales there. But we'll never be able to say that with certainty.

It's hard to pinpoint at, Randy. I mean, if you look to history, we've seen spikes in the past. Sometimes, those spikes -- and we were speculating that time, too, can be caused by rate increases and what comes through and things in the news. There's a lot of things. It's hard to pinpoint it, but as Jack said, it was a spike. We saw it tick up and has come down a little bit since then.

So but flu, maybe on the margin, flu pushed some folks in?

It could be.

Okay. And then I just -- I wanted to -- and I think Jimmy mentioned the kind of the -- for the yield assumption on the LTC block that was set in the fourth quarter of '14. I think it was -- if we look back to the fourth quarter '14, the 30-year treasury yield was at pretty similar level, maybe it was a little bit lower than it is right now. So if we use that as the risk-free rate and then earnings would be higher, when would that need to start inflecting higher? Because if you fast-forward to kind of the end of this year, that would be 4 years then, and then it would 5 years at the end of '19. Is it -- do you need to have like a one year visibility on that trending up? Or can you wait for that to start trending up in year 5?

Yes. And I think, Randy, Jack answered it in kind of the path we picked back in 2014, and that we would stay flat and move up. We exceeded that. We're starting to see interest rates move up, 30 or similar, credit spreads are wider, but you've certainly seen the 10-year. And so you have a very tight 10-30 spread, which is -- which should change over time, hopefully. And so we have to stand here today and look forward. And so it's not beholden to that path in 2014 that we picked. It's as we sit here and look forward in what's the path that we choose for the future. And so I think, that's what goes into our assumptions every year. As we go through it, we kind of give you a track as to what we saw then, what we're seeing now. That would stay flat for a period of time, then we start to trend up. And we're hopeful that it will, but we continually look at that as we do every year in terms of what the go-forward path might look like.

So is this 30 minus 10 something to think about there rather than just 30?

No. I think 30 is still the right number. I'm just indicating that, that 10-30 spread is unusual in terms of how tight it this. So if the 10 continues to move up, you might expect the 30 will actually gain some spread as well. And out in the 30, you might see a little bit wider credit spread than you'd see in the 10 as well. So it's still very much a 30-year view, 30-year treasury view that would be.

We'll next move to Tom Gallagher with Evercore.

Can you comment on the favorable mortality in the quarter on the long-term care benefit ratio? Can you quantify, at least ballpark, how much of a benefit you thought that was for the quarter?

Yes. I mean, we're not going to get into talking about specific assumptions by quarter and how far they benefited or didn't. It was a partial offset to what we saw around incidence in policyholder terminations.

But I guess, Jack, my question is if the elevated claims submission continues for a little bit here and we see normal seasonal mortality -- and I think you described it as very favorable. If that goes away in 2Q, are we looking at a loss ratio north of 100 or you think it's still below that?

Yes. I mean, I'm not going to speculate on that. It's hard to think that bad things stay forever and the good things go away. So we've had volatility around bunches of assumptions by quarter and would expect that to continue.

Okay. And then just from a rate increase standpoint. Would you say based on what you're seeing right now, would this prompt you guys to consider a big, new fresh round? Or where -- I know you're still in the process of completing the bigger 2014, 2015 plan. But what are you thinking right now? Is it still kind of wait and see to see how this plays out before you consider strategy with rate increases? Or are you considering accelerating something there?

Yes, Tom. This is Steve. Yes, it is just part of our assumption review. We go through -- we look at all of our actual to expected, compare that frankly back to previous filings that we've made with the states to understand what has changed against those, because they do need to be actuarially justified with the states. And so we would not develop a new strategy until we have that full picture because it may influence what part of the block we may want to rate as well as any potential magnitude of those rates increases. So I'd say, it's wait and see, and if there is another round, we'll finalize that in conjunction with our assumption review.

Yes. I'd reiterate though, Tom, that to the extent that assumption review creates a situation that's adverse to where we are currently. I would expect there would be a refreshed round of rate increases to go along with the new assumptions.

Got you. And just in terms of the holding company cash that is at a strong level, just curious what you're thinking there. Is that -- considering your options and your alternatives here, is that -- would you say you're taking more of a wait-and-see approach? Or is there any contemplation that you could do something more aggressive on capital return depending on how the rest of the year shakes out with -- given how much holdco cash you have?

Yes. It's great to have the cash, that puts us in a very good position with a lot of flexibility. Given the uncertainty in the environment around -- particularly around what's happening with risk-based capital factors, what the NAIC is going to do, how the rating agencies across-the-board are likely to react to that, my feeling is this year probably isn't the year that we'd be more aggressive on returning capital. But it's great to have it, and it puts us in a good position to respond to whatever happens from a capital perspective with the rating agencies.

And Tom, I think the buildup of holding company cash is more a factor of we've seen really good statutory earnings. Our capital returns to shareholders has been pretty consistent on the share repurchase side, and we've been increasing dividends on the common stock dividends side. And so it's more a factor of that and watching our core businesses generate that cash. It's built up. I think Jack articulates it right, it's good to have that flexibility. And as things move throughout the year, we'll maintain some of that.

That all makes sense. And just one last one, if I could sneak it in. The -- just curious if you could comment on just looking through the 2017 long-term care supplement for Unum and several others, it looks like incurred claims went up a lot in 2017, both for Unum and for the industry, it was like a double-digit delta year-over-year. 2016 was much less of an increase. And then for whatever reason, incurred claims just went up a lot in 2017. Any thoughts about what's driving that in terms of underlying factors, anything anomalous? Or any help you can give on that?

Yes. If you look at those forms and you look at the annual periods, 2016 is the outlier. 2016 for us was, I think, like a 99% actual to expected. It had been running around that 110%, 115%, pretty consistently for the years before 2016. It returned to that in 2017. So when I look at the stat forms, I would pick out '16 as being the outlier. I wouldn't really pay too much attention to the increase over '16 because if you look at the trend line, we were pretty consistent with that. I'd say a couple of other things on the statutory forms. First of all, the runout on our disabled claim reserves. That run out over the entire period. But it was about $330 million negative. I -- we also increased strength in reserves by $340 million during that same period. And so if you offset those 2 based on our current reserve level for claim reserves, things are working out pretty good and very steady. I think the other thing on those forms, you can see the impact of rate increases. Our gross-to-net ratios show a 42% increase. So we're running in that kind of 70% range on gross to net. And so I think if you look at -- and you take 2016 into consideration, things have been pretty steady.

We'll next go to Alex Scott with Goldman Sachs.

First question is just on the LTC premium rate increase environment. Could you discuss just how the regulators look at, I guess, the long-term care business. And in the context of the legal entity and some of the other businesses that you have in there, are you finding that they're looking at a purely isolated to the long-term care and sort of what's going on in the Fairwind captive? Or is there any pressure to potentially offset some of it with the very positive results you've had in some of your other core businesses?

Yes. This is Steve, and thanks for the question, Alex. I think a very positive aspect of the conversations we've had with the regulators is they've stuck to the letter of the contract and the regulations, which really says you need to look at this on a stand-alone basis from a product perspective. The products need to stand on their own. You need premiums that are sufficient for those products. So sometimes we'll hear comments from consumers around that, a little bit more around some of our more favorable profitable businesses and how that might influence these rate increases. But the regulators strictly look at how is the long-term care block performing, how do we project that to perform, what does that mean to lifetime loss ratios and what does that mean to premium efficiencies. So I think conversations, by and large, have been very constructive around looking at it on a stand-alone basis. I do think, generally, the environment with the regulators has improved over, say, the last 3 to 5 years, where regulators are very engaged in the discussion around long-term care and understand the need to approve significant rate increases for this line of business.

And then the second question I had was just on the individual long-term care. I think you're getting sort of deeper into the sort of the lifetime of the block and getting closer to where you'll have peak claim levels. So could you just discuss the level of statistical significance that you're -- that you have with new claim activity that's coming in relative to when you're looking at it in '14? Like are you -- is the experience much greater, the amount of data you have much greater now than it was a few years ago?

I am assuming the data are greater now than it was a few years ago. I think there's still a long way to go. Particularly when you talk about claims, experience and trends in the '80s and '90s, there is not as much known about that either on a claims side nor on the active life reserve side around what mortality will actually be in those later durations. So credibility in the long-term care business is building, but it's a long haul and particularly at the very old ages.

And maybe if I could sneak one more in on just the group disability. When I think about the benefits ratios and how favorable they've been, can you characterize at all the amount of that, that's sort of coming from favorable development on the claims reserves as opposed to current period claims and how that's trended? And sort of if you have any visibility on when you'd expect some of the favorability from the claims reserves to slow down?

Yes. I mean, I think particularly kind of historically, there was some favorability in claim development. Claims assumptions have pretty much caught up with that. So I think we are well in line in terms of where our loss ratio is and where our reserve assumptions are. So I wouldn't expect it to reverse, but I don't expect it to get any better either.

And I'd add one thing to that. The theme is, we've talked about it over the last several years, is also -- and a lower rate environment has been taking price. And so that has come through. And working closely with our customers to justify that. But we have been increasing prices over the last several years. And I think we're to a point now where we're very happy where those prices are.

Our next question comes from John Nadel with UBS.

So I guess more of a big picture question. Last quarter, Jack, I feel like you were really specific about all of the reasons why Unum's approach to the long-term care business was still vastly different from GE and what occurred at GE in terms of the more than doubling of their long-term care reserves is just not something that we should think could happen for Unum. This quarter, we're seeing some elevated near-term loss ratio and a higher claims incidence. And I don't know, maybe that cost you guys a couple of pennies versus expectations. But the stock is down 15%. I don't think that has anything to do with a couple of pennies. I think investors are doubting your reserve adequacy. And so far, my sense is that you're not exhibiting that same level of confidence in the quality of your reserves as you did last quarter. So with that as the backdrop, like what underlying reserve assumptions are you currently most concerned about as you start this annual review or robust review process? And clearly, it sounds like premium rate increases are coming in a bit slower, but where else are you seeing things diverge from your underlying assumptions?

Yes. As I said, John, my position on this has not changed at all, but marketplace's position may have. But I still think we -- there is a vast difference between us and GE, difference between being a direct writer and a reinsurer, the difference between the age of our business, the fact that we're -- more than half of our business and an increasing share of our business is in the group long-term care space as opposed to the individual long-term care space. And even on that group side, we're unique in that the bulk of that business is employer-funded. Paid premiums has a very different lapse expectation. It has very conservative plan designs. In terms of the history of how we've managed it, we've put more than $4 billion of margin into our long-term care block between rate increases and reserve charges. GE came out with this onetime review, we've done 2 comprehensive reviews in 2011 and in 2014. We keep after it on an annual basis. And we actively manage the block, both from a rate increase perspective, from a reserve margin and investment perspective as well as we're continually talking about our long-term care block. We bring you up to speed on it on a quarterly basis. And our expectation is that we will continue to do that over the life of the block.

Okay. I appreciate that response. I really do. If I could just ask one more specific question on LTC reserving. Can you tell us whether you assume morbidity improvement, whether in your cash flow testing or premium deficiency testing? And if you do assume morbidity improvement, how much improvement do you assume and for how long?

Yes. I'm not going to get into the specifics of what we assume for morbidity improvement. We actually assume both morbidity improvement and mortality improvement, which goes against us and our reserve assumptions, but I'm not going to get into the particulars on it.

Okay. So would it be fair to assume that if you're reflecting mortality improvement, then you're also reflecting morbidity improvement that the 2 might generally -- or that they might wash out over time?

It's not a washout, but they go in different directions.

(Operator Instructions) We'll next move to Suneet Kamath with Citi.

I just want to follow up on Humphrey's question first. The 3 to 4 points related to the timing of the premiums that should reverse. Was that -- I'm assuming that you knew about this. So that was embedded in your kind of low 90% loss ratio that you gave, I guess, at the outlook Investor Day. Is that correct?

Yes. I think the low 90s was more around the historical trend of where they'd been than a parsing of what the drivers were. I -- we knew about that there was some pressure. I think we've done more work to quantify that both in terms of what the level of that pressure is and how we would expect that to wind out over the next coming years.

Okay. All right. So then just to go back to the Investor Day. I think you were making 2 points, if I recall. I think one point that you made -- and I know this all fluid, but one point you made, Jack, I think, was that if you were to take a charge this year, next year, it would be sort of similar to kind of what you'd taken into the past, order of magnitude, which I believe you said was around $450 million on an after-tax basis. And then relatedly, I'm pretty sure you were suggesting that if you took a charge, it would be on a GAAP basis only and that there wouldn't be any kind of statutory impact. So I just want see -- I know we're a few months away from that. But I just want to make sure that, A, I'm right about these 2 statements, and B, that you still kind of stand by them?

I made those statements. We're going to have to go through the work. What I would reiterate is there's good margin between where our GAAP reserves are right now in the statutory front, and that comes from 3 different places. One, we've exceeded our interest rate assumptions, so our portfolio rate today is well above where we expected it to be in our reserve assumptions at this point. This create -- that creates margin. The second one is we have -- we still have room in our rate increase assumptions, both in terms of expectations of the rate increases that have already been filed as well as the opportunity to refresh and refile new rate increases based on any new set of assumptions that we might come up with. And we have expected at year-end $1.3 billion to $1.4 billion difference between our stat reserves and GAAP reserves. So I can't tell you right now what the answer is because we've got to go through the work, but I would reiterate that there's a lot of margin between where our current GAAP reserves are and where our stat reserves are.

Okay. And then maybe just one last one just to think about it. And again, I know these things are moving around. But if we think about that extra margin that you've built because you've been investing over your 5% bogey, and we kind of think about the investment return assumption kind of grading up. If rates don't grade up, how long would it take to sort of -- all else equal, how long would it take for that additional investment margin that you have on the balance sheet to get eroded? Is it 2 years? Is it 5 years? I mean, just any sense of timing would be helpful.

Yes. I mean, it's -- that's difficult to say. So the margins are there, those investments are there. They'll continue to be there. It's the impact of new money rates and cash flow that will have an impact. I mean, that's one of the things that we'll consider. But that beat has been meaningful and has created a decent margin that we have to work with on interest rates.

Okay. I mean, I think just to John's point on the stock, I think any additional color that you can give on some of the trajectory for these assumptions, I think would certainly be helpful.

Understood.

And we'll next move to Ryan Krueger with Keefe, Bruyette & Woods.

I guess I have somewhat of a similar question as John and maybe Suneet. But in the past, you pretty confidently said that any changes to long-term care reserves over time, given the margin you built up on a statutory basis would not be expected to have any impact to your capital management plans going forward. I guess I just wanted to confirm that you're still confident in that view going forward.

Again, we're going to need to react to the experience that we've been seeing emerging. We'd reiterate that there's a lot of space for reserve, for assumption fine-tuning between where we are right now and where we'll be. But we -- but again, we need to go through the work before we can define the answer.

And we have no further questions in the queue at this time. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Yes. Thank you. This is Rick. I just want to thank everybody for joining us this morning. We hear your questions on long-term care. We have -- we're working through it, as Jack has said. We'll be -- we'll articulate it best we can, all of the factors that we see out there, the trends that we see. And just as we've done in the past, we'll continue to do that. We're going to be out in about a number of insurance conferences and make sure we're answering your -- continue to answer your questions at those as well. So thanks for your time this morning, and that will complete our 2018 earnings call.

And once again, that does conclude today's call. We thank everyone for their participation. You may now disconnect.