Unum Group (UNM) CEO Tom Watjen on Q2 2014 Results - Earnings Call Transcript

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Unum Group (NYSE:UNM) Q2 2014 Earnings Conference Call July 31, 2014 9:00 AM ET

Executives

Thomas White - SVP-IR

Tom Watjen - President and CEO

Richard McKenney - CFO and EVP

Analyst

Suneet Kamath - UBS Securities

Mark Hughes - SunTrust Robinson Humphrey

Erik Bass - Citigroup

Yaron Kinar - Deutsche Bank

Steven Schwartz - Raymond James & Associates

John Nadel - Sterne, Agee & Leach

Tom Gallagher - Credit Suisse

Christopher Giovanni - Goldman Sachs

Seth Weiss - Bank of American Merrill Lynch

Colin Devine - Jefferies

Operator

Good day and welcome to the Unum's second 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, Danny. Good morning, everyone and welcome to the second 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 Securities and Exchange Commission and are also located in the sections titled Cautionary Statement Regarding Forward-Looking Statements and also Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and our subsequently filed Form 10-Q. Our SEC filings can be found in the Investor section of our website at unum.com.

I remind you that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found in our statistical supplement on our website 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 will turn the call over to Tom Watjen. Tom?

Tom Watjen

Thank you, Tom and good morning everybody. I am very pleased with our overall performance for the quarter, with operating earnings per share increasing 11% to $0.91 per share, and for the first half of the year, operating earnings per share grew at 9.9%, which is at the upper-end of our outlook we provided for you for 2014 of 5% to 10%. Importantly, to our book value per share, excluding AOCI, continues to grow and increased 9.1% year-over-year to $33.80 a share.

Now, I think there are three key takeaways for the quarter, which Rick will just address further in his comments. First, all three of our core business segments; Unum US, Colonial Life and Unum UK, continued to produce strong results and higher year-over-year operating earnings in the second quarter.

Each of these business segments is generating consistent solid margins, and as a Group, generated an operating return on equity of 15% for the quarter, which is also at the upper-end of the outlook as we provided for 2014. I should add too that our overall results for the Closed Block were strong as well.

Second, as I mentioned earlier, operating earnings per share grew this quarter by around 11%. What's more important to me though is the balance we saw in the quarter between operating performance and the impact of our share repurchase activities. This quarter, our after-tax operating earnings increased 7.5% and our capital management or share repurchase activities added 3.5% to our quarterly earnings per share growth rate. I like this balance and this is the balance we are seeking over the longer term.

And lastly we saw very strong sales at improved premium growth throughout much of the company. I am very confident that these results have not come at the expense of profitability, but instead reflect the strength of our brand and the quality of our offering and people.

At the halfway point in the year, we are generally within or above the outlook for 2014 sales and premium growth we provided last year.

So, in summary, the second quarter was a strong one for the Company. All of our businesses have showed solid year-over-year improvement. Our stronger level of operating earnings growth along with our share repurchase activities give us real operating leverage. And we are seeing excellent profitable top line growth opportunities, which we are expecting to carry into the second half of the year.

Now, I will turn things over to Rick for a more thorough review of operating results. Rick?

Richard McKenney

Thank you, Tom. Our second quarter results were quite good, as we reported operating earnings per share of $0.91, up 11% from last year. We saw good underlying growth in our after-tax operating earnings, which accounted for roughly two-thirds of our operating EPS growth. We will continue to focus on driving growth in operating earnings.

And our second quarter performance continued to build off of the favorable trends we've seen emerging over the past several quarters. This growth will be additive to our underlying earnings growth per share that is generated as we steadily decrease shares outstanding.

Looking first at Unum US, operating earnings increased 2.2% year-over-year, driven primarily by favorable experience in the Group Life and AD&D line. Group Life and AD&D produced a strong quarter with $61.6 million in operating income, up 7.5% on favorable risk experience, and premium growth of just over 3%.

Our supplemental and voluntary line reported operating income of $83.6 million for the quarter, basically flat with the year-ago quarter and operating income in our Group disability business increased slightly to $73.6 million from $73 million a year ago.

Premium income was essentially flat this quarter, which is an improved result from the small declines we experienced over the prior two quarters, as we are seeing better sales trends and continued stable persistency. Net investment income continues to reflect the impact of the low interest rate environment.

Interest reserve margins remained solid, well above our targeted levels at 91 basis points, but lower asset yields continued to pressure net investment income for this line.

Importantly, our benefit ratio in group disability continued to improve, with the ratio declining to 81.9% this quarter from 83.9% a year ago, as the underlying experience showed stable claim incidence trends and continued favorable claim recovery performance.

Looking forward, we expect the stable level of earnings from group disability, with some slight improvements in the benefit ratio and premium growth offset by some ongoing pressure from net investment income given the low rate environment. We expect our profit margins in this line to remain strong, among the highest in the industry. Overall, it was a solid quarter for Unum US, and the segment ROE stood strong at 14%.

Moving to Unum UK, operating earnings were £23.6 million for the second quarter, 8% higher than the second quarter 2013, and generally consistent with our expectations. Our Group Life results are much improved and reflect the aggressive pricing and repositioning activities of the past several quarters.

Group disability results were improved this quarter and our overall benefit ratio was 74% compared to 84% in the year-ago quarter. Our margins for the UK have actually improved back to the mid-20% area, which generates about an 18% of return on equity.

Colonial Life generated another very strong quarter at $75.3 million compared to $71.1 million a year ago. We saw a steady, consistent risk experience across its business lines, generating a benefit ratio of 52%, in line with the benefit ratio from last year. The underlying profitability of this business remains excellent, producing an operating ROE of 17% for the quarter.

And rounding out the enterprise, the Closed Block also had an unusually strong second quarter with operating income of $37.3 million, driven in large part by very favorable results in long-term care and higher miscellaneous net investment income. The interest adjusted benefit ratio for the LTC line continued to run favorably at 80.8% for the second quarter, primarily reflecting a lower level of claim incidence rates. We generally expect the LTC interest adjusted benefit ratio to be in the range of 85% to 90% and the first half benefit ratio was 82.8% and has performed better relative to that expectation.

The interest adjusted benefit ratio for the Closed Disability Block showed some negative volatility this quarter at 89.4%, due to higher claim incidence levels and unfavorable mortality, partially offset by favorable claim recoveries. The age of these closed blocks subject them to more quarterly volatility and in this quarter, it ran favorably for long term care, but negatively for our disability line.

So now moving on to our sales and growth trends across the Company, we are particularly pleased this quarter with the results we are seen. In Unum US, total sale increased by 40% in the second quarter, a sharp jump from the year-ago quarter, when we were seeing the worst of the disruptive impact of healthcare reform on our market and our customers.

When we look at the longer-term view of sales going back to 2011, this quarter's results get us back on the trend line of growth in the mid-single digits, a more normal sustainable level of sales growth.

Within our Group benefit lines, long-term disability, short-term disability and group life, total sales increased by 50%, with 40% growth in the core market and 80% in large-case market, much of which was driven by sales to existing customers.

Our voluntary benefit sales also increased by about 20% in the quarter with a good mix of sales in the core market and large-case segments.

These are large increases across the board, but to give you context from a profitability perspective, of the $53 million of growth that we saw, half is coming from existing customers, and another quarter from sales to new core market customers which is our most profitable business.

In addition to the strong sales, persistency for our Unum US employee benefits lines remained strong at 89% for the quarter. Bring it all together, premium growth for Unum US was up 2.3% for the quarter, and we believe we are starting to see some of the benefit from better overall employment trends.

Also at Colonial Life, we saw very good sales again this quarter, an increase of 7.7% overall, with positive contributions from both new accounts and existing accounts. We also saw better trends in our core commercial markets, with quarterly sales growth approaching 9% in the under 1,000 life market.

Results in the large-case commercial and the public sector markets were also favorable this quarter, largely with growth coming from new accounts. Persistency remained slightly lower relative to the first half of 2013, but overall, premium income increased by 3%, which is in line with our expectation of 2% to 4% for Colonial Life.

And finally in the UK, sales were down about 11% in the quarter to £12.6 million. Much of the decline is in the group life market, down 29%, probably due to the competitive pricing conditions in our own actions, as we carefully priced this book of business. The pipeline does tell us that we should see this improve in the second half of the year.

Disability sales were essentially flat with the year-ago quarter at $9 million. Persistency in the UK is trending higher, but remains below our longer-term expectations, premium income in total, increased by about 2% for the quarter.

So, overall, we are pleased with the growth trends in the Company, and equally pleased with the pricing on the business that we're selling today. We feel we have largely moved past the disruptions brought on by healthcare reform initiatives, though some evidence of that disruption still remain to the very small end of the market.

Also, we are beginning to see some evidence of the improved top line growth from better employment trends. It is certainly nowhere near the pre-recession levels, but a welcome trend nonetheless.

Now, looking at the investment portfolio, the credit quality of our portfolio remains in excellent shape, no changes there, and the watch list of potential problems continues to be very low. The decline in interest rates and the spread compression once again this quarter, make for a challenging investment environment.

We continue to look for the best opportunities in the investment markets and for the best relative value among the asset categories we have historically focused on.

We are experiencing some near-term pressure on our investment income and product portfolio yields relative to our expectations similarly to what we have seen over the past several quarters. Our investment team continues to perform well, and we remain disciplined in how we manage through this low-rate environment.

Moving to a capital update, the weighted average risk-based capital for our traditional US life insurance companies remain consistent at approximately 401%, and our holding Company cash and marketable securities was $616 million at quarter-end.

Our statutory operating earnings of $171 million are within our range of expectations and improved over the level of the first quarter this year.

Following the first quarter issuance of $350 million of 10 year notes at a 4% coupon in the second quarter where we retired $145 million of the debt issues scheduled to mature in November 2015, which was issued out of our UK holding company.

As a result, there are two non-operating earnings that basically offset each other in the quarter debt extinguishment costs of $10.4 million after tax, and a currency hedge gain related to that debt of $10.5 million after tax, so no impact on this quarter's net income.

Also, we continually and steadily buy back our shares with the capital we are generating another $100 million for the quarter which keeps us on pace with our $300 million to $600 million range for the full year.

I would also note that our Board of Directors approved an increase in our dividend rate of 14% during the second quarter, which is the 6th year with a double-digit dividend increase.

Wrapping up, I would also affirm that our 2014 outlook for growth and operating earnings per share remains in a range of 5% to 10%. In fact, most of the trends we have experienced thus far in 2014 are in line, if not at the higher end of our 2014 outlook for sales, premium growth and our ROE expectations. A strong first half of the year and we like the trends we are seeing as we head into the second half.

And now I will turn it back to Tom for his closing comments.

Tom Watjen

Before we move to your questions, I'll close by just reiterating some of the things that were said before, but certainly we have a very strong start to the first half of the year. Our focus remains on continuing to grow our business while maintaining strong margins through disciplined pricing, underwriting and expense management. We expect to continue to generate excess capital and we will continue to balance the deployment of that capital with the needs of the business, opportunities we see in the market place and returning capital to our shareholders through our share repurchase and dividend actions. Now this completes our prepared remarks, and Danny, let's move to the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Suneet Kamath with UBS Capital Markets.

Suneet Kamath - UBS Securities

I wanted to start with the Individual Disability Close Block. Rick, I think in your comments, you talked about the elevated benefit ratios as maybe normal fluctuations. But have you dug in to the Block to see if there's anything that's jumping out there?

Richard McKenney

Actually, as we look at the Individual Disability Block and I try to reference our remarks, we saw some elements which we surely attribute to volatility, things around mortality and incidence levels that we haven't seen in some time. So, it does not look like a trend. Certainly, it's something we would watch, but we would very much chuck that up to volatility in that line of business. And we have dug into that, yes.

Suneet Kamath - UBS Securities

And then, I don't want to get too far ahead of ourselves, but if we look at the sales growth now over the past three quarters, it has been generally pretty strong -- and I'm talking Unum US and Colonial combined. So, as we think about 2015, I think your 2014 guidance for premiums was relatively flattish for both of those segments, maybe a little bit stronger in Colonial Life, but how should we be thinking about the impact of these sales on your expectations for premium growth in 2015?

Michael Simonds

Yes, good strong sales in the quarter. Feel good about how the strategy is meeting the market seeking to broaden our relationships with existing clients and grow our employee pay business. Our sales and client management folks are doing a terrific job. Our turnover in both those roles is at historic lows. And so we feel really good about how we are meeting the market. That being said, in the pure second quarter, we have a little bit of an anomaly in the year-over-year growth metric, but Unum US was up 40%. That was again, as you will recall, probably the low point in terms of market activity that we'd experienced in the second quarter of last year. And so one of the things we do is look at it, skip over '13 and look back to 2012, where we experienced growth of about 12% or 13%.

So, a little bit of an anomaly. To your question about looking forward, I would expect those comparables will get a little bit more difficult when it comes to sales growth in the third and the fourth quarter. 2Q was really last year the low point. We saw it sort of flattened out in terms of sales growth, and then start to improve to your point in the fourth quarter and the first quarter of this year. So, certainly with the combination of building sales momentum probably closer in the second half of the year to the guidance that we issued last year around 7% to 10%. Combined with strong persistency levels that we are experiencing, we would start to see earned premium probably to the high-end of the guidance, and then, probably a tick or two better than that next year.

Randy Horn

Yes. We feel real good about our sales momentum at this point. We are coming in really right within our target range for the year, which we established at 4 to 7%. We think that's going to lead to good premium growth performance again, right around our targeted range of 2 to 4% growth here in 2014. So if we can keep this momentum going, which we feel optimistic about, Suneet, there is no reason why we shouldn't be in our targeted growth ranges moving forward and possibly even in the upper-end of those ranges.

Again, we had a range of 2 to 4% premium growth this year over the next couple of years, that was moving up more in the 3 to 5% range, and we feel our trend line is pointing us in that direction.

Suneet Kamath - UBS Securities

And then hey it's for Randy, just a quick follow-up on Colonial, Aflac US has obviously been going through some issues in terms of their field force, so maybe two-part question. One, is that having any impact on your business in terms of additional opportunities?

And second, can you maybe talk about how you managed your field force, because it doesn't seem that you're having nearly the same issues as they are? Thanks.

Tom Watjen

Especially with that last question about how we're managing that sales force, it might be good just for me to make a very brief comment just about how we are structured actually. Because I think you're right, there are different people in the markets who have different ways about going about the business.

So I think as everybody knows, we have really two avenues into the voluntary market. So in the Unum US the avenue is very important to us, because voluntary provides -- allows us to have a very integrated offering of Group, individual and voluntary products in the marketplace. We actually market those to brokers and consultants.

And so, that brand is distributed in the market in a very different way than Randy's business for example, because Colonial has a more narrow voluntary benefit offering in the marketplace, but that's sold through agents. The agents may ultimately use a broker, but the agent controls that business. And so, from the Group point of view, we have two very good brands, two very different ways to come to market, and its proven to be very, very successful for us over the years.

In fact, if you take those two businesses and look at just the results last quarter, our total VB sales were actually up 11% across Unum US and Colonial businesses. And so, that's a pretty strong performance. It's up 8% actually for the year.

And if you look at the last three years, by having this sort of two-pronged approach to the marketplace, as a combined business, the growth rates range from 2 to say 8% over that period of time. So, we had steady growth each and every year. I just want to give that piece of context, because we go to the market a little differently from some others by having two brands and two distribution systems, and they are very powerful. They give us a lot of access to different markets. They complement one another. And that's proven to be a good formula for us.

So with that, Randy, you want to pick up a little bit on just the Colonial part of the story.

Randy Horn

First of all, Suneet, in terms of opportunities coming from the Aflac side of things, I, of course, can't speak to the specifics of what they are doing, but they are undergoing a lot of change in their agency distribution system. And so, yes, in the short-term, that does create opportunities for any competitor.

In terms of the management of our agency system, and how we go about things, just to give you the short story, and it is really a fairly simple story, Suneet, we are maintaining a very consistent focus on our agency distribution system. And this is the channel that we use to go to market both in terms of direct sales on the smaller-end of the market and then having our agents partner with brokers as they move up market. So through this approach, we really avoid any type of channel conflict and we have been very focused on that approach for a long, long time.

Secondly, just gets back to sound execution of the fundamentals of our business; recruiting reps and managers, upping the quality level of that recruitment effort, developing our agents effectively, growing the number of producing agents and sales managers, and seeing very, very good results from that at the present time. We are seeing increased activity levels, more appointments occurring with the employers, a good surge in the number of closed cases, that type of thing.

And lastly, we are seeing the market environment improving. So that's helping us. As Rick said, we are seeing gradual, continued improvement in the economy, still some pressure on the real small end of it, but that's loosening up as well.

I think most employers, as Rick said, are putting the Affordable Care Act implementation behind them, and that has really led to more new accounts being open for us, sales and product lines to complement the changes that employers are making in their medical plans, such as our Medical Bridge product, critical illness, accident, on and so forth.

So, it's really led to an environment, Suneet, a very broad based sales growth, and we are optimistic about reaching our targeted sales growth for the year based on what we're seeing.

Operator

And we will take our next question from Mark Hughes with SunTrust. Please go ahead.

Mark Hughes - SunTrust Robinson Humphrey

Intrigued to hear you say you are starting to see some of the benefit from better overall employment trends. What do you think that means in terms of, I think you talked about the natural growth rate, how much has it ticked up so far and where could it go?

Michael Simonds

So, we would have seen through the recession -- actually a headwind there, where we saw contractions in the order of 1 to 2%, I'd say over the last four quarters or so. That leveled out to a push up a little bit in the quarter down a little bit in the quarter and now I think, through the first half of this year, we've actually started to see that move into positive range and think in terms of a percentage point or so.

We are optimistic. Our business plans don't center on the assumption, but we're optimistic that we will continue to see that build slowly. It plays out in natural growth to our book-of-business as our premiums lever on hiring trends and salary increases, that premium comes in at very low acquisition cost, which is terrific. Also at play is the attitude towards benefits. So, as some of the slack comes out of the labor market, we are seeing clients with a little bit of a better attitude towards improving benefits plans, perhaps adding a new benefit or two and so, that's showing up in our MBOC results as well.

So, not likely to accelerate rapidly, but a gradual improvement over the last couple of quarters.

Mark Hughes - SunTrust Robinson Humphrey

And then the sales overall this quarter, understanding that you had an easier comp, but still for that you had excellent growth. Was there an adjustment in pricing strategy?

Obviously, your benefits ratios have been improving. Did you take that more into account when you were putting up proposals this quarter? It just seems like there was more of a step function that I am curious as to what drove that?

Tom Watjen

Mike, you want to take that? And also as part of just (inaudible) I think you dissected -- we dissected the sales in the quarter, where that sales are coming from is a good sort of indicator of that whole pricing environment actually.

Michael Simonds

So just to hit the question directly first and then speak to the mix of sales overall. Orientation around pricing is very consistent and actually has been for an extended period of time. We actually feel pretty good in each of our lines of business about having the market share that we do, having blocks the size that we do yield some pretty good insights around where prices need to move up a bit, where we can afford to come down a bit, but the aggregate level has actually moved not much at all. And looking at the quality of the business, it's one of those quarters, where everything broke our way across segments and products, which is good to see. But if you look at the strategy, we are very focused on building out the breadth of the relationships we have with the clients that know us and that appreciate the Unum brand.

So, 62% of all of our new sales came from those existing relationships, that's important. We see two points or three points more favorable pricing from a line that's added to an existing relationship. We know that as we build out the relationship, it drives persistency in future period and that's very important to us through the renewal program.

One of the key drivers certainly was large case. And just to put that into perspective, if we look at large case it actually feel good about where that business is. It was up 80% in the quarter. But if you look at the last 12 quarters, seven times we've been up, five times we've been down, and we really don't get too caught up in what happens quarter-to-quarter, we look at the aggregate, long-term trend. ROE in that business is actually very comparable now to our core business, and we started to see a leveling of the earned premium, which is great and will bode well for earned premium going forward.

So, feel actually very good about the mix and the quality of the business that's coming in.

Mark Hughes - SunTrust Robinson Humphrey

Sorry, one more follow-up. The 62% from existing relationships, what was it in Q1?

Michael Simonds

Well that would've been actually just a tick lower, 61% last quarter.

Operator

And we will take our next question from Erik Bass with Citibank. Please go ahead.

Erik Bass - Citigroup

Just following up on a couple of the last questions, I guess in the group market, we have seen several competitors that continue to face the margin pressure and appear to be either pulling back or raising prices. So has this resulted in either less competition or provided a little bit of a price umbrella for you to ramp up growth?

Michael Simonds

Certainly, it remains a competitive market. At any given point in time, there is going to be some carriers that are retrenching and trying to improve profitability, and in others, there's going to be carriers that are trying to extend share. That being said on balance, I would say it is a pricing environment that is slightly improved over prior year. While I couldn't speak to any particularly competitor, our best insight is that the industry, when it comes to Group insurance, is currently running at a mid-single digit ROE, which would suggest there is some work to be done and I think we're starting to see the benefit of that in a little bit of a firmer pricing environment.

As we look forward, again, so we're sort of cautiously optimistic that the market will firm or continue to firm up a bit.

But we also recognize that, as you come around the corner and you're headed towards the second half of the year, it is not easy always to maintain that pricing discipline in the face of decreased sales and so it's somewhat of an open question, as to whether industry players will stick their guns when it comes to improving the margins of their book of business.

Erik Bass - Citigroup

And you mentioned the sales to existing clients. What products are they adding? Is it a move to adding more voluntary products? And how much additional opportunity do you see the cross-sell? Is keeping it in that 60% range of sales of reasonable target?

Michael Simonds

Yes. Great question. We actually think we've got a pretty long runway there. So if you think about Unum, we have built a very broad franchise, primarily around disability insurance. So we've got a large number of important clients where we've got a line or two lines in-force and we feel like absolutely voluntary is a huge opportunity. Over a third of all our new voluntary sales are coming in on in-force group relationships. We see the individual disability, which is typically a supplemental sale for higher earners, that's a big opportunity for us. And then actually, even within traditional life insurance, we a see nice opportunity for our voluntary supplemental plans that sit on top of, perhaps, an employer-funded base.

So really across the Board, we see a pretty long runway and a big opportunity to drive additional growth.

Operator

We will take our next question from Yaron Kinar with Deutsche Bank.

Yaron Kinar - Deutsche Bank

Wanted to start off with a question on capital generation, I noticed that -- I think if I backtrack in that part of the $150 million of debt repurchase and the equity or the share repurchases and so on, I think it gets to roughly $100 million of excess capital generated this quarter. And I want to see if my math is correct, and if so why it's a little bit late compared to the $550 million to $650 annual run rate that you guided to?

Richard McKenney

It's a good question on our capital generation, and I think this quarter we saw a good, you've to go back to our statutory earnings, which actually were back on track that we have seen over many, many quarters on average, which is right around $170 million, and you would note as well, that's up off of what was a lighter quarter in the first quarter. So you have to take that into account first.

As you look at the excess generation that we have, we continue to generate at a clip that I would expect overall. You have to take out of that, I think we're trying to do that, take out of that some of the work with debt issuance and repurchase and all the different pieces. But if you do take those different pieces out, we feel very good about our generation, where that lands and our ability to redeploy that. So, you would have seen in the quarter that we actually bought back $100 million of our stock. We feel good that we're continuing to retire some of our shares.

And in conjunction, you would have seen our dividend increase that we did as well. So, we go through and you could reconcile the numbers a lot of different ways, but I would say very much that our capital generation plans are on track and very consistent with what we would have talked about last year at investor day and how we look for the rest of the year.

Yaron Kinar - Deutsche Bank

Okay. I guess I'm still little confused, because I guess, if I take out the $100 million in buyback, $37 million dividends, $35 million interests, I get to the $505 million remaining, and then ultimately you came at $616 million. So, I guess that means about $100 million of excess cash generation. Again, it seems a little low relative what you had guided to on an annual basis.

Richard McKenney

So, I'd add one add in there, but I'd not spend the time on this call to go through it. We could take you offline with that. But add in the UK capital generation as well, which has been very consistent over a period of time. But we're happy to take you through that offline, Yaron.

Yaron Kinar - Deutsche Bank

And then switching gears to long-term care, clearly you had a good quarter there, yet one of your competitors seem to have to run into some trouble there and is reviewing assumptions, just want to hear your thoughts on as you look at your legacy book and the older vintages, what you are seeing there and how comfortable you are with results there?

Jack McGarry

Yes. We had a very favorable quarter in the second quarter. We also reported a favorable quarter in the first quarter, driven by favorable submitted new claims, both the incidence rate was favorable as well as the severity with good claim resolutions during the quarter. So, we really didn't see some of the things that perhaps some of our competitors saw in the quarter. I'd note that it's a small immature block. It's going to be volatile. We don't -- we aren't changing our long-term outlook of a loss ratio in the 85 to 90% range, but it was just -- was a good quarter. It's good to see it. It's good to put it in the bank. And we continue to very aggressively manage and monitor the block going forward.

Operator

And we will take our next question from Steven Schwartz with Raymond James. Please go ahead.

Steven Schwartz - Raymond James & Associates

Mostly asked and answered, but I do want to go back to the sales in Group DI. I understand ACA or whatever, and maybe that has something to do with it, although I find it hard to believe. But just my question is, why 2Q? Usually, things are very, very flat. There is not -- in my sense, there's not a whole lot of activity, flat between 1Q and 2Q, and all the big activity happens in 4Q. That's where you tend to see the surge in business being done. So, is there anything to say about why now?

Michael Simonds

Yes, sure. I mean I think maybe one of the things that you're getting to, Steven is right. So, fourth quarter is going to be the biggest quarter from a sales perspective in group insurance, because that's when you're one-one decisions are sorted. And so, actually, you'll see a little less volatility I find in the fourth quarter, because the volume is bigger. And so, second quarter not being the largest from historical pattern, quarterly, seasonality, being the biggest quarter you are subject to more volatility.

And that's where I think we saw was not our biggest sales quarter. A number of things broke our way, and when that happens, I think good things can happen. So, seven ones are the primary - July 1, effective date for the primary group sales that are getting submitted in the second quarter here.

Again, strategically feel very good about where those sales are coming through. But because it's a smaller sales quarter, it is subject to a bit more volatility.

Operator

And we will take our next question from John Nadel with Sterne Agee.

John Nadel - Sterne, Agee & Leach

The 26%, I think, effective tax rate in the quarter, Rick, what should we be thinking about as it relates to the tax rate for the remainder of the year?

Richard McKenney

Actually, John, we would, say calculate right out of 30%. So we may be moving some of the non-operating items in and out that are --

John Nadel - Sterne, Agee & Leach

Oh, maybe I did. Okay. That's fairly --

Richard McKenney

30%, that's our expectation for the year. So it's tracking very much for our expectations.

John Nadel - Sterne, Agee & Leach

Okay. And you mentioned miscellaneous investment income, maybe, a little bit high in the Closed Block. And, overall was there anything notable in miscellaneous investment income relative to sort of the run rate in the last several quarters?

Richard McKenney

No, I think that when you look at it, on average it was maybe a tick or two higher than normal, but nothing that was out of a reasonable range of expectations.

John Nadel - Sterne, Agee & Leach

Okay. And then, just an overall question on guidance. Yes, I recognize, maybe we all recognize that there has got to be some allowance for volatility in underwriting results and that sort of thing but clearly some real strength in the first half of the year.

Even the upper-end of your full-year, 10% EPS growth suggests the back-half of the year would be a lower earnings period relative to the first half. Affirm the guidance instead of maybe slightly raising the range. I am just wondering if you guys have contemplated that, and if you had and decided against raising the range, what was the key reasons?

Richard McKenney

Certainly, I'll split that into two parts for you, John. One is, how we think about it from our process perspective; our outlook. As we talked about a number of our things we have seen here, we really do refer back to what we're doing last year, and we looked at 5 to 10% and it will be very unlikely that we would change that, unless we saw something taking that out of the range through the first half of the year. So, I don't want to discount. We're very happy with our first half results. We've had some things that went in our favor, certainly. But there's nothing, as we look to the back-half of the year, that I am overly concerned about and in bringing that down. But it's just almost from our process perspective, we wouldn’t necessarily adjust that unless we saw something taking us outside that range.

Operator

Our next question comes from Tom Gallagher with Credit Suisse. Please go ahead.

Tom Gallagher - Credit Suisse

The first question is on group disability. Your performance there continues to be quite strong, especially relative to peers, with the benefit ratio now sub-82%. Can you comment at all -- I am sure you've looked across the industry to decipher broader trends. But can you comment at all about why you think your book has performed so differently, because I think, virtually, everyone else in the industry has seen some level of deterioration. And the one thing that comes to mind for me is, you have consistently flagged better claim recoveries and maybe that's where you're outperforming, but anyway, any help on that would be appreciated.

Tom Watjen

And let me actually take it (inaudible) Tom, but then actually ask Mike to speak to it in more detail. But sometimes we try to get too cute about what distinguishes us from everybody else. I think as you know, we've prided ourselves for the last six or eight years around a very disciplined approach to the business. And that's word gets oftentimes overused. But I think it's very important here, because we have a very disciplined plan of attack for all of our businesses, we have very disciplined pricing and underwriting in all of our businesses. And as you know, if we look over a longer period, that means, at times, we haven't grown as fast as some of our competitors actually have grown, because we put a higher priority on margin and manageability and risk management frankly, than some have done.

So, I think to a degree, just, as Mike makes his comment, I think as an overall institution. We've put a lot of priority on the importance of disciplines, staying focused and being sure we incent people to do the right things as it relates to those things.

So, there is certainly probably some nuances about why we can do a little better, but I would say, first and foremost, it's that disciplined approach to the marketplace, I think, that frankly all of our businesses benefit from. And Mike, want to pick up on that little bit?

Michael Simonds

And so, just to build on Tom's point, what you would've seen from us over the last several years is earn premium that's relatively flat to a tick or two down in long-term visibility. And I think part of that is the pricing discipline out there.

In the market, it was good to see the segments start to grow just a little bit here, but I think it is reflective of front-end acquisition pricing, as well as on the backend. And so, even here in the second quarter, strong sales, but we continue to look through the Block.

On cases in the renewal program, we achieved increases of the 6 to 8% range, depending on whether you're talking about core or large-case, where we've had strong persistency, 89%. The business that's turned has come off and has been performing at five points to eight points lower than the active blocks. So it's a continuous active pruning process in terms of the pricing. But then, yes, absolutely, we sort of look at, okay, what are the investments that we've made in underwriting and then in benefits organization in general.

So to give you a little color, LTD submitted incidence, for instance, was pretty much in line, but a little bit volatile, paid incidence was rock steady. And so what actually comes through in terms of our liability acceptance rates, in terms of paid incidence, recovery trends, what we've been able to achieve in terms of settlements and offsets, all those operational metrics have been in line with expectation to slightly improve. So again, can't comment on any particular competitor, but feel very good about the position of the block and what our anticipated trends would be going forward.

Tom Gallagher - Credit Suisse

The next question is stat earnings looked solid. Can you comment on a more consolidated enterprise-wide basis? How did they -- how were the captive results this quarter? I presume based on the performance, at least the gap numbers on the Closed Block, those probably were additive, because just wanted to see what that adjustment would be that the 171.

Richard McKenney

When you think about our different captives that we have out there, I think the one that I would note is Northwind was probably a little bit lighter this quarter, but that goes back to what we saw from the individual disability results in our Closed Block. So that's the only of note, that I'd it was really off of from that perspective. And as you know, the capital results in there are for a very different operation and structure, and everything else and so that's why we exclude it from our normal stat earnings, and I think that's still appropriate.

Tom Gallagher - Credit Suisse

And Rick, did Northwind lose money this quarter and if so, how much?

Richard McKenney

Yes. I don't think I could quantify that at the moment, but I think that it's going to be pretty breakeven I think is ultimately where it came down to.

Tom Gallagher - Credit Suisse

Okay. And I guess, my last question is on long-term care, which would be for, Rick. So, the favorable claims that you're seeing right now and I know it's doing better than your longer-term expectations. But if we assume that it continues to remain anywhere, let's say, couple of 100 basis points around this level, does this -- would this get you out of harm's way with the potential risk of a GAAP balance sheet charge, if you look out over the next few years? And I know the GAAP balance sheet issue is more -- I know there's a heavy-duty interest rate component to that. But I just want to understand the sensitivities based on where we're trending right now and whether that might actually alleviate the need to strengthen GAAP.

Richard McKenney

Sure. Tom, when you think about the claim trends that we are seeing right now are certainly very good and much better than we would have seen a year ago. The question is, how do those influence our longer-term expectations around the block of business? And that's a little bit more challenging. So, if time is in dimension to that, so instead if we continue to see this for a long period of time and becomes a trend, that's certainly quite helpful. But the question is, how it would that inference our long-term trends.

And we're going through a process, and that's where I take you back, you highlighted another aspect that we obviously have to continue to look at. Price increases continue to go well out there in the marketplace, so I'd iterate that. The liabilities of our book of business, which include this claim, trend that we're seeing right now, pretty good, happy about what we saw here in the second quarter.

And third piece is interest rate, and interest rate is obviously continuing to be quite challenging. So, you take all those different pieces together, we will continue to look at them, and monitor them and work through that as we get closer to our year-end process.

Tom Gallagher - Credit Suisse

And so, Rick, would an update on all that likely occur in 4Q of this year?

Richard McKenney

I think that's probably realistic. We don't like to talk about the specific quarters, because we reflect it as we know things. But I think that fourth quarter traditionally, has been where we've brought all that together in a comprehensive look.

Tom Watjen

And right not just this block, but all the other blocks.

Richard McKenney

All of our blocks. That's our normal processes as we get to closer to year-end.

Operator

And our next question comes from Christopher Giovanni with Goldman Sachs. Please go ahead, sir.

Christopher Giovanni - Goldman Sachs

In the UK, I believe you noted you retained more the group life reinsurance program you had. If that's the case, just wondering what percentage of that program you recaptured? And where you think that could trend to, now that it appears -- you've stabilized and improved the profitability there?

Richard McKenney

Yes. So, I'll take you back, Chris, to the process we went through actually two years ago, and actually reinsuring the majority of the or I should say the half of that block of business and other bloodlines of business. I think that was a good move. We were seeing volatility at that time and we're going through re-pricing. And so, I think we're happy we did that.

At the beginning of this year, we retained 25% of that. So, we actually recaptured a quarter of the block back. As we get into year-end, we will have to make those decisions, in terms of where our pricing in the market is, where our profitability levels are, etc. But I think the actions we've taken and the team in the UK have taken are very prudent to-date. And we will evaluate that as we get closer to year-end.

Christopher Giovanni - Goldman Sachs

Okay. And then, wondering what impact the strong sales growth is having on RBC strain? And if it's not that material, just given the continued favorable trends you guys are seeing, the potential for buybacks maybe to accelerate, maybe, towards that the top-end of the target you provided in December?

Richard McKenney

I'd like to have a discussion, because as we see this growth, I think that we've always said that the first thing we want to do with our capital is continue to grow our business. And I think we're seeing that. We are very happy about that. The second piece of that is when does it become material to change our capital outlook and we're not near that yet. So, thinking about it from a premium perspective and the growth that we're seeing, it's certainly something we will continue to update you on.

But that's something we'd like to see, but we're not in the any point where we're changing our outlook around how we deploy capital in the near-term. But that will be a great discussion to have if we continue to grow at a more rapid rate than even what we are seeing today from a premium perspective.

Christopher Giovanni - Goldman Sachs

Okay. Then last one, don't even know if there's a discussion to be add here but for Jack, any evolving thoughts or developments around potential reinsurance or risk reduction opportunities in long-term care?

Jack McGarry

We continue to stay abreast of the market. We continue to talk about it. I don't think there's been a material change where the marketplace is. Still a lot of interest in the asset side of long-term care and much less interest in the liability side of long-term care. And so, I think until we get more stability in the marketplace and those two views come closer together, we will continue to do to look at it, but it's not a short-term option right now.

Operator

Our next question comes from Seth Weiss with Bank of America Merrill Lynch.

Seth Weiss - Bank of American Merrill Lynch

I just wanted to again return to sales and maybe just baseline my understanding of what the outlook was, and when you were talking about the strength in two quarters sales, you spoke about anomaly in terms of the easy comps and skipping over 2013 and looking back to 2012, does that extend for the entire year's 7 to 10% sales growth? And the reason I ask is, suppose if I was looking at this over just 2013 levels, which was, of course, a lower sales year, the 7 to 10% would imply, I believe, flat sales growth for the back-half of the year.

But if I am looking relative to a compounded rate of growth over 2012, which was obviously a higher rate of sales, we are talking mid double digit growth in the back-half of the year.

So, just trying to baseline what the expectations are?

Michael Simonds

So, I we will run into tougher comparables as momentum picked up over the second half of last year and we talked about it earlier, there is a lot of work to do between now and the end of the year, we have 55 to 60% of the sales here yet to book. So, going to be a little bit cautious about making predictions, but I would anticipate that, we put guidance on the 7 to 10% for the year, I think that's actually a reasonable guidance for the pure second half as well, sort of in that mid-single digit approaching 10%; all that with the caveat that there is a lot of work to do. And as we talked about numerous times, part of the determination will be with the pricing environment out there, because we will stay pretty consistent. And if the market allows us to do that, we will certainly take it if not we'll live with the lower number.

Seth Weiss - Bank of American Merrill Lynch

Okay. So, the full-year sales growth outlook, though, relative to 2013, at least in the US, you would expect to exceed that 10% range?

Michael Simonds

I think it's right at the top of the range, maybe a bit over it potentially; but again, a lot of work to do between now and then.

Tom Watjen

So, I think what you hear is a sense of optimism about the things that we can't control. And I think that's where Mike, is right to point to the fact that, listen, we've got some good pipeline activity underway. We always do worry about a second half and competitors are behind sales plans that they do crazy things in the marketplace. So, please don't misconstrue anything we're saying for a lack of confidence in the second half. We can't control what happens in the marketplace, and we've seen times where people have done some crazy things when they get behind sales plans.

Seth Weiss - Bank of American Merrill Lynch

No, that's helpful, and was mainly looking to baseline expectations here.

And in terms of premium growth, I think you also mentioned this year, maybe to hit the upper-end of that range, and next year maybe get a tick or two higher than the 2% premium growth.

Given a normal sales environment, is that type of topline growth we should be looking for or as we look out farther in a normalized environment, we see premium growth maybe a little more than 3%?

Tom Watjen

Yes. Rick, why don't you take that? Because I think maybe it's also a reminder. I think you said it in your comments, we try not to go back and redo the outlook sort of midpoint, unless there something really significant going on. But obviously, our Investor Day meeting is a chance to recalibrate everything. But maybe just talk about how (multiple speakers)

Richard McKenney

Yes. And I think that the - actually, well, Seth, we would look to recalibrate that as we continue to go. And couple of things I'd highlight from the overall Mike said it very well as has Randy, I think when you look at where we are, our sales look good today. Our competitiveness feels pretty good where we are today. Importantly, our persistency is holding very well, and I think that's something we don't talk probably as much about, but that's very good. Our customers are certainly keeping us on the books. And the last piece, which is something we don't know yet today, but I think we're giving you the indication, that we are seeing better employment picture out there. And that's the first time we really have done that. And if all three of those things work in concert, I think you will see some good premium numbers as we take you to our outlook at the end of the year.

Operator

Our next question comes from Colin Devine with Jefferies. Please go ahead, sir.

Colin Devine - Jefferies

A couple of questions. One, if I think about the US business, really for the last eight years, if I look at the benefit ratio on a trailing 12 month basis, and including this quarter, it's been a very steady turn down. And yet if I look at the expense ratio, for the most part, it's been fairly flat. There's been some improvement, but not a lot. Is that something, as you look ahead, where you might be able to leverage technology to drive some change there? So that's one question.

Second, for Rick, with respect to capital, I look at every one of the businesses, the US, UK, Colonial, all solid 15%, at least the ROEs this quarter, and yet we still got the Closed Block, obviously, probably producing about 4.

When I think of the IDI piece of that, which I assume is still about half, about half of the debt has been retired from when you did the securitization a few years back. Is there an opportunity to roll that, so we can get a little bit more leverage on that to help boost the overall ROE? Thanks.

Tom Watjen

Thanks, Colin. Mike, do you want to pick the first one up about the US business and the component piece of benefit and expenses?

Michael Simonds

And I think there's actually a relationship that's worth pointing out between the two, benefit ratio and expense ratios. So, one of the drivers that led to that pretty steady improvement in the benefit ratio is the shift in the mix of business, where we moved with greater growth rate in the core smaller end of the market, and we shifted more towards employee pay. Both of those businesses tend to have lower loss ratios, but they also tend to be -- have higher operating expense ratios.

You are dealing with more transactions to get at the same number of insurance. So, actually it's taken a series of investments in technology and business process to maintain the operating expense ratio because without the actions, we would have naturally seen the operating expense ratio drift up a bit as we shifted the mix the way that we have. And as we look forward, we will continue to look for stronger growth in those businesses in particular and I think feel confident that we can offset that natural mix shift and the pressure that it creates on the operating expense ratio, and maybe do a little bit better than that as we look at, probably not quarter-to-quarter, but over the next several years, continue to find some ways to improve that operating expense ratio.

The priority though is about better serving clients and finding ways that we can grow that top line, because as you pointed out, we feel actually pretty good about where benefit ratios are. We see a little bit of improvement but we're looking to generate operating earnings out of disciplined top line growth. And that's where the priority is going to be.

Tom Watjen

And then might I add, that investment in certain expenses, which ultimately helped the service levels improve our ability to cross-sell, which we talked about earlier.

Colin Devine - Jefferies

That's right. That's right. That's good.

Tom Watjen

Rick, do you want to pick up on the capital question?

Richard McKenney

Yes, I'd like to, Colin, actually, I think that it's a great question. And we think about all of our liabilities including those at the back -- to liabilities and others in terms of what we can do. We try to be very active in terms of how we manage that. You would have seen that in this quarter with the retirement of our UK debt and looking at that.

And particularly to the instruments that you're talking about that are backing our Closed Block. You're about right, it has run down over time and has halved. The liabilities have run down as well over that period of time. I would tell you that the team that put that in place prior to my time here, did a very good job and got a very good structure.

It is floating rate in nature, so they actually -- the interest rates being down don't help you from a refinancing perspective, but it's certainly something we look at, just like we look at all of our liabilities in terms of, is there opportunity there.

But the more ideas you have like that around our capital, Colin, we'd be happy to take them on and look at them. Because I think it's something we have tried to be very active on, is managing the balance sheet and on an ongoing basis. Thanks for the question.

Colin Devine - Jefferies

Yes. Just one quick follow-up, is the old IDI block still running, I guess about a cash flow neutral where you just don't have the interest rate sensitivity there anymore, or what's coming in in premiums is just paying the clients?

Richard McKenney

That's exactly right. Still like that. I think the only place that you have to watch that as bonds get called in in this low-rate environment, but to-date, it's run very much cash flow neutral.

Operator

It appears there are no further questions at this time. I would like to turn things over to Mr. White for any closing remarks.

Thomas White

Let me just finish up here, Danny, if I could. We - certainly for those on the line, we know there's a lot going on this morning, and thank you all for taking time to join us, and Danny, this will complete our second quarter 2014 earnings call.

Operator

Ladies and gentlemen that does conclude today's participation.

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