Unum Group (NYSE:UNM)
Q1 2016 Earnings Conference Call
April 28, 2016, 10:00 ET
Tom White - SVP, IR
Rick McKenney - President & CEO
Jack McGarry - EVP & CFO
Mike Simonds - President & CEO, Unum U.S.
Tim Arnold - President & CEO, Colonial Life
John Nadel - Sterne, Agee & Leach
Suneet Kamath - UBS
Yaron Kinar - Deutsche Bank
Jimmy Bhullar - JPMorgan
Michael Kovak - Goldman Sachs
Humphrey Lee - Dowling & Partners
Ryan Krueger - KBW
Eric Berg - RBC Capital Markets
Seth Weiss - Bank of America Merrill Lynch
Ken Billingsley - Compass Point Research & Trading
Welcome to the Unum Group first quarter 2016 earnings 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 the Senior Vice President Investor Relations, Mr. Tom White. Please go ahead, sir.
Great. Thank you, Don. Good morning, everyone and welcome to the first quarter 2016 earnings conference call for Unum. Our remarks today will include forward-looking statements which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the sections titled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors in our Annual Report on Form 10-K for the fiscal year, ended December 31, 2015.
Our SEC filings can be found in the Investor section of our website at Unum.com. I remind you that statements in today's call speak only as of the date they are made and we undertake no obligation to publicly update or revise any forward-looking statements. In a presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures, included in today's presentation, can be found in our statistical supplement, also on our website, in the Investor section. Participating in this morning's conference call are Unum's President and CEO Rick McKenney and our CFO Jack McGarry. As well as the CEOs of our core business segments, Mike Simonds for Unum U.S.; Peter O'Donnell for Unum UK; and Tim Arnold for Colonial Life.
And now, I'll turn the call over to Rick for his opening comments.
Great, thank you, Tom and good morning, everyone. We're happy to be taking you through our first quarter results which were a strong start to the year. Overall, we saw first quarter operating income per share at $0.95 which was an increase of just under 7% over last year. There are continued positive operating trends underlying this. This starts with solid levels of premium growth across all three of our core business segments and also included stable benefits experience. This performance continues to drive strong profit margins and excellent capital generation for the Company, giving us lots of flexibility.
We've consistently said that our financial flexibility is an important asset. I believe our first quarter actions demonstrated that point, as we not only maintained capital deployment through share repurchases at a time when our shares were trading lower, but we also invested in our future growth with an announcement of our agreement to acquire Starmount Life Insurance Company. We believe this transaction will help us capitalize on the growth opportunity in the dental market which is very consistent with our employee benefits focus.
Now let's get to a few key highlights of the first quarter and then Jack will provide an analysis of our results in greater detail. To begin, I'd like to highlight the premium growth we continue to see in our core business segments. For the first quarter, premiums in Unum U.S., Unum UK and Colonial Life all showed very good momentum, with roughly 6% growth rates.
For Unum U.S., we generated premium growth of 5.8% for the first quarter, with good persistency trends, strong contributions from our renewal programs and pricing actions and our 2015 sales levels. New sales did decline in the first quarter due to some increased competition we're seeing in the market and also some difficult sales comparisons. It's an area where we will continue to be disciplined and we will continue to take price where we see it is needed. Unum UK premium growth in local currency improved 6.1% in the first quarter, with the benefit of the National Dental Plan acquisition we did in the middle of last year. And, finally, at Colonial Life, premium growth for the first quarter was 5.7%, driven by the very positive sales trends we have seen over the past two-and-a-half years which continued again this quarter, with a new-sales growth of 16%, our strongest rate of sales growth in many years.
Next, with this improvement in premium growth over the past several quarters, I'm especially pleased that we've maintained the profitability of our core business. I believe this demonstrates our disciplined approach to our markets and how we price, underwrite and go through our renewal process once we have placed business on our books. It can be challenging in today's low interest rate environment to continually move price increases into the market, but our teams are doing a commendable job of managing the balance required between generating top-line growth and maintaining profit margins. With these strong operating results, we continue to produce a very strong level of statutory earnings and capital which provides us substantial financial flexibility.
As I mentioned, this flexibility was especially evident this quarter with the repurchase of $100 million of our shares at very attractive levels. Along with the announcement of our planned acquisition of Starmount Life Insurance Company which we expect to close in the third quarter. The Starmount acquisition is consistent with our desire to invest in the growth of our core businesses and we believe will provide an attractive national platform for us and its scalable infrastructure to profitably grow in the dental market.
Starmount also brings a team that has a strong cultural fit with Unum and how we serve our customers. We're excited about the strategic transaction which will help us expand our customer relationships, both within Unum U.S. and Colonial Life operations. In addition to all this, our book value per share, excluding AOCI, continues to grow at a steady pace, ending the quarter at $36.68, an increase of 8.6% from a year ago. Overall, it was a very good quarter with our core operations driving steady, stable growth and our capital management actions continuing to deliver value for our shareholders.
So, with those highlights on a very good first quarter, let me turn the call over to Jack to cover our results in greater detail. Jack.
Thank you, Rick and good morning everyone. Rick provided a high-level overview of our first quarter results and now I want to provide a more in-depth view of the operating trends we saw in the quarter. I'll begin with Unum U.S., where first quarter operating income was $215.9 million, an increase of 0.7% from the year-ago quarter of $214.3 million. Premium income growth remained very healthy, increasing 5.8% over the year-ago quarter. The benefit ratio for Unum U.S. segment was favorable, at 69.3% in the first quarter, although it was slightly higher than the very favorable 68.3% in the year-ago quarter. In addition, our focus on disciplined expense management also contributed to the operating results.
The profitability of Unum U.S. remains very strong, with an operating ROE of 14.4% for the first quarter, compared to 13.5% in the year-ago quarter. Within the Unum U.S. segment, operating income in our Group disability business was $70.4 million in the first quarter of 2016, a decline of 5.2% from the year-ago quarter of $74.3 million. Premium income increased 6.3% over the year-ago quarter, but we continue to see pressure on net investment income which declined by 3.4%, compared to the year-ago quarter, driven primarily by lower portfolio yields. The benefit ratio of 80.6% in the first quarter was at the favorable end of our expectations, although it was higher than the very favorable 80.1% benefit ratio we experienced in the first quarter of last year.
Group Life and AD&D operating income was $55.4 million for the first quarter, a decline of 4.3% from the year-ago quarter. Premium income continues to grow, increasing 5% over the year-ago quarter. The benefit ratio was 71.5% for the first quarter, compared to 70.9% in the year-ago quarter, due to increased incidence and a higher average claim size. Operating income in the supplemental and voluntary lines was very strong at $90.1 million in the first quarter of 2016, an increase of 9.7%, compared to the $82.1 million in the year-ago quarter. Premium income growth trends were also strong in this line of business, increasing 5.7% in the quarter, compared to last year. From a benefits perspective, our overall results remain in line with our expectations.
The first quarter benefit ratio for the individual disability line was 50.9%, compared to 48.9% in the year-ago quarter, as new claim incidence rates were slightly higher. For the voluntary benefits line, the first quarter 2016 benefit ratio was 43.8%, compared to 40.9% in the year-ago quarter. Underlying claims experience for the voluntary line was stable in the quarter, with the increase in the benefit ratio being driven by the change in active life reserves, resulting from fewer policy terminations in the current quarter, compared to the year-ago quarter. Looking at Unum UK, operating income was £23.5 million for the first quarter, an increase of 9.3% over the year-ago quarter of £21.5 million. Premium income increased 6.1% over the year-ago quarter, driven by the acquisition of NDP and growth in the group disability line.
The benefit ratio was 67.9% for the first quarter, compared to 65.3% in the year-ago quarter. Higher claims incidence trends in the group life line of business and the impact of inflation linked benefit changes were partially offset by more favorable experience in group disability. Overall, profitability of the Unum UK segment remains quite favorable with an operating ROE of 17.7% for the first quarter, compared to 16.1% in the year-ago quarter. Colonial Life again generated strong consistent results with operating income of $77.4 million, compared to $77.6 million in the year-ago quarter. The slight decline in operating income was driven by lower net investment income reflecting lower miscellaneous investment income. The benefit ratio improved to 50.9% in the first quarter, compared to 51.3% for the year-ago quarter, driven by favorable benefits experience in the Accident and Sickness and Critical Illness product lines.
Margins remain strong for Colonial Life with an operating ROE of 17.7%, compared to 16.9% in the year-ago quarter. Finally, for the Closed Block operating income was $33.7 million in the first quarter of 2016, compared to $26.7 million in the year-ago quarter. The increase in operating income was primarily driven by higher miscellaneous investment income, compared to a very low level of miscellaneous investment income in the year-ago quarter. The underlying benefits experience for the individual disability line was in line with our expectations. The increase in the interest adjusted loss ratio to 84% in the first quarter, compared to 80% in the year-ago quarter, was largely driven by a reduction in the reserve discount rate to recognize the impact on future portfolio yields from the higher level of bond calls and bond tenders we experienced during the first quarter of 2016.
For the long term care line, the interest adjusted loss ratio was 88.9% for the first quarter, compared to 87.3% for the year-ago quarter, resulting from a higher average submitted claim size. The underlying risk experience for long term care remains within our long term expected range of 85% to 90%. I'll move now to the growth trends we experienced across the Company in the quarter. Starting with Unum U.S., total sales declined by 4.5% for the first quarter compared to a year ago. This was not unexpected, as we had a very strong core market sales results a year ago first quarter and we continue to see the increased rates offset interest rate pressure. However, we also you saw increased competition in the quarter, particularly in the mid-market.
Looking at the sales results by product line, LTD sales were flat in the first quarter, while STD sales declined 32.5% compared to the year-ago quarter. LTD sales improved in the large-scale segment, due to strong sales to existing customers, offsetting lower sales in the core market segment. Group life and AD&D sales declined 4.9% for the quarter, as we continue to take disciplined pricing approach to this market. Our individual disability sales increased 35.8%, compared to the year-ago quarter, driven by strong growth to existing customers. Finally, in the voluntary benefits product line, total sales declined 4.5% against a very strong first quarter last year which included a $25 million single large-case sale. Core market sales for voluntary benefits performed very well in the quarter, increasing 16%.
Our sales outlook for 2016 for Unum U.S. calls for growth in the 2% to 4% range again and it's likely we'll see quarterly volatility as we did in 2015, particularly given the volatility on the timing of large-case sales. Persistency for Unum U.S. continues at very healthy levels. For the group lines combined, persistency was stable at 88.8%. Voluntary persistency of 76.7% was favorable to prior-year results and individual disability persistency of 91.3% improved over the first quarter of last year. Given recent sales trends and strong persistency levels, along with the underlying management of our in-force renewals, we generated premium income growth of 5.8% for Unum U.S. this quarter. Sales in the UK were strong as well, increasing 16.4% in local currency, with favorable trends in core markets for both group long term disability and group life, along with the benefit of the NDP acquisition and an increase in other supplemental product sales. Persistency was favorable at 85.6%, due to improvements across the product lines. Given these trends, premium income growth for the UK this quarter was 6.1% in local currency.
Finally, Colonial Life sales remain on an accelerating trend, increasing 16% for the first quarter. Growth this quarter was [indiscernible] and well-balanced between the commercial sector, both core market sales and large-case sales and the public sector. In addition, each product line shows positive year-over-year growth trends. Persistency for Colonial Life was slightly lower across all product lines in the quarter, but it remains in line with our expectations. Premium growth continues to show good momentum, increasing 5.7% in the first quarter, compared to the year-ago quarter.
Overall, we remain very pleased with the growth trends we see across our business segments, as well as the profit margins we're maintaining. Looking now at investment results, new money yields were pressured in the first quarter by declining yields for both 10-year and 30-year treasury, despite this, we're again able to slightly exceed the new-money yield assumptions we have for our long term care portfolio just as we did throughout 2015. Given the recent volatility in oil prices, I'd like to give you an update on our energy holdings. As we told you last quarter, we believe our energy exposure is very manageable within our existing capital plans. The sharp increase in oil prices since we last talked has further strengthened our outlook for the portfolio. The portfolio ended the quarter in a net unrealized gain position of $18.9 million, compared to a net unrealized loss position of $51.4 million at year-end 2015. The size of the portfolio also shrunk modestly.
During the first quarter, the rating agencies undertook a comprehensive review of energy credits. As a result of that review, along with other portfolio management actions, our below investment grade energy exposure increased by $66 million. The impact of all the rating changes to our RBC ratios for the traditional U.S. insurance companies was only 2 RBC points. It's worth noting that the impact of rating changes to RBC ratio is heavily impacted by a Company's ratio of C2 risk to C1 and C3 risk. Since we're more heavily weighted to C2 risk, the impact of these downgrades to our RBC ratio tends to be lower. Net-realized losses in the energy holdings from both gains and losses on sales, as well as other-than-temporary impairments, were $24 million pre-tax for the first quarter. These losses were partially offset by realized gains in the rest of the portfolio.
We continue to review our energy holdings and examine those holdings through a number of stress scenarios. Current oil prices are higher than our baseline scenario and our experience in the first quarter was consistent and in some cases better than we expected. In summary, we continue to believe that the capital impacts of our energy holdings are very manageable and do not alter our financial or capital plans. Moving to capital management. It was an active and very productive quarter for us. Our share repurchases totaled $100 million, with most of that activity occurring while the stock was trading up in February, thereby enabling us to buy the shares at an average price of just over $27 per share.
As a result, we retired 1.5% of our shares making a very productive use of our excess capital. In addition, as Rick highlighted, we announced the planned acquisition of Starmount Life Insurance Company which we believe will provide us with a platform to begin to develop a substantial national dental and vision business over time, benefiting the growth prospects for both Unum U.S. and Colonial Life. This transaction won't close until the third quarter and is being financed in such a way that we expect to remain well within our capital ranges while maintaining our share repurchase plans. Also on capital management, we typically see a reduction in our holding Company cash in the first quarter. This year we decided to maintain the dividends we take from our insurance companies in 2016 at approximately the same level as 2015, but we decided to adjust the quarterly pattern. Therefore, we took $179 million of dividends in the first quarter, about $35 million higher than the year-ago quarter.
As a result, our holding Company liquidity position remained stable at $478 million, compared to $475 million at year-end 2015. In addition, we've extended our $400 million credit facility by a new five-year period to provide added flexibility. The higher statutory dividend, along with the growth in previously discussed downgrades, caused our risk-based capital ratio to slightly lower, at approximately 390%, compared to approximately 400% at year-end 2015. We continue to target our risk-based capital ratio in a range of 375% to 400% for the year and holding Company liquidity is at least one times our holding Company cash-coverage needs of just under $300 million this year. Statutory after-tax operating earnings were quite strong for the first quarter at $184 million, compared to $158 million in the year-ago quarter, a nice 16% increase. Wrapping up, our expectations for the growth in after-tax operating income per share for 2016 is unchanged from what we discussed when we reported the fourth quarter which is a growth rate within a range of 3% to 6%.
Overall, it was a very good start to the year. We're pleased with the operating results and feel very good about the strength of our balance sheet and our financial flexibility.
Now, I'll turn the call back to Rick.
Thank you, Jack. Before we go to your questions, I would just reiterate how pleased we're with the first quarter performance, good premium growth, stable benefits experience, strong capital generation and in addition, we're finding good ways to put that capital to work, both through returning it to shareholders, as well as investing in future growth.
So with that, we'll move now to your questions. I'll ask Don to begin the question-and-answer session.
[Operator Instructions]. We'll take our first question from John Nadel with Piper Jaffray.
I guess the only real area of focus I've got in the numbers is that the last few quarters now, in the closed block, the long term care benefit ratio has been hovering in that 88% to 89% range. So, it's toward the upper end of your 85% to 90% expectation. Is there anything of worry there when you look, underlying that benefit ratio, in terms of some of the underlying trends there?
Yes, John, I'll take that. We're not really seeing anything in underlying trends. There's some volatility in the results we see, but if you look at over the average, it's pretty close to being right in the middle of that range which is where we're comfortable. And we have seen it bounce around quarter to quarter.
I think, John, you highlighted the last three quarters. But if you went to the beginning of last year, we actually saw very favorable results. So it's like this block with [indiscernible], you've got to take a longer term view to it.
Just wanted to check that box. Then the only other question I've got is maybe, Mike, some commentary on what you're seeing in sort of the competitive environment. I mean, I know there are some impact on your sales, probably just from comparisons being tough from the year ago, but can you give us some color around sales and sales outlook.
I guess I would start by just saying we feel really good about the strengths of the product portfolio and expanding product portfolio. The distribution relationship's rock solid in the service proposition, so, I think that's just important context. As you highlighted, we do have a tough comparison in the first quarter. A year ago, sales were up in the high teens. But even given the tough comparison, if you sort of unpack the aggregate sales number here in first quarter of 2016, there's some pretty encouraging trends within our [indiscernible] and voluntary segment, we saw VB, as Jack highlighted, grow by 16% in the core and actually large case VB had really good momentum as well.
We had a $25-million sale last year to an existing client. To give you a sense, this year our biggest VB sale was just a little under $4 million. So, broad-based, I think, traction and success with voluntary. And also in the segment, recently issued IDI sales were up 36% and that's been a really good story for us and fits with our strategy of selling multiple lines into existing clients. As you highlighted, the soft spot for us was new group insurance sales and we felt that most acutely in what we would call the midmarket which is sort of employers 250 to 2,000 lives. To give you a sense, proposal activity in that segment was actually up in the low double digits. So, good traction in terms of taking good looks at opportunities, but our ability to close that business was definitely constrained by an increasingly aggressive underwriting environment out there.
We saw that materialize a bit in the second half of last year and it's definitely persisted here into the first quarter of 2016. We have seen this cycle many times. So, we're going to maintain our discipline. We'll certainly look to write business where we can do so profitably, but we're going to have to, I think, keep a real close eye on it. Group insurance, this is our smallest sales quarter of the year, so a lot of work to transpire between now and the end of the year, but the competitive market is one we're going to watch really closely on the new sales front.
I guess the final thing I'd say is renewal placement activity, another place where you'd see competition, we were really pleased with the ability to place rate increase due to the interest rate environment and persistency hanging in just a tick below 90%, earned premium growth up about 6%, feel good in aggregate, but watching the new sales environment is going to be really important.
We'll go next to Suneet Kamath with UBS.
Just given the current interest rate environment and how much things have changed since the end of the year, Jack, would you envision a discount rate adjustment as we get into the fourth quarter which is when I think you usually take a look?
Interest rates have gone down. Spreads have moved. It would be early to anticipate an interest rate, discount rate adjustment. Actually, our interest margin and LTD has held in very nicely over the past couple of quarters and so we will look at it at the end of the year. It's always a game-time decision. But there isn't anything startling about the impact of the first quarter that would drive us in one direction or the other.
Suneet, I think I'd just add to that, our margin, the one metric you could look at, there's a lot of things that go into our decisioning process actually got better. From 81 to 86 basis points. So, we actually saw a little bit of improvement in the first quarter.
And then just shifting to the closed block IDI. In the December Investor Day you talked about some strategies maybe to try to get some capital out of that business. Is that really an interest rate driven kind of an event. In other words, in order to execute a strategy you'd need to see higher rates? Or is there -- I guess that's the question.
No, I would say that's more of a capital-driven event. The IDI closed block reserves get treated as disability reserves, from an RBC Capital perspective. Anyone who is over age 65 in that block and has a lifetime benefit is really an annuity, as opposed to a disability reserve. And so, our view is that given the stability of the risk there, it gets over-capitalized by the risk-based capital ratios. And so, it's trying to figure out if we can do something about that.
Okay. So, any strategy that you pursue is not going to be reliant on the level of rates.
Okay. And then just the last one. In the past, you've given us sort of the quarterly view of long term care GAAP versus Stat reserves. Is that something that you could share with us again this quarter?
Yes. So, the difference. It is creeping up. It's probably somewhere around 800 range this quarter.
We'll take our next question from Yaron Kinar with Deutsche Bank.
So, I realize it's only one quarter, but still results came in above the midpoint of guidance despite interest rates coming in as a significant headwind. Can you maybe highlight some of the things that went better than planned and also maybe remind us what the underlying interest rate assumption is for the guidance?
We actually don't take an underlying interest rate assumption. When we set our plans, we assume that the interest environment we're going to face in the future is consistent with the one we're currently in. That's what went into our 2016 plan. Some of the things that went well, we talked about expenses, were favorable. Our tax rate was not out of the ordinary, but was slightly favorable as well. We had good risk results across the board. So, there was pretty much no dip in the risk that some of the line needed to make up. From our perspective, it was just a quality quarter, throughout.
Okay. And then on the expense side, was the decrease in other expenses as a percentage of revenues, was that a function of just lower sales or was there also other expense management initiatives involved there?
No, clearly, we have a focus as a Company on being as efficient as we possibly can. That wasn't sales related. It was more related to just our ongoing pursuit of becoming more efficient as a Company.
We'll go next to Jimmy Bhullar with JPMorgan.
I had a couple of questions. First, just on group disability margins, obviously, they've improved steadily over the past few years. And improved again in the first quarter. So, to what extent do you think sub-81% level is a sustainable level in the group disability benefits ratio?
We did have a good risk quarter in group disability, actually, first quarter of last year was exceptionally good. I would say the group disability loss ratio is going to move 1 point or 2 around that 80% to 82% range. There's a little bit of seasonality as we go you through the summer months. I'd expect some of our paid incidents to pick up just a little bit if prior year proves out. Over time the improvement in the loss ratio that you're citing, a lot of that is us taking rate action in the book to account for interest rates.
So, as our net investment income is falling, we're making up with that through price levels which shows up in our loss ratio. So, I would characterize it as a good, solid to slightly favorable risk quarter and within our targets, looking forward.
And any changes in your views on your long term care reserves if we stay at these types of interest rate levels, what's the likelihood for you looking at your GAAP reserves for long term care and then also is it fair to assume that you'd end up adding to stat reserves for the New York sub, if we're at rates close to these levels through the end of the year?
I don't think the levels we're at are dramatically different than the levels that we based our last calculation of the New York subs. So, I'm not feeling pressured around that. In terms of the long term care, we said pretty clearly that when we set that reserve, we assumed we'd be in a level interest rate environment for the next four to five years and then we'd gradually revert to a mean over time. We're in that level interest rate environment. Last year for the full year, as well as in the first quarter, we were able to put out new money at a level that was consistent with the reserve assumption that went in there. If it lasts forever, yes, there's going to be some impact. But right now we're pretty comfortable with where we're in the guidance we gave.
Lastly, on group life you saw an uptick in the benefits ratio there. Was that mortality? If you could give us more details on what you saw.
A little bit adverse, although we talk about that business being a 70% to 72% benefit ratio. We found ourselves just at the top end of that range. It was a little bit of incidence but average size or severity was more the culprit this quarter.
We'll take our next question from Michael Kovak with Goldman Sachs.
Just one on capital here. Can you provide us an update, maybe in a little more detail, in terms of how you're thinking about sort of the uses of capital, understanding you didn't really change your share repurchase plans with the acquisition of Starmount, but theoretically some of these capital could have potentially been used for additional repurchases below book value. Can you just update us on your thoughts there?
I think our thoughts -- it's pretty consistent with what we've always stated about our uses of capital, that the first place we want to put it to work is in the growth of our businesses. And Starmount through an acquisition provided a great opportunity to do that. We're really excited about the platform that brings to the table and the growth prospects we'll have. We have a large improving distribution system in the dental market. We've had a partnership with united Concordia for some time now.
And so, we're excited about what that brings to the table. So, when we look at that long term value versus a share repurchase, it felt like the right thing to do for us. Again, share repurchase, we understand is important. We'll continue to return capital to shareholders to the extent we have excess capital, but it's a notch below opportunities like Starmount.
And then shifting gears, on the long term care business can you give us a sense of any of the progress you've made on rate increases in terms of filings, the percentage of approvals and, potentially, price increases relative to the requests that you've made?
Yes, we continue to make significant progress on rate increases. We had built assumptions about the approvals we would get into our reserve assumptions when we took the charge in 2014. Our experience has been very consistent or maybe slightly favorable to that. We think the market for rate increases is actually continues to improve. More and more the states that aren't allowing rate increases are becoming the outliers, as opposed to the states that are. So, we feel good about where we're, we feel good about our assumptions and we feel good about rate increase prospects going forward.
And on that, have you seen any shift in terms of whether you're able to get the percent that you're requesting today versus, potentially, I think you've talked about in the past, shifting the benefit, can you sort of give us any of the change in dynamic there?
In our last rate increase we filed what we called the lending spot, where our person had the choice of either accepting the rate increase or reducing their future inflation option from 5% to 3%. We've had very good success with that as a result of providing that option, I think it's far more likely that states will award us the entire rate increase that we asked for. Some states spread that out over a couple of years, over a three-year period, as opposed to all at once. And we've had very good uptake on that option. So, there's a lot of customers that are availing themselves of it. And that's favorable for us. We're kind of neutral from a financial perspective, but it does reduce the future liability when they take the option. And so, you do get a decrease in exposure as a result.
So, as that's implemented should we expect that to roll through the financials? Can you discuss how that would be impacting your loss ratio?
It's not going to impact GAAP results significantly, because it was already assumed in the reserve assumptions. To the extent -- due to rate increases that weren't assumed or we exceed those expectations, you'd see some of that in loss ratio. But I wouldn't anticipate a big change.
We'll take our next question from Humphrey Lee with Dowling & Partners.
Just a question on the organic growth in the quarter. Can you comment in terms of the wage growth or employment growth that you see in your premium numbers?
I'll take that one. We've talked about it over the last couple of years, moving from a little bit of a drag to a little bit of a lift. I think he's that's what we saw play out here. I would say while we've seen macroeconomic employment growth, a lot of that growth has come from part-time, nontraditional and contract workers, where that's not as big a part of our block, but we have started to see some of that wage come through. I would sort of be thinking of it in the 1% to slightly under that kind of lift. It varies a bit by product.
Also there seems to be an elevation in unemployment rates in the oil patch states. Can you remind us your exposure to those states in general, so in addition to the oil -- to the energy sector, but to the broader employment markets in those states?
Yes, sure thing. I think I got the question, Humphrey but tell me if I missed it. Our exposure we would watch most closely is our disability exposure. It's about 2% or a little under of our book. That's looking primarily in Texas and up in the Dakotas. We've actually been watching the incidence, even on that small sliver and we're doing pretty well.
We'll go next to Ryan Krueger with KBW.
This is one of the best sales quarters you've had at Colonial in quite some time. I was hoping you could dig in a little bit and give us some more color on the underlying drivers.
I think there are a number of factors, Ryan. Certainly favorable market conditions for the voluntary product are helping us. We believe we have a strong strategy and plan for serving all size segments of the commercial and public sector markets. Colonial Life has a proven track record of working with brokers and serving employers on a direct basis as well. We have a complete and competitive suite of group and individual products, strong portfolio of value-added services for employers and employees. A heavily customer-focused employee culture here in Columbia and throughout the organization. We have national enrollment capabilities and a national footprint for enrollment which allow us to serve new and existing customers with face-to-face telephonic, web chat and Internet based self-serve options.
Finally and perhaps most importantly, we have a growing focus and highly effective national sales team. So, very pleased with the first quarter results. I would tell you the year is young and so we'd guide people to the upper end of the range that we shared back in the investor meeting in December of around 8% for the year, probably.
And then just a follow-up on the new money rate comment. Can you just give us a sense of what type of new money rates you're getting on the cash flows back in long term care at this point. I think you had talked about, I think you got around 5% maybe last year, but can you comment on what you're getting kind of today.
Yes, 5% is the bogie that we have out there that was what was underlying the reserve assumption and we slightly exceeded it in the first quarter.
Our next question is from Eric Berg with RBC.
My first question relates to Starmount and the dental insurance business, in general. It would be my sense that dental insurance is a fairly penetrated marketplace. It would be my sense that pretty much every major corporation in America offers it. Where is the opportunity? Is this, like group life, a takeaway business? I mean, I certainly understand the idea that your distribution is broader and probably deeper than the acquiries at Starmount, but is this a growing business?
I think your sense is right when you get into the large end of the market, generally, it is a fully penetrated dental and vision business. There is still a reasonable amount of GAAP in terms of coverage as you move down into the small end of the market. I would say one of the key trends I'd point to is the growth in voluntary dental business. Vision is very often voluntary. So, when you think about the opportunity for Unum and Colonial Life, it's about adding two important and employee high demand products into the portfolio and then leveraging client -- distribution client relationships and enrollment capabilities.
So, when we can sit down and walk an employee all the way through a benefits package and really be able to tick off all of the non-retirement, non-major medical categories, I think we see a lot of upside opportunity there.
One question for Jack and that will wrap up for me. With respect to the closed block as a follow-up to the earlier question, I think you said that the reserves are considered disability reserves. First question of two in this area, that wouldn't relate to long term care. In other words, your comment about, again, the closed block reserve is being treated for statutory purposes as disability reserves, I'm presuming you meant only -- you were speaking only about the disability business.
Yes, I was talking about the old IDI block in terms of that. For long term care, most of the reserves in long term care are active life reserves. They're not disabled claim reserves.
Right. And so just as a follow-up then and this will wrap up for me, just as a follow-up to this question. It's not interest rate related, it's more a matter of freeing up some of the capital associated with what you folks perceive to be reserve, excess of reserve redundancy, because of the age of the disabled individuals. Where are you in this process? We're four months after your Investor Day. Are you further along and are you optimistic about doing -- how would you characterize your sentiment about the probability of doing a transaction this year and where are you in the process? Thank you.
I would say, Eric, it's a work in progress. We continue to look at options. There's a lot of capital in the closed block between long term care and IDI and we're continuing to look at options on both sides of the equation. So, I think it's early on in the process.
[Operator Instructions]. At this time, we'll go to our next question with Seth Weiss with Bank of America.
I want to ask about just net investment income again and I recognize it's a challenging interest rate environment. I suppose I was a little alarmed at the differential between your premium growth in the U.S. at about 6% and the decline in net investment income which was 3.5%, so it's almost a 10% differential there. Perhaps I'm thinking about it wrong, but could you discuss the falling net investment income maybe within that context and let us know if it was alarming to you as well, internally?
Yes, Seth, it wasn't alarming to us. Couple of things drive it. One is, particularly in Unum U.S., the change in miscellaneous net investment income. We were kind of average overall, but a ton of it showed up in the closed block with less in places like Unum U.S. and Colonial, that's a piece of the driver.
The other piece of the driver is because of the risk management efforts in Unum U.S., LTD reserves are actually going down and have been for a while. And so that's a big driver of net investment income, too. So, even though our margins are actually went up during the quarter, the asset base that we earned those margins on went down. So, it's not rate driven as much as it's some other factors.
And if you could just remind us on the pace of the decline in the reserves in LTD and where that's -- directionally, how that's moving over the next year or two.
You know, I mean, I don't have that offhand. We can get back to it, but it's been pretty steady, the quarterly reduction. We can get back with a number.
Seth, you can see the reserves in the statistical supplement. We have those broken out, so you can see that for group disability.
I think it's important, Seth, the point that Jack made which is our net income or net investment income is going to trend with those reserves, not with premiums. Those are the two things to keep in mind.
We'll go to our next question with Ken Billingsley of Compass Point.
Just had one question. MetLife announced that they're exiting individual disability. Can you talk about that, any opportunities there? I don't know how large of a player they were versus what you were seeing, but is there any opportunity or any reasons why they're exiting that's something that maybe is impacting you guys?
So, we saw that move. I think you can almost think of it the same way that we think about individual disability. There's really two businesses. One is a single life direct to the individual business and you'd have to engage the team at MetLife. My sense is that's the business that they're taking a step back from. There remains an employee benefit, multi-life individual product, that's what's sold at the work site to typically mid to high earners. That's the business we characterize as recently issued.
It has been a market that's sort of been a slow-growth market that ticked up a bit and it's been a really good story for us here at Unum. I mentioned sales were up about 36% in the first quarter, most of that coming off block growth opportunities. Often, it's cross-sold with our group insurance and voluntary lines and we've got it to a place now where the top line is growing about 5%. It's a good market for us. I don't think that particular move that you mentioned with Met is going to have a big impact for us, but it remains a market that we're pretty excited about.
That concludes today's question and answer session. At this time, I'll return the call to Tom White for any concluding remarks.
Actually this is Rick. I'll take it. Thank you all for taking the time to join us this morning. We're actually over the next couple months going to see many of you at various investor conferences and meetings and we look forward to taking you through some more detail and our progress as we move forward. Thank you very much. That concludes today's call.
This does conclude today's conference. Thank you for your participation. You may now disconnect.
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