Unum Group's (UNM) CEO Peter O'donnell on Q1 2014 Results - Earnings Call Transcript

May. 8.14 | About: Unum Group (UNM)

Unum Group (NYSE:UNM)

Q1 2014 Earnings Call

May 08, 2014 9:00 am ET

Executives

Thomas White -

Thomas R. Watjen - Chief Executive Officer, President and Director

Richard P. McKenney - Chief Financial Officer, Executive Vice President and Principal Accounting Officer

John F. McGarry - Executive Vice President, Chief Executive Officer of Closed Block Operations and President of Closed Block Operations

Michael Q. Simonds - Executive Vice President, Chief Executive Officer of Unum US and President of Unum US

Randall C. Horn - Executive Vice President, Chief Executive Officer of Colonial Life and President of Colonial Life

Peter G. O'donnell - Executive Vice President, Chief Executive Officer of Unum UK and President of Unum UK

Analysts

Suneet L. Kamath - UBS Investment Bank, Research Division

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Jay Gelb - Barclays Capital, Research Division

Yaron Kinar - Deutsche Bank AG, Research Division

Erik James Bass - Citigroup Inc, Research Division

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Thomas G. Gallagher - Crédit Suisse AG, Research Division

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Sean Dargan - Macquarie Research

Ryan Krueger - Keefe, Bruyette, & Woods, Inc., Research Division

Operator

Good day, everyone, and welcome to the Unum Group First Quarter Earnings Results Conference Call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Senior Vice President, Investor Relations, Mr. Tom White. Please go ahead, sir.

Thomas White

Great, thank you. Good morning, everyone, and welcome to the first quarter 2014 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 SEC 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, 2013. Our SEC filings can be found in the Investors section of our website at unum.com.

I'll 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.

So participating in this morning's conference call are Tom Watjen, President and CEO; and Rick McKenney, Executive Vice President and CFO; as well as the CEOs of our business segments, Mike Simonds for Unum US; Peter O'donnell for Unum UK; Randy Horn for Colonial Life; and Jack McGarry for the Closed Block. And now I'll turn the call over to Tom Watjen. Tom?

Thomas R. Watjen

Thank you, Tom, and good morning, everybody. I'm very pleased with our overall performance in the first quarter, and I think they were off to a strong start to the year. Operating earnings per share, which excludes realized investment gains and losses, as well as certain pension costs, increased 8.8% to $0.87 per share, which is consistent with our 2014 outlook for operating earnings per share growth of 5% to 10%. Our growth rate this quarter was more balanced than it's been in a while, with our after-tax operating earnings increasing 4.7%, the highest rate of growth since 2011.

Once again, we have been able to augment our operating performance through capital management actions, which I'll touch on in a moment. Importantly, too, our book value per share, excluding AOCI, which I continue to believe is a strong measure of enterprise value, increased 9.2% year-over-year to $33.01.

Now let me touch on a few specific highlights before turning things over to Rick. First, we continue to generate strong consistent operating results within our ongoing businesses with all 3, Unum US, Colonial Life and Unum UK generating higher year-over-year operating earnings. Unum US results continue to be driven by favorable risk results, reflecting our focus on disciplined underwriting, pricing and risk selection. Colonial Life delivered a very strong quarter with favorable risk result and strong premium growth. And finally, Unum UK continued to show solid year-over-year margin improvement, driven in large part by our actions to improve profitability in our group life line of business. Overall, our core ongoing business segments are generating consistent, solid margins with an operating return on equity of 14.8% for the quarter, which is towards the upper end of the outlook we provided for 2014.

Secondly, the results of our Closed Block were again within our expectations this quarter. The loss ratio in the long-term care line improved relative to recent trends, continuing in -- at the lower end of the range of our expectations. This still remains a challenging business, but I am very encouraged by the actions that our team is taking to manage these blocks of business.

Third, we continue to speak stronger sales growth in both of our U.S. operations this quarter and good growth in the Unum UK in our flagship group disability product line. In Unum US, total sales increased by 7.2%, with particularly strong results in our small and midsized employer markets, which are employers with under 2,000 lives, where group benefit sales grew by 16.5% over last year and our voluntary sales grew by 9%. We also, again, saw strong sales results in our Colonial Life operation. We're driven by strength in our commercial market business. Total sales increased 6.5% in the first quarter.

Lastly, while our Unum UK sales were generally flat in local currency this quarter, group disability sales increased 6% in the quarter. Group life sales comparisons will remain challenging, as we continue to take aggressive pricing actions in a very competitive market.

Moving next to investments. While the credit quality of the investment portfolio remains in very good shape, we continue to be challenged by today's low interest rates and tight corporate bond spreads. Frankly, these pressures increase in the first quarter and pose challenges for us and our industry. We are, however, maintaining our investment quality standards and are continuing to adjust prices in those products that are most interest rate sensitive. We are hesitant to invest fully in this environment; and as a result, we hold higher-than-normal cash balances, which is having a negative impact on our net investment income. You saw that in our Unum US and Closed Block segments this quarter.

And finally, our capital position remains quite strong and continues to provide us with significant financial flexibility. Our risk-based capital position was approximately 400% in the first quarter, and our holding company liquidity position stood at $822 million, which includes the proceeds from our recently completed debt offering. We repurchased $100 million of stock in the quarter, and that's now 15 of the last 16 quarters that we have repurchased shares, totaling approximately $1.9 billion over this period.

As you know, dividend actions are also an important part of our capital management strategy and has been the practice in the past. Our Board of Directors will review our dividend policy at the upcoming May meeting. I expect you'll see another increase at that time. Over the past 5 years, we have increased our dividend by 93% or about 14% per year.

So in summary, the first quarter was a good solid start to the year. I'm encouraged by our stronger level of operating earnings growth, which, combined with our share repurchase activities, resulted in strong per-share growth in operating earnings and book value. Additionally, the combination of strong persistency and good sales growth has allowed us to generate modest but profitable top line growth.

Lastly, our capital position remains very healthy, giving us the ability to invest in our business and markets while also returning capital to our shareholders through share buybacks and dividend increases.

Now I'll turn things over to Rick for a review of our operating results. Rick?

Richard P. McKenney

Thank you, Tom. Our first quarter results were solid, as we reported operating earnings per share of $0.87, up almost 9% from last year. We saw good underlying growth in our after-tax operating earnings, which accounted for roughly half of that growth with the balance coming through our ongoing capital management. We will continue to focus on driving growth in operating earnings, and our first quarter performance was the best quarter we've seen in the past 2 years.

Looking first at Unum US, operating earnings increased 1.3% year-over-year, driven by favorable experience in the group life and AD&D line and the supplemental and voluntary lines. Group life and AD&D produced another strong quarter with $59.8 million in operating income, up 3.3% on stable risk experience and premium growth of just over 2%.

Our supplemental and voluntary line reported operating income of $82.5 million for the first quarter, up 14% from a year-ago quarter, as our voluntary benefits experience stabilized from the higher lapses we saw in the year-ago quarter.

Operating income in our group disability business declined to $68.5 million from $77.9 million a year ago, driven primarily by lower levels of miscellaneous net investment income and some pressure on net investment income from holding higher-than-normal cash balances in the quarter. I'd also remind you that we recorded a $4 million gain on debt ex [ph] last year's first quarter.

Importantly, risk results in group disability remained quite strong, with a benefit ratio declining to 83% this quarter from 84.3% a year ago, as the underlying experience showed stable to lower overall claim incidence and continued favorable claim recovery performance, familiar themes for this line for the past several quarters.

Looking forward, we expect a slightly higher level of earnings from group disability, with some incremental improvements in the benefit ratio, offset by some ongoing pressure from net investment income, given the lower-rate environment. We expect our margins in this line to remain strong, consistent with what we've delivered over the past several quarters. Overall, it was a solid quarter for the Unum US segment as return on equity was 13.4%.

Moving to Unum UK. Operating earnings were GBP 22 million for the first quarter, 9% higher than the first quarter of 2013 and generally consistent with our fourth quarter earnings. We continue to make good progress in improving the profitability of our U.K. business, particularly with the repricing and repositioning of the group life business.

The operating ROE for the U.K. has improved to about 18% for the quarter. In the first quarter, the Unum UK benefit ratio was 70.1%, which is slightly higher than a year ago but down from the fourth quarter. We continue to see improved performance in our group life line of business, while risk experience was a little bit weaker in our group disability line, reflecting higher claim incidence. Overall, I'm pleased with the progress Peter and his team have made in the U.K.

Colonial Life generated a very strong quarter at $79.4 million compared to $75.4 million a year ago, one of the strongest quarters in its history. We saw favorable risk experience across all of its business lines, producing a benefit ratio of 50.5% compared to 52.5% a year ago. The underlying profitability of this business continues to be excellent with an operating ROE of 18% for the quarter.

Rounding out the enterprise, the Closed Block also had a strong first quarter, with operating income of $29.1 million at the high end of our range of expectations for this segment. The interest-adjusted benefit ratio for the LTC line improved relative to our recent experience at 84.7%, primarily reflecting an improvement in claim incidence. We generally expect the LTC interest-adjusted benefit ratio to be in the range of 85% to 90%, so this quarter's experience was slightly under that. The interest-adjusted benefit ratio for the Closed Disability Block was consistent with a year ago at 81.5%.

Looking at our sales and growth trends across the company, the positive sales momentum that emerged in the second half of 2013, following the slower half of last year, continued to build in the first quarter. And we're quite pleased with the sales results in our operations.

In Unum US, total sales increased by 7.2% in the quarter, with solid contributions across our various product lines and market segments. Within our group benefits lines, LTD, STD and group life, total sales increased by 12.1%, with a 16.5% growth in the core market and 5% in the large-case market. Additionally, our voluntary benefit sales increased by about 5%, with particularly good results in the core market segment where we were up 9%.

We continue to be encouraged as we look to the second quarter. And in addition to good sales, persistency for our Unum US employee benefits line ticked up to 89% for the quarter compared to just under 88% for the full year 2013. So bringing it all together, overall premium growth for Unum US was up 1.1% for the quarter, well within our outlook range of 0 to 2% for the full year.

In the U.K., sales were down slightly at GBP 10.4 million for the quarter. We produced growth in the disability line of 5.7%, but the overall decline was driven by our group life line of business where we continue to be careful on pricing.

Persistency in the U.K. improved over last year. However, persistency in the group life line continues to reflect the pricing actions we are continuing to implement. Premium income was also lower than last year's first quarter due to lapses resulting from our repricing of the life block.

Finally, at Colonial Life, we saw a very good sales for the quarter, an increase of 6.5% with positive contributions from both new accounts and existing accounts. We also saw a very strong trends with re-enrollments in some of our larger account cases. Persistency was slightly lower relative to the first quarter of 2013, but premium income increased by 3%, which is consistent with our expectation of 2% to 4% for Colonial Life. Overall, we're quite pleased with the growth trend lines that we see in the company.

Now moving to the investment portfolio. The credit quality of our portfolio remains in excellent shape, and the launch list of potential problems continues to be quite low. The decline in interest rates and the spread compression made for a challenging investment environment again in the first quarter. We saw A 10-year bond dropped by 36 basis points. At times like this, we will sometimes hold cash balances for our product portfolios at higher-than-normal levels, as we look for better opportunities to put the money to work. The net effect is some near-term pressure on investment income relative to our expectations, and we felt that across a number of our business lines. This would be similar to what we have seen a year ago, and our team will continue to remain disciplined in good asset selection.

Moving to an update on capital management. The weighted average risk-based capital ratio for our traditional U.S. life insurance companies was approximately 400%, and our holding company cash and marketable securities was $822 million at quarter end. Our statutory operating earnings of $130 million continues to be within our range of expectations, though it was on the lower side of what we have been experiencing. Statutory results can tend to be a little bit more volatile.

During the quarter, we took advantage of the low interest rate, tight corporate bond spread environment and did issue $350 million of 10-year notes at a 4% coupon. We are in the process of redeeming roughly half of the debt we have maturing in 2015. Total amount maturing next year is 279 -- $297 million at a 6.85% coupon. As a result, for the second quarter, we will be reporting debt extinguishment costs and a currency hedge gain related to the debt, and those numbers will net close to 0.

We continue to buy back our shares with some of the capital we're generating, and the first quarter was a more active quarter for share purchases relative to the end of last year. Share buybacks totaled $100 million and keeps us on track for our $300 million to $600 million range for the full year. I would also affirm that our 2014 outlook for growth in operating earnings per share remains in the range of 5% to 10%. In fact, most of the first quarter trends we experienced were in line with our 2014 outlook for sales, premium growth and our ROE expectations; and I would say it was a good start to the year.

Now I'll turn it back to Tom for his closing comments.

Thomas R. Watjen

Thanks, Rick. Before we move to your questions, I'll close by Rick reiterating how pleased we are with our start to 2014. Our focus remains on continuing to profitably grow our business through disciplined pricing, underwriting and expense management, along with a clear need to maintain sound risk management in managing our investments and capital. We expect to continue to generate capital; and as we have done in the past, balance the deployment of that capital with the needs of the business, opportunities we see in the marketplace and returning capital to our shareholders through share repurchases and dividend actions. This will complete our prepared remarks. And operator, let's move to the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Suneet Kamath with UBS.

Suneet L. Kamath - UBS Investment Bank, Research Division

Just for Rick first, just to start off with long-term care, can you just give us an update in terms of how you're thinking about the guidance you've given us in the past around a potential reserve build? Obviously, there have been a number of moving pieces, UPILs come onshore, underwriting score was a little bit better, but interest rates are a little bit lower. So if we kind of put it all in the mix, how are you thinking about that original guidance that you gave us?

Richard P. McKenney

Sure. Suneet, let me take you back actually a couple of years, and I don't think it's changed dramatically. As we look at our long-term care assumptions, these are long-term assumptions, we will see those change over as we look through time. If I were to highlight a couple of things that we continue to look at is one of the underlying experience that we see, you would've seen we actually had a good first quarter. That is one data point, but it -- it's certainly good to see that as we've seen volatility in the line. As you mentioned, the -- on the interest rate side, we are in a difficult investing environment. But as we come up of the year end, I would say that it's not dramatically different than what we've seen here over the last several years. And as we look out to the range, it's something that we have to evaluate as part of the overall mix in terms of our ability to invest those cash flows that we'll receive as part of the long-term care and the management of that. I think the big thing that we continue to work hard on, and Jack continues to work with his team, is on the pricing front. And maybe I'll turn it over to Jack to talk about the progress we're making on that front. Jack?

John F. McGarry

Thanks, Rick. We're really pleased with where -- the progress we're making on rate increases. We've exceeded what was built into the initial gross premium valuation reserve for rate increases. So far, we're continuing to file for additional rate increases. We're continuing to seek good success in getting additional approvals. And actually, I think the environment for rate increases has continued to improve somewhat within the state regulatory environment.

Suneet L. Kamath - UBS Investment Bank, Research Division

Any sense in terms of order of magnitude of how much better you're doing on the price increases versus what you thought?

John F. McGarry

I mean, it's in the 5% to 10% range.

Suneet L. Kamath - UBS Investment Bank, Research Division

Got it. Okay. And then I guess for Rick, just to follow up on this, as we think about still that potential reserve build hanging out there at some point, is it fair to say that, given the capital contribution you made when you brought UPIL onshore on a statutory basis, that you've kind of handled what we might have otherwise seen as a statutory reserve build at the time that you take potential GAAP charge? Is that the right way to think about it?

Richard P. McKenney

Certainly, when you look to last year and the work that we did about bringing our UPIL business back onshore, as part of that restructuring, actually, statutory reserves were increased. So we've talked in the past about stat to GAAP differentials and how those were close to each other as we went back a couple of years, and our stat reserves have increased as part of that process. So there is some room there between our statutory reserves and our GAAP reserves, as we look out to the future.

Suneet L. Kamath - UBS Investment Bank, Research Division

Right. And just a final question on this topic, so if there's a GAAP event that happens at some point, '15, '16, whenever it is, we should -- should we think about that as sort of a noncash sort of event since, perhaps, it might not be a statutory impact and thus potentially no impact on your capital management targets?

Richard P. McKenney

Well, I think I'd just repeat what I just told you that there is a differential between those 2 to project out that far in how things would play out. I don't think it's something that we want to do today. But I think the actions that we took at last year end to bring that back onshore were good proactive strong actions, and we'll continue to manage the block that way. And it's hard to isolate any one thing.

Operator

We'll go next to Steven Schwartz with Raymond James & Associates.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

A couple more general, sales were very strong, and surprising -- I was wondering if you could put that in the context of maybe new accounts, new clients versus payroll.

Richard P. McKenney

Yes. Mike, do you want to get started with the Unum US business? And then maybe, Randy, ask you to speak as well actually on that.

Michael Q. Simonds

Sure, thanks. Yes, we've seen a good rebound, and I think Rick alluded to it earlier, but we saw health care reform and ACA implementations slow things down a year ago. So the first half, it was slow as employers and their advisors were sorting through the changes. We saw proposal activity down really across our market segment and sales declines in the third quarter. That started to abate a bit. We saw a little bit of growth in the fourth quarter. And so I'd see first quarter result as the next step on that continuum being up about 7%. Encouraging for us, we continue to see strong growth out of existing clients. So over 60% of our new sales, from a Unum perspective, came from those existing relationships. That's very important to us because we know those sales actually drive greater stickiness. It's a contributing factor to why I think persistency continues to tick up a bit. It also comes in favorably priced and with a slightly lower acquisition cost. So existing clients remain a really key growth opportunity for us. I would say, and maybe I'll turn it over to Randy with this, while in the mid and larger ends of the markets, we're seeing that increase in proposal activity continue at then a very small end of the market, say, under 50 life employers. There's still a fair degree of sorting out going on the health insurance side, so it's still a little bit sticky there.

Thomas R. Watjen

And Randy, before you chime in, I just -- maybe Mike, I think it's worth saying, too, that the growth you saw in the first quarter really did not come from natural growth. We weren't seeing an emergence of that as a contributor to growth per se yet.

Michael Q. Simonds

Yes. We think about -- when we think about the earned premium lines, Tom, that's right. We're seeing basically a flat level of natural growth. So the growth we see in premium from new employees being added or rate increases driving premium increases, it's really -- our growth is coming from new lines of coverage sold, new clients coming in and plan design changes and the like.

Thomas R. Watjen

Randy, do you want to add to that?

Randall C. Horn

Yes. You bet, Tom. Yes, we saw good sales growth for both new accounts and existing accounts. As Mike said, there's still some ongoing pressure in that real small end of the market, under 50 employees. But -- so -- our number of new accounts was down a little bit in that segment. So on average, we were just writing larger cases. We are seeing good momentum, though, building. Things were kind of loosening up in that smaller end of the market, so we're optimistic with the trend lines we're seeing at the current time. But again, good solid numbers for both new accounts and existing accounts.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Randy, same for you, not really employment growth, but just offering more products to existing accounts?

Randall C. Horn

Yes, it's offering more products but just knocking on more doors, Steven, just getting them in. Our new rep count was up nicely in the first quarter. They're the ones writing a lot of the smaller new accounts, and we're seeing very good productivity from new reps so far here in 2014.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Okay. One more, Randy, for you, if I may. There was a -- there was an -- I think it was the Wall Street Journal, things are beginning to blur, but I think it was Wall Street Journal. There was an article with regards to changing definitions of cancer and maybe changing treatment. I don't know if you saw that or not. But if the definition of cancer was changed, would that affect your business?

Randall C. Horn

I did not see that specific article, Steven. But no, I don't think that would have a direct impact on us in terms of changing the definitions. I mean, I'd have to see specifically what you're talking about. But again, we sell purely indemnity products that lay out very specifically what we'll pay for certain types of treatments and diagnoses. I guess, if there was some broad-based change in the definition of what cancer is, it could have some impact on us. But I don't think it would be all that immediate. And of course, we'd have the opportunity to go in and change our product designs and our definitions, if that did take place.

Operator

And we'll go next to Jay Gelb with Barclays.

Jay Gelb - Barclays Capital, Research Division

In the Colonial Life segment, the benefit ratio is under 52% for the first time in a while. Just wanted to get a sense of whether you feel that level of improvement, which is sort of at the low end of your range, is sustainable.

Thomas R. Watjen

Randy, do you want to pick up on that?

Randall C. Horn

You bet. Yes, it was definitely in the lower end of our range. We had great results in all of our major product segments, very good mortality in the quarters, so everything just lined up very nicely for us. So that is lower than what we would anticipate for the balance of the year. Now our outlook is for stable benefit ratios. We feel really good about kind of that 51% to 53% range, so again, look for good stability there. But everything just lined up well for us in the first quarter, so a little bit on the low side there.

Jay Gelb - Barclays Capital, Research Division

So Randy, as growth improves in Colonial Life, that will probably be a positive factor in the benefit ratio going forward, right?

Randall C. Horn

Absolutely, because you have better benefit ratios in that -- in those early durations of almost every product.

Jay Gelb - Barclays Capital, Research Division

Okay. And then switching gears to private exchanges, any update you can provide there in terms of the growth opportunity or product expansion potential, that would be helpful.

Thomas R. Watjen

Sure. Why don't you, Mike, sort of pick that one up? And I think, Randy, you can add a little to it as well. But Mike?

Michael Q. Simonds

Sure. Thanks, Tom. Certainly, activity and interest in exchanges continue to increase out there, but actual volumes of premium coming through on private exchanges is, it's pretty minimal to date. And really, we think about it regardless of the pace with the absolute level of adoption amongst employers. We're pretty well positioned, both Unum and the Colonial Life businesses. Being category leaders in each of these products is important, as intermediaries and technology firms create exchanges. They're coming to us. Our leadership in voluntary benefits has positioned us well and that we got over 40 connects into this technology companies, previously focused on benefit administration, now focused on private exchanges. So while it's early days, and I suspect it's going to play out, not over months or quarters, but over the next few years. We feel like we're well positioned. And I think the last comment I'd make before turning to Randy, in all of the exchanges in which we're participating, and in fact, in all that we've encountered in the market, for our lines of business, the carrier is selected by the employer. So I think, at times, there's a little bit of confusion out there as to whether individual employees are going to be choosing amongst different carriers for life insurance. But in fact, to get good spread of risk in the most efficient delivery, each of these exchanges is looking for the employer to select the carrier first. So our strong brand reputation with employers and with their advisors has played in the market traditionally and will play in these exchanges going forward. How about, Randy, if you have anything to add there.

Randall C. Horn

Yes. I guess, maybe Mike, the only thing I would add is in addition to the employer continuing to be involved in making account-specific decisions, the exchanges we're involved with today for a VB line of business, we would be the only carrier involved on that specific employer account for that selected VB line of coverage. So we're not -- it is -- it's not an open marketplace kind of situation where an employee would be selecting amongst several different VB carriers. We're also very focused on continuing to have our agency system involved, our benefit counselors involved on those accounts. So again, we are involved in a number of exchanges today. We're evaluating several others. Not seeing a lot of sales generally in the industry coming through private exchanges today, but we feel like we are very well positioned going forward, if that, in fact, does happen.

Operator

We'll go next to Yaron Kinar with Deutsche Bank.

Yaron Kinar - Deutsche Bank AG, Research Division

So we've been focusing on the sales in the U.S. for the first half of the Q&A. I want to switch gears maybe to the U.K. And I noticed that the large case market saw some improvement in sales after some pressure last year. I think that's also the market where the unit came into a little bit of a pressure in terms of underwriting results a couple of years ago. So maybe you could give us a little more color as to what's driving the sales growth there and what's different this time as opposed to kind of the 2010 there?

Thomas R. Watjen

Peter, do you want to respond to that question?

Peter G. O'donnell

Yes. Great. Thanks very much for that. It's very different, I think. So as you know, we've seen sort of undertaking a renewal program across our book. What we are seeing is, in the group life area, where I think we were very competitive a few years ago in the group life market, that's where the life large cases where written around 2010. If you look at what we've written in group life, we're being very selective. We still see that market as very competitive. We wrote very little large schemes in the group life market. And it's a challenging market, we think, to make money in. Some of our competitors are writing cases there. But I'm taking some of our business, actually, on our persistency is a bit lower as well in that large case. So we're being selective in where we write that business and maintaining our discipline. Where we have seen success, though, is in our LTD market. We can compete very effectively with other carriers in that space. Our claims proposition is, in our view and in the brokers' view, more value for money in terms of what we do for the customers. And we can charge a bit of a premium for that claim service over and above the competition. And actually, our premium tends to be around 10% of the large end where the claim service works. And we've been successful in writing a number of large schemes in the first quarter versus the competition. And we've also been successful in bringing some new schemes to market in that space, where, particularly, the banks are looking at what the benefits are and offer. And now the economy recovers a little bit in the U.K., they're willing to invest a bit more in their employee base.

Yaron Kinar - Deutsche Bank AG, Research Division

Got it. So it's mostly our financial institution banks granted?

Peter G. O'donnell

That's right. Yes.

Yaron Kinar - Deutsche Bank AG, Research Division

Okay. And then one more question, if I may. On the Closed Block, I saw that the individual disability premiums declined by quite a bit. And I was hoping maybe to get a little more color as to what was driving that decline.

Thomas R. Watjen

Jack, do you want to take that one?

John F. McGarry

Yes. I mean, the decline is just a natural runoff of the book. That block has been closed for a long time, since the mid '90s. Those people are aging. Most people do not extend their coverage beyond age 65. So it's kind of like the baby boom retiring, if you will. So it's just naturally running off the books.

Yaron Kinar - Deutsche Bank AG, Research Division

So that move, kind of maybe mid single-digit decline to low-teens, should be -- we should think of that maybe as the new run rate?

John F. McGarry

I mean, I think as the block ages, it's going to -- the decline is going to accelerate. So, yes, I would think that would be the -- I don't know whether this quarter is specifically the new run rate, but you should think about the run rate accelerating as the block ages.

Richard P. McKenney

But more in the mid single digits than the double digits.

Operator

We'll go next to Erik Bass with Citigroup.

Erik James Bass - Citigroup Inc, Research Division

First question on expenses. Expenses have picked up across a number of segments the past few quarters. So I was just hoping you could talk about what's driving this and whether we should view it, your recent expenses, as a reasonable run rate going forward or if there's some one-off investments in there.

Richard P. McKenney

Yes, sure, Erik. This is Rick. When you look at our expense base overall, as you would have seen over many years, we manage it very tightly. We think about it from an expense ratio, so relative to premiums, and manage that as well. Relative to last year, you would have seen a tick-up. But I would tell you it's basically we're right on our plans for this year. Included in those plans, include some investments that we continue to make in the company around technology, around brand and different things like that, but it's very much in line with our expectations overall. So I think what you saw this quarter is about a run rate that you should expect for the remainder of the year.

Erik James Bass - Citigroup Inc, Research Division

Got it. And then on long-term care, just curious, we saw the first noticeable reinsurance transaction this quarter with CNOs, Closed Block deal, but they didn't. I realize there are a number of significant differences between your block and theirs, but I'm curious whether you view this as a one-off transaction or does it suggest that a third-party market for long-term care risk might be beginning to emerge?

Richard P. McKenney

Good. Good question. This is Rick again, Erik. When you think about that, and we've talked about that previously in terms of what will happen, we think, in this market over time, as more data evolves in long-term care space, I think there will be more opportunities for other people to take on that risk at certain prices. This transaction you saw there might be one of those that actually bodes, that's out there in the horizon. I think you also look at a very robust reinsurance market for other blocks of business that you've seen out there. So those are all good things. What I wouldn't do is read across to our business that there'll be something of a large nature that's coming across our block anytime soon. But those are all good indicators that the market is getting better. But as part of the transition we would expect to see in this market, as data grows, as more information grows, as capital becomes available to it, it will be something we look at. And that points you back a number of years to what we did with our Northwind transaction, that it went through the same cycle around the individual disability space. And we hope to see that in the long-term care space as well. So good things but don't read across that there's something imminent on the horizon for us.

Operator

We'll go next to Christopher Giovanni with Goldman Sachs.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

First question on the U.K. So it seems results are sort of tracking back in line with your expectations, with earnings clearly stabilizing, the sales and the life piece falling as you work through kind of that repricing process. And I think you're going to be through kind of the repricing of that book by the end of the year. So just wondering how you're thinking about the reinsurance agreement that you have in place when that's up for renewal and if you have an estimate for how much earnings you're kind of giving up with that -- with the reinsurance contract.

Thomas R. Watjen

Rick, why don't you start on that one, and then Peter can pick up a little color on it.

Richard P. McKenney

I think the way you characterized it, Chris, is right, that as we went through that reinsurance transaction, we're going through a major restructuring of the block, including the reinsurance, including pricing and what we're doing in the market. And actually, this year-end, we recaptured some of that business. So I shouldn't say recapture. We renewed reinsurance, but we didn't have the same amount that we reinsured out. We have retention levels higher of around 70%, 75% of the block. At the same time, on the reinsurance front, we did keep in place a volatility cover. So we actually, per life, we retain less. We think that's good volatility management for that block of business. And in both cases, we've been very happy with the pricing. And once again, this is a structure which goes out 1 year. So we have a lot of flexibility as we get towards the end of this year to figure out what type of retention we want to continue to hold on that block. But I put all that in the context of we're very happy with how the returns have changed and improved for our U.K. life business, and we think of reinsurance there as a tool to help us manage the return to good profitability that we've experienced in the past.

Thomas R. Watjen

Peter, do you want to add a little bit, too, just in terms of where we are in the repricing actions and just maybe some of the market dynamics?

Peter G. O'donnell

Yes. Thanks, Tom. So in terms of what are the repricing actions, yes, in terms of the -- we're about 75%, 80% through. So I guess in U.S. terms, we're in the seventh innings. We've probably got eighth or ninth innings. So I expect to be done by sort of the end of the third quarter on the repricing. As Rick said, what we've seen is we're very happy with the business we're retaining. We're seeing those results come through. You can see that in this quarter's results, very evidently in the sort of group life product stream and the return on equity. And as we've reached the sort of third quarter, we'll take another look at the reinsurance. I suspect the per life looks like a good thing to do, and then we'll look at the retention level, depending on how it's performing. But it's certainly working for us today.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Great. And then a follow-up on LTC for Jack. So the repricing comments were helpful. Wondering if you could talk about conversations you're having in the marketplace. It seems like there's sort of increased focus from the NAIC around the repricing process and if minimum loss ratios should maybe be met before submitting price increases. So, really, just wondering how you're thinking and handling these dialogues. And if the type of loss ratios that have been proposed are adopted, any estimate for what portion of your book are already above those minimums and would be eligible for repricing?

John F. McGarry

Yes, we've been actually very active in dialogues with the NAIC and regulators. I've gone out personally, visited Scott Kipper, who runs the Senior Issues Task Force of the NAIC. I've been out to see him twice. The loss ratio that's being vented about are logically, prospectively on new business written. They don't necessarily apply to enforce blocks and particularly close blocks. But even with that said, the loss ratios are at a level that they wouldn't impact our ability to pursue rate increases.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Got it. And then just one quick one for Mike or Tom. You've talked about kind of expanding partnerships as sort of the benefit marketplace evolves, and you've done a number of things with health care. Just wondering if there's anything else in the pipeline that we should have on our radar.

Thomas R. Watjen

Chris, it's a great call. And Mike maybe talked about that because there is a lot going on that we probably can't get too specific. But we're in some interesting general dialogue.

Michael Q. Simonds

Thanks. Great question, Chris. And I'd say the macro trend, as you are seeing health plans, continued to get less bridge and gaps get created, and that creates real opportunities for us, broad-based. And then finding new and interesting ways to get after those opportunities continue to surface. You mentioned the UHC partnership. That's been a very good partnership. We're about 3 years in. It's been a differentiator for us in that large part of the marketplace to have the world's biggest managed care company and the world's leading disability company working together. And we actually have a pretty healthy pipeline of other partnerships coming that attack actually different segments as well.

Operator

We'll go next to Thomas Gallagher with Crédit Suisse.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Wanted to come back to long-term care. So first on the rate increases you're getting. Can you comment on whether or not you see a big enough benefit to offset the previous comments you've made and the previous disclosures you've had about potential charges, I think, mainly related to discount rates. So can you -- is there any way to quantify that? Is that a positive enough new development that there's a chance that, that could fully offset the potential need to strengthen GAAP reserves? That's my first question.

Richard P. McKenney

Yes. Rick. Yes, let me take that again. And, Tom, maybe I'll recharacterize some of the things I'd say, which is just to say there are -- kind of if you think about it, 3 big moving parts, and they're constantly changing. One of them is going to be the experience in the block. And if you think about what we saw this quarter, that's good, but these are, once again, long-term views of how we see the experience in the block emerging. We've got the interest rate pressures. We've got to put these cash flows to work at certain levels, and we'll deal with that over a period of time. This quarter, a little bit tougher, but once again, these are our long-term views around how cash will get put to work over a very long period of time. And the third piece, as you say, is the price increases. And so that's a little bit better than we thought. And these pieces of how we see them, how we feel about them are constantly moving, are constantly reevaluating them. And as we look to establish the correct level of reserves to the block, we're going to continually reevaluate them. And it's hard to look at any one moment in time and say explicitly where they are. But like I said, we can only give you the best transparency, we give you the indicators that we see out there and how those are evolving over time. And that's what we'll continue to do with you quarter in and quarter out. And that's our best read that we have as we sit here in the first quarter.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

And, Rick, can you comment on the -- I believe the last time you all took a charge in 2011, there was a difference between stat and GAAP, and you equalized those 2. What is that difference today in the reserve levels?

Richard P. McKenney

Sure, Tom. Actually, it changed over time as they do, but I will give you a number, probably safely say it's north of $500 million and why it sits out there today. So that will be the differential today. It's a little bit north of that, and that will change over time. But there is some differential between our stat and our GAAP books today.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Okay. And what's the latest update on if there is a strengthening, what kind of timing? Is it still a few years away potentially? Or is there any way to get timing clarity around that?

Richard P. McKenney

I think I'd take you back, Tom, to what I just told you, which is there's a lot of pieces and they're moving constantly. It's hard to give you clarity around the timing. It's because those dynamics are constantly changing. So I probably would just leave it at that, that we'll continue to reevaluate it and continue to give you some views on that. But particular to the interest rate piece, I think that we go through ups and downs in the interest rate cycle. And the original guidance we gave you back in 2011 still is pretty reasonable in terms of how we look at it.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Okay. And then just a comment about not fully investing right now. How should we think about that? I guess interest rates remain a bit low. Should we consider or should we expect you all to have that same strategy for the next few quarters if rates remain low? Is there going to be a point at which if it goes on long enough, that you'll start more fully investing?

Richard P. McKenney

Sure, Tom. When we think about investing, this is actually something we did exactly how it played out last year as well, where there wasn't a good selection of assets. And sometimes it's rates, sometimes it's actually supply. So there's a lot of reasons why we wouldn't put our money fully to work. The dynamics look similarly today. If you look at last year as an example, we've got it all to work by the end of the second quarter. So how's that going to play out in the course of this year? I can't really tell you today. But our team looks at it very carefully, and we are in constant conversation about when to put money to work and when to sit on it and wait for what we think will be a better environment. A lot of dynamics going to that conversation, as they are right now, but I can't give you much more than that as we look out to the second and third quarter.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Okay. Just my last question. Would you -- I know you had mentioned statutory earnings were a little bit lower this quarter. Is the full year expectation still roughly the same as it's been in terms of statutory? And was there anything in particular weighing on results in 1Q?

Richard P. McKenney

Tom, the statutory results in 1Q were a little bit lighter, but I'd put you within a range. Last year, if you went to first quarter, they were actually a lot better than we thought. So in stat, we will see more volatility, but that doesn't change our outlook in terms of where we think our stat results can come in. And importantly, it doesn't change our views around what our capital management programs look like. So although we see the volatility, we'll continue to watch it, but we don't read across anything to the full year yet.

Operator

We'll take our next question from John Nadel with Sterne Agee.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

A couple of quick ones. Most has been answered already. In the U.K., I was just -- I was interested in whether you could give us some sense for the order of magnitude, as you think about the pricing today on the group life side, cases that you're actually willing to write, relative to the pricing, say, perhaps 3 or 4 years ago when you sort of cited that you are maybe a little bit -- a bit overly competitive.

Thomas R. Watjen

Peter, do want to pick up on that one? Again, I think it's just -- it's a matter of just looking back, as John said, about just the pricing environment a couple years ago versus how you're sort of viewing it today and what -- where we're playing and where we're not playing.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Yes, I'm trying to get a sense. Is that 20% higher pricing or 100% higher pricing?

Peter G. O'donnell

It's in the 10% to 15% higher pricing, I would say. So -- whereas -- where you're writing pricing around about your cost of capital are slightly below even when you got pushed on competitive. We're now pushing for more of where we feel comfortable a good return on that business is. And so it's low-teen, double-digit increase, that kind of thing. I think the challenge -- what you've seen on the life book is -- so as you shrink the book, clearly, that gives you some -- a little bit of expense pressure. But we're more than happy that we're balancing that with a margin increase.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Got it. That's very helpful.

Thomas R. Watjen

And, John, as you know, the group life business tends to be pretty price sensitive from a customer point of view, and you have far less ability to start differentiating your offering with service and claims processes and things like that. So those may seem like relatively small percentages, but they can swing business quite a bit.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Yes, I know. I understand, Tom. That's helpful, though. On the U.S. group disability side, we actually saw a couple of players in that market increase their discount rates this past quarter. I guess it doesn't really make a whole lot of sense, given what we've seen on the rate side, on the interest rate side or yield side, but did you guys make any adjustments to discount rates? Or do you expect to make any?

Thomas R. Watjen

Rick?

Richard P. McKenney

Sure, John. Yes, when you look at our discount rates, it's something that we manage over a period of time. We did not make any adjustments this quarter. And we look at how we're investing money relative to the portfolio, and you've seen us over the last several years manage that carefully. To give you a sense, our margin between our asset yields and our liabilities is still 90 basis points, very consistent with where it's been. So we manage that all together and do it. And I would tell you, it is -- we did see it on the net investment income side. It is a challenging environment, and that line feels it. But we also have the ability to price for it, to manage it and work through it. So it's not a new story for us. It's how we continue to manage it.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Yes, I know. I certainly appreciate your commentary on the new money investment side. I think we're starting to see some companies maybe stretch for yield, and it certainly seems like you guys are being more conservative on that front. The last question for you, maybe for Rick, you had sort of mentioned that you've got this 2015 debt maturity, I think it's just shy of $300 million, that you've maybe already repurchased some of that. Can you just give us maybe a bit more detail on what's going on there?

Richard P. McKenney

Sure. We actually had about $300 million that was issued out of the U.K. It's part of -- they're not directly linked, but it's part of our issuance we did. We chose to actually tender for half of that. So that's actually in the process of being done. So that will happen probably in the mid-May time frame, a little bit later in the month. So you'll see that come through. We're actually paying to make a hole [ph] as part of that, so there will be debt extinguishment costs. But because this was U.K. debt, we also had currency hedges on. And so as we removed that, there was a gain associated with that. So they will be in a couple of different line items in our income statement, but those 2 roughly equate -- kind of thinking the $10 million to $15 million range on both sides of the equation netting close to 0.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Got it. So you'll get a head start on sort of interest expense coming down as a result of this?

Richard P. McKenney

That's correct.

Operator

We'll go next to Sean Dargan with Macquarie.

Sean Dargan - Macquarie Research

Just to head back to Closed Block LTC, was there an element of the improvement in the interest adjusted benefit ratio that was attributable to group LTC?

John F. McGarry

We actually saw improvement in both individual and group, so yes.

Sean Dargan - Macquarie Research

Okay. It's my understanding, when a state approves a rate increase and the carrier goes to the policyholder, that they get 3 options. They can either pay the increased rate, they can keep their old rate with reduced benefit or lapse. And with individual policyholders, I think carriers have found that, overwhelmingly, the policyholders will pay the higher rate. Is that the same dynamic that you've seen in the group market?

John F. McGarry

It's a little different in the group market in that the premiums, first of all, are a lot lower. Our average premium in the group market is $400 versus like $2,000 in the individual. We are probably seeing more buydowns in nonforfeiture options in the group market than we see in the individual, and that tends to be positive from a reserve development perspective.

Sean Dargan - Macquarie Research

Right. And so I guess is that something that's sustainable? Or is that kind of a onetime benefit that you'll get maybe at the January 1 and July 1 renewal periods?

John F. McGarry

Yes, it will tend to spike in January and July when it happens. It only happens when you're going through rate increases. And so it will happen as long as we're continuing to implement group long-term care rate increases. And we'll be doing that for a while because you implement them in the order that states approved on at the next anniversary. And so there's -- we implemented the first batch of state approvals this year, but there are other batches that will be emerging next year as well.

Operator

We'll go next to Ryan Krueger with KBW.

Ryan Krueger - Keefe, Bruyette, & Woods, Inc., Research Division

A question about Colonial. You've had a lot better sales results over the last couple of quarters than one of your main competitors, despite probably facing similar headwinds in regards to health care reform uncertainties. So it begs the question, are you seeing any change in buyer behavior? And what I mean by that is, is there a shift -- has there been a shift in preference towards using brokers, which is your main distribution avenue, versus, say, using career agents [indiscernible] for these products?

Thomas R. Watjen

All right. Ryan, just to clarify, as you know, we really have 2 pathways into the voluntary benefit business. Certainly, the Unum US pathway, sales primarily through brokers and consultants. As you know, the offering we bring to market there is a more comprehensive full offering of group voluntary and executive benefit. The other avenue certainly is the Colonial offering, where we actually market a more limited set of voluntary benefit products, but those go through agents. And the agent may choose to actually use the broker. And so I just want to clarify, we've got sort of 2 avenues into the voluntary marketplace. We consciously chose to keep those 2 avenues because they actually complement one another as we come to market and, in our mind, actually give us a much broader array of choice in the marketplace, everything from the very small employer to the very large employer and in the public sector as well. So sort of with that backdrop, maybe, Randy -- maybe -- is it worth talking a little bit about what you're seeing actually from the broker side of things?

Randall C. Horn

Absolutely. Well, let me emphasize, first of all, that we are continuing to stay focused on our agency distribution system. We do not have different distribution channels here at Colonial Life. Again, our focus is on our career agency system. As they move up market, there typically will be a broker involved. And so we work with brokers through our agency system in a partnership manner. Really not seeing any big shifts in that. I mean, there certainly are growing opportunities as employees are given more and more responsibility for their benefits. And we're seeing more and more brokers interested in getting into the voluntary space, Ryan. So we're very optimistic and feel like the way to go is to keep focused on our agency system and have them work effectively with brokers.

Thomas R. Watjen

Mike, would you like to add a little bit of that from your market perspective?

Michael Q. Simonds

Yes, just to echo Randy's point, we definitely see the increased interest amongst brokers. I don't know about the switch amongst employers going more towards accessing the benefits through the broker, but the brokers' interest. As they've seen some of their revenues capped from a health care perspective, they are looking for ways to build out their client relationships and diversify revenue. That drives interest in voluntary. To give you a little bit of a sense, Ryan, over 1/3 of our new sales in the first quarter came on an integrated group in DB basis. So we're seeing that same advisor bring multiple product solutions. That's also driving good interest in our executive benefits or IDI product line as well.

Ryan Krueger - Keefe, Bruyette, & Woods, Inc., Research Division

That's very helpful. And then just one quick follow-up. You talked about M&A a little bit in the past. I know, generally, there hasn't been a lot going on or a lot available in your markets. But wondering, are there any additional lines of business that you guys would be interested in longer term, say, something like medical stop loss that may benefit from more demand from health care reform?

Thomas R. Watjen

Rick, do you want to just touch the overall M&A strategy?

Richard P. McKenney

Yes, Ryan. Let me just give you a view. It's probably not going to be different -- significantly different than what we've seen, although the market is active. I think the M&A markets, in general, across the insurance space are active out there. When you get more specific to our lines of business, people still tend to like their benefits business and are not avid sellers. When you get to product line, we have a good product set. So we're pretty well filled out across the board, but we'll continue to entertain things that fit within our strategic sweet spot at the -- working at the employer to provide protection benefits. And then I'd also remind you that we look around the world as well. So it's not just different lines we have in the U.S., there's different geographies, which we'll be seeing similar dynamics of what we have today. So we're quite active out there in looking in terms of different opportunities. But the M&A markets, I think, within our lines, particular business probably have not changed that much as you look over the last several years.

Thomas R. Watjen

Good. Thanks, Ryan. Well, it looks like we've actually exhausted our questions. So thank you, all, for taking the time to join us this morning, and we look forward to seeing many of you at various investor conferences and events this spring. And operator, this will complete our first quarter 2014 earnings call.

Operator

Again, that does conclude today's presentation. We thank you for your participation.

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