Good day, and welcome to the Unum Group 2Q 2019 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Tom White. Please go ahead, sir.
Great. Thank you, Cody. Good morning, everyone, and welcome to the second quarter 2019 earnings conference call for Unum. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the sections titled Cautionary Statement regarding Forward-Looking Statements and Risk Factors in our annual report on the Form 10-K for the fiscal year ended December 31, 2018, as well as our subsequently filed Form 10-Q. Our SEC filings can be found in the investor section of our website.
I remind you that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found in our statistical supplement, also on the website in the investor section. Participating in this morning's conference call are Unum's President and CEO, Rick McKenney, and Chief Financial Officer, Steve Zabel, as well as the CEOs of our core business segments, Mike Simonds for Unum US, Peter O'Donnell for Unum International, and Tim Arnold for Colonial Life. Now I'll turn the call over to Rick for his comments.
Great. Thank you, Tom, and good morning, everyone. Before we get into the results, I would like to welcome Steve Zabel in his new role as the company's Chief Financial Officer. I couldn't be happier with how the smooth transition has taken place, not only with Steve, but more broadly within our finance organization. I also would recognize Jack and his help in the transition until he retires later this year. On to the quarter. We continue to be very pleased with the financial results of the company and the overall business trends we are seeing. Our after-tax adjusted operating income per share for the second quarter increased 4.6% to $1.36, and for the first half of 2019 has increased just over 5%. This lines up well with our outlook range for the full year of 4%-7% growth.
Looking at second quarter results, one of the biggest highlights was the growth in premium income that we saw in our core business segments, which totaled just under 7%. Unum US premium income increased by 6.2%, benefiting from disciplined sales trends, very strong persistency in our group lines, and growth from new product lines like dental and vision. Colonial Life has been a consistent source of growth for us over the last several years, and the premium growth rate this quarter was 6.4%. This is despite sales being down for the first time in many quarters. Finally, our Unum International segment produced premium income growth of 14.2% on a U.S. dollar basis, certainly benefiting from the Unum Poland acquisition, but also higher growth within Unum UK.
This has been the result of our persistency improving over the past several quarters, while the team has done an excellent job driving renewal premium increases. Across the company and given our disciplined approach to growth, I believe the value proposition we bring to our markets and our strong focus on customer service are positively reflected in these growth trends. I'm also pleased with the expense management we are seeing in our core business segments. We're delivering improved expense ratios while investing in new capabilities and investing in many of the faster growth areas of our business, such as leave services. Turning to the closed block this quarter, this marks the fourth quarter since the long-term care assumption update in the third quarter of last year.
Steve will cover this in his comments as well, but I'd highlight the rolling four-quarter interest-adjusted loss ratio was within our long-term target of 85%-90%. This will play out over a longer time period, but it's good to see these results in line with our assumptions. Finally, the disciplined management philosophy we bring to the business continued to generate strong margins in the core businesses this quarter. With those margins, we have continued to deliver strong statutory earnings and cash generation. This has enabled us to maintain strong and stable capital metrics while consistently returning capital to our shareholders. This quarter, that means that along with $100 million of share repurchases, we also raised our dividend by just under 10%. To wrap up, we're pleased with our results for the second quarter and the first half of 2019.
We're tracking in line with the expectations we set out for the year. Our teams are excited with the growth we are seeing in our business and the opportunities to provide our financial protection products and services to more employees and their families. On to Steve to cover the details of the second quarter results. Steve?
Thank you, Rick, and good morning, everyone. I'm excited to be in my new role and look forward to further building my relationships with our shareholders and the broader financial community. To echo Rick, I'm pleased with the quarter and the overall trends we're seeing in our businesses. In my comments this morning, I will provide additional detail on the performance of our business segments and provide an update on our capital position and outlook for the year. Beginning with Unum US, we continue to see very good results from these operations. In the second quarter, adjusted operating income increased 1.3% to $254.3 million.
As Rick mentioned, we are pleased with the premium growth we generated in Unum US, growing 6.2% over the year-ago quarter, driven primarily by the excellent persistency levels we're seeing in our group businesses, our recent sales trends, and the emergence of our dental and vision business. We continue to see pressure on net investment income for the Unum US segment, down 6.3%, driven by lower miscellaneous investment income as well as the ongoing pressure on portfolio yields. Miscellaneous investment income for the second quarter for the company in total was in line with our historical trends and consistent with the total in the year-ago quarter. The impacts to adjusted operating income was different for each of our business segments, which I'll point out in my commentary.
Within Unum US, adjusted operating income for group disability increased 2.5% to $83.6 million in the quarter. We continue to experience good premium growth and excellent benefits experience, though net investment income remains under pressure. Premium income showed strong growth, increasing by 6% as the in-force block increased from strong persistency levels, particularly in short-term disability over the past year, and higher sales of both LTD and STD products in recent quarters. The benefit ratio improved to 74.7% in the second quarter from 76.2% a year ago, driven by favorable claim recovery experience in the group long-term disability line, partially offset by higher paid claim volumes in the group short-term disability product line.
Consistent with recent trends, net investment income in the quarter declined 9.2%, driven by the ongoing trends of reduced assets backing the line and lower portfolio yields on those assets, as well as a lower amount of miscellaneous investment income relative to the year-ago quarter. Adjusted operating income for group life and AD&D line declined by 6.7% in the second quarter to $62.7 million. Premium growth was favorable in the quarter, increasing 7.4%, primarily from prior period sales growth and strong persistency trends. Higher average size of claims elevated the benefit ratio to 72.9% in the second quarter from 70.3% in the year-ago quarter. Sales for these group lines of business in Unum US were very strong in the second quarter, increasing 16.8% over the year-ago quarter. The group disability lines primarily drove this growth, increasing 32% with strong large case sales growth.
While we experienced a slight decline of 1.3% in group life, persistency in the Unum US group lines remains very strong at 90.7% for the first half of 2019, and remains an important driver of our premium growth. Finally, for Unum US, the supplemental and voluntary line showed very good results for the second quarter, with adjusted operating income of $108 million, an increase of 5.6%. The primary drivers for the quarter were good premium growth and favorable expense management, which did offset lower net investment income and a higher overall benefit ratio. Premium income grew by 5.2%, primarily driven by higher sales in the voluntary benefits and dental and vision product lines. Looking at benefit experience for each product line, the benefit ratio for individual disability was unfavorable due to unfavorable claims activity and less favorable mortality experience.
In the dental and vision line, the benefit ratio was also higher relative to the year-ago quarter, primarily due to a higher average claim size, but consistent with our expectations for this product line. I'll add that with the continued shift toward the group dental products and discontinued sales of the individual coverages, the benefit ratio for this line will naturally grow higher. Finally, the benefit ratio for the voluntary benefits line improved primarily due to favorable claims experience in our disability and group hospital indemnity products. Sales for the supplemental and voluntary lines increased by 5.1% for the second quarter, with strong growth in dental and vision and voluntary benefits offsetting lower sales in the individual disability product line.
As we discussed on our first quarter conference call, persistency in the voluntary benefits line will continue to be impacted throughout the year by the high level of terminations experienced in the first quarter. Terminations in the second quarter were consistent with our expectations. Our Unum International segment reported adjusted operating income of $30.7 million for the second quarter, an increase of 11.2%. The increase was driven by higher operating income from the U.K. line of business in local currency, as well as the inclusion of the financial results of Unum Poland. In local currency, the Unum UK line of business produced adjusted operating income of GBP 22.7 million in the second quarter, an increase of 11.3%.
Results for the U.K. business included favorable growth in premium income of 7.3% relative to the year-ago quarter from higher overall persistency, sales growth, and the benefit of rate increases in the group long-term disability product line. The benefit ratio for the U.K. business increased to 85.6% in the second quarter from 76.7% in the year-ago quarter. The increase was driven by unfavorable mortality experience and a reduction in the claim reserve discount rate to recognize the impact on future portfolio yields from the unusually high level of bond calls we experienced in the quarter. The benefit ratio was also impacted by inflation-linked movements in benefits related to our group products as inflation was higher in the U.K. in the quarter. Net investment income in the U.K. was significantly higher in the quarter, increasing almost 43%.
This was driven by the unusually high level of miscellaneous investment income due to the bond calls I mentioned before, and a higher level of invested assets, which was partially offset by a lower yield on fixed-rate securities in the investment portfolio. With the rise of inflation in the U.K. this quarter, investment income from inflation-linked securities in the portfolio was also higher as we hold these securities to support the claim reserves associated with our policies that provide increases in benefits linked to inflation. Unum International sales in USD increased 5% in the second quarter, with generally flat sales in the U.K. in local currency, plus the inclusion of Unum Poland for this period. Persistency for the U.K. business continues to be quite strong, even as we have successfully implemented renewal rate increases over the past several quarters.
The Colonial Life segment produced adjusted operating income of $84.4 million for the second quarter, down slightly from the year ago result of $84.6 million. Growth in premium income remained strong at 6.4% for the second quarter, reflecting growth in the in-force block from prior period sales growth, particularly expansion of our dental and vision products. The benefit ratio was unfavorable at 51.4%, compared to 51% in the year ago quarter, due to higher claims incidents in the cancer and critical illness line of business, partially offset by lower claims incidents in the life line of business. Net investment income declined by 7.5% in the second quarter, primarily due to lower miscellaneous investment income, which produced a $4 million negative swing relative to the year ago quarter, as well as a lower yield on invested assets.
In the quarter, the amortization of deferred acquisition costs increased due to the growth in the level of deferred asset and the impact of the prospective unlocking for future experience relative to assumptions for our interest sensitive voluntary life products. This is the FAS 97 unlocking which we perform each year in the second quarter. This produced a negative swing of about $3 million relative to the year ago quarter. Overall, we feel good about the underlying trends for Colonial Life and the 17.4% adjusted operating return on equity this business generates. Sales at Colonial Life declined 4.2% in the second quarter compared to the year ago quarter, with declines in the large case and core commercial markets in the public sector. The comparison was a challenging one, given the strong growth rate we had in the year ago quarter.
We are working to build our recruiting pipeline for new agents and are encouraged that we'll return to positive sales growth in the second half of the year. Moving to the closed block, adjusted operating income was $33.7 million for the quarter, an increase of 13.9% over the year ago quarter. As expected, premium income for the segment continues to decline, down by 4.2% in the second quarter, primarily due to the ongoing policy terminations and maturities for the individual disability line. Net investment income increased by 2.6% in the quarter, driven by an increase in the level of invested assets, which was partially offset by a lower level of miscellaneous investment income. In the individual disability product line, the interest-adjusted loss ratio was 81.3% for the second quarter compared to 82.9% last year.
The second quarter of 2018 results included a reduction in the claim reserve discount rate to recognize the impact on future portfolio yields from an increased level of bond calls in the year ago quarter. Partially offsetting the impact was elevated new claims incidents during the second quarter of 2019. The results of the long-term care business line for the second quarter reflect the updated reserve assumptions which we adopted in the third quarter of 2018. On this updated reserve basis, the interest-adjusted loss ratio for long-term care was 87.4% in the quarter, in line with our expected range of 85%-90%. The interest-adjusted loss ratio in the year ago quarter is not comparable given the reserve basis change. We are now four quarters past the update to our long-term care reserve assumptions we recorded in the third quarter of 2018.
Over those four quarters, the interest-adjusted loss ratio is 86.7%, well within the 85%-90% long-term range we outlined. In addition, we've making good progress against the assumptions for future rate increases, and we've received approvals for just under half of the $1.4 billion assumption. We remain encouraged about our ability to achieve this goal over the coming years. Also, we have exceeded the new money yield target of 5.5% over the past four quarters, including the second quarter of 2019. As we have cautioned, we need to take a long-term view of this business, given its potential volatility, but we are pleased with how the trends have evolved over the past four quarters.
Wrapping up the corporate segment, the adjusted operating loss was higher in the second quarter at $43.8 million compared to a loss of $35.5 million in the year ago quarter, in large part to lower net investment income from a lower level of invested assets, as well as higher expenses, including higher pension costs and a higher level of debt outstanding. This quarter's results are consistent with our expectation of quarterly losses in the mid $40 million range. Statutory earnings for our traditional U.S. insurance companies have remained at healthy levels, providing support to our plans to maintain a strong, steady level of capital to back the growth in our core business lines while also supporting our capital management plans. For the second quarter, statutory after-tax operating earnings totaled $278 million compared to $249 million in the year ago quarter.
Our capital metrics remain in good shape with the risk-based capital ratio for our U.S. traditional life insurance companies at approximately 365%, consistent with our plans for the year. Cash at our holding companies totaled $977 million at the end of the second quarter. The increase from the first quarter largely mirrors the debt issuance we completed in June, which was a $400 million 10-year senior debt issue with a 4% coupon. The proceeds have been earmarked for the $400 million maturity we have in 2020. Share buybacks in the second quarter were $100 million, consistent with our outlook for the year. I'll wrap up by reiterating our expectation of growth in adjusted operating income per share in the 4%-7% range for full year 2019. This is consistent with the view we shared at our outlook meeting back in December.
Now I'll turn the call back to Rick for his closing comments and look forward to your questions.
Great. Thank you, Steve. It was a good overall quarter for the company, and one that I believe shows the benefits of our strong position with the employee benefits and voluntary benefits markets. The team is here and ready to respond to your questions, I'll ask the operator, Cody, to begin the question and answer sessions. Cody?
Absolutely. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. In order to accommodate as many questions as possible, we do ask that you please limit yourself to one question and then one follow-up. Once again, please press star one to ask a question. We'll take our first question from Ryan Krueger with KBW. Please go ahead.
Hey, thanks. Good morning. I had a question on Unum US core market sales. They've been trending a bit weaker for several quarters, and I think you had expressed some caution about the competitive environment. There's some improvement in the quarter, I was hoping to get an update there. Are you seeing a bit better competitive conditions now?
It was a good quarter, Ryan. Thanks. Mike, do you want to take that?
Yeah. Thanks. Good morning, Ryan. Good quarter overall. Just taking a step back from the core and looking at the 12% growth, which is great. Q2 is not our largest quarter. It's particularly encouraging because it signals some momentum across the majority of the segments, and I would definitely highlight the core. As we look at Q1, we closed the gap to the prior year. Here in Q2, we're starting to show a little bit of growth, and I'm encouraged as we look forward to the pipeline as we get towards the very significant fourth quarter when we'll be looking to close January 1st effective dates, which as you know, is a big part of the sales year for us. Really a combination of continued success cross-selling into existing clients based on the strength of those relationships.
Growth in dental has been helpful in its own right, but it also comes packaged quite a bit with other core lines in the small end of the market. Employers love to package. Remains a competitive market for sure. But I am encouraged when I look at the trends in that part of the business.
Thanks. In regards to, I guess, some new claims discount rate in the U.S. and the reduction in interest rates, can you just give us a sense of how that looks at this point and if there's risk that you may need to lower the discount rate as we get closer to the end of the year?
Steve, you want to take that?
Great, yeah. Good morning, Ryan. I'll just take interest rates from a higher level, and then Mike's going to talk just a little bit about how it affects our pricing. I guess, we look at interest rates differently across our various product lines. When you look at our U.S. long-term disability, we think about that as having a good level of margin in those discount rates versus what our current portfolio yield is. We think we have some margin in there that we can work with. We also have the ability to rate that block over time, guaranteed renewable business, so that gives us quite a bit of flexibility there. We look at our CDB block, our closed block individual disability, very little new money coming into that, so very little cash flow risk. For LTC, we look at that over the longer term horizon.
We feel good about the new money rates that we're getting today. We've exceeded our 5.5 and look to be able to do that over the near term. Overall, we think interest rates are manageable in the short term, but I'll let Mike talk a little bit more just about some of the pricing competition and how we think about go-forward pricing.
Thanks, Steve. Appreciate it. Ryan, you've been following us for a while and know that you've certainly seen low interest rate environments and fluctuations, and one of the things that we stay very focused on from the actuarial to the underwriting to the distribution function is being able to take a long-term view, place renewals when we need to, adjust new business pricing when we need to. We've been pretty successful at maintaining profitability through various interest rate environments. That being said, when we think about pricing, just building on Steve's comments, interest rates and yields are one factor that we work in. When we look at things like claims incidents, recovery, offset momentum that we have, things like our expense level, those all go into formulating new business pricing.
From where we sit right now, we don't really see the need to make adjustments from where we're putting business into the market and the renewals that we're going through. We'll continue to watch it closely, and in particular, as we go through reserve adequacy and look at things towards the end of the year as we start to think about 2020 and 2021. I think we're in a good spot currently.
All right. Thank you.
Thanks, Ryan.
Thank you. We'll now move on to our next question from Humphrey Lee with Dowling & Partners.
Good morning, and thank you for taking my questions. Looking at Colonial Life sales, it's definitely weaker this quarter. I think you pointed out that the weaker agent recruiting was a factor, also due to difficult comp. I was just wondering if you can talk a little bit about your kind of recruiting outlook as well as any other additional factors that may affect the sales growth in the quarter. I guess lastly is, are you still comfortable in terms of achieving your 2019 kind of sales growth outlook for Colonial Life?
Thanks, Humphrey. We've got Tim Arnold here. Tim, you want to take that?
Sure, yeah. Thank you, Humphrey, for the question. There were a few factors that contributed to the sales challenges that we had in the quarter. Before I get to those, I know we have one or two people who are maybe new on this call, and just as a quick reminder, over the last 22 quarters, Colonial Life's average growth rate in sales
Has been a little bit north of 8% in an industry that's growing 3%-4%. A long track record of very strong growth. In the quarter, we did experience pressure from some recruiting shortfalls we've seen over the last few quarters, beginning in the second half of 2018. We attribute that to a couple things. First, the very strong growth that we had in 2018 caused our sales team to be very busy producing sales, helping implement new customers, enrolling a significant amount of new business. I think that took a little bit of focus away from recruiting when such very strong sales activity was occurring. The second is, in this economy, with incredibly low unemployment rates, recruiting can be a challenge. We do expect that recruiting to swing back in the second half of the year.
We've made some changes in the way we recruit people and the way we onboard them. We do expect that to swing back. Our new rep production is actually not down as much as the recruiting would suggest. While recruiting is lower, we are seeing somewhat improved productivity in the people that we are bringing on. The environment is still very competitive, especially in large case, and we see that showing up as pressure a bit. You and Steve both mentioned a challenging comparable from last year. We launched our new dental product on March 25th of last year. That fueled extremely strong growth in the second and third quarters of last year, at 13.5% in the second quarter and 13% in the third quarter.
Finally, I would say, in the quarter, we made the decision to restructure and terminate a very small number of high volume brokerage relationships where the kind of business that we were getting from certain brokers had very low quality, low persistency, and where brokers perhaps valued compensation more than they valued a good, strong customer experience and value to the customer. That created some headwinds for us as well. In terms of the outlook, it's going to be a challenge, but our team is highly motivated to do everything we possibly can to try to get to the bottom end of the range, but it will be an uphill battle. The good news is that we feel good about the pipeline we have, including in large case right now, and as a reminder, 40% of our annual sales occur in the fourth quarter.
While it's going to be a pretty steep hill to climb, there are some opportunities for us to close the gap.
Thanks for the color on that. Shifting gear, I think in Rick's prepared remarks, you talked about kind of this leave service management opportunities, and I think that kind of showed up in Unum US supplemental and voluntary this quarter with the other income and expenses a little higher. I guess maybe at a high level, can you talk about what kind of opportunities you're looking at in terms of P&L impact? Because I thought that the leave management was more of a service as opposed to an earnings generator, but maybe I was wrong. Any color in terms of how you think about that business going forward?
Sure. I think it's a good question, Humphrey, because leave services is very important to our business, and we've been a leader in that space and been doing it for several years. I think you're right. It's not in and of itself an earnings generator, but it's an important part of the package as we go and talk to customers, that they value those services very much. We do an excellent job at that and have for a long time, I think we're well known to provide that service very well. It is the part of the package. It's part of the reason why you see good core growth across our broad package that we have out there today.
You mentioned it can skew the expense ratio a little bit given the fact that those are kind of just expenses that get added on and really get reflected in the margins that we see otherwise. It's a very good business for us. We're continuing to invest in it. We think it's a real help to the overall value proposition that we bring to our customers. It's widely talked about in the market today, we think we do a great job of serving our customers, and we look that to help us as part of our overall growth trajectory. Mike, do you want to add anything to that?
Just a couple of quick things, Rick. Humphrey, we find that in the group disability segment, the fees that we charge for that business, it's not a risk-bearing product, the expenses, plus a small margin, gets you to the fees charged. Rick, I think, nailed it really well. The one thing I would point to is every time that you read about another state or another municipality passing some sort of paid or protected leave law, that means complexity for employers. I'd say we're seeing, with increasing frequency, employers looking to outsource the compliance and the employee experience around those paid and protected leave. It's a complex business, it's a really good opportunity for us to embed value.
When you look at the growth and the accelerating momentum in our short-term and long-term disability lines, a good amount of that you can attribute back to the strength of the leave offering.
Thank you.
Thank you, Humphrey.
Thank you. We'll now take our next question from Thomas Gallagher with Evercore.
Good morning. Hey, first question is just on, can you comment on, in group disability, how you see the margins trending, just given the mix shift that we're seeing here? You had better top-line growth this quarter, but it was mainly large case, and it looks like there was a big surge in short-term disability sales. Any thoughts on how you see that changing the margin at all, or you think it's roughly being priced where the book is being priced in aggregate?
Sure. Yeah. Thanks, Tom. As I just mentioned, the leave business has helped drive short-term disability growth, and that does tend to pull long-term disability along as well. We do price to very consistent return targets, and have gotten to a place where there's comparability large case to small case and across products from a return on invested capital point of view. We're pretty bullish about the growth and the accelerating momentum that we're seeing. When we think about the earnings coming out of that Group Disability Segment, a lot of consistency in the loss ratio when we look at incidence patterns, when we look at the recoveries, when we look at the offset patterns. I think when we look at opportunities to continue to chip away at expenses, I think there's a lot of reasons to feel like there's sustainability in that segment from an earnings perspective.
Thanks. I guess just to follow up on that, would there be any major difference in the loss ratio in long-term disability versus short-term disability? I ask that because I think you've had a very favorable claim recovery trend, which I presume is mainly on the LTD side. I was just curious if there's a meaningful difference between those two products and how it would show up.
Yeah. The loss ratio is higher on the short term. What I would say is, there's less capital behind that short-term disability line, so you don't need as much premium margin to generate the same returns on the capital behind it. The other thing is, as we do see some building momentum in the core market, that tends to bring more fully insured long-term disability premium along with it. I see some encouraging patterns on that front as well.
Got you. Steve, I think your comment on new money being better than 5.5% and near term, you felt like there was still pretty good visibility there. Just thinking about that's almost 300 basis points above the 30-year treasury. What are you guys buying to get that kind of yield and to continue to have good visibility on that? Is there a corresponding capital charge based on the type of assets you're buying, or you're still able to get higher-rated paper, higher-rated bonds as you're buying those?
Tom, I'll answer the specific question. Rick might just cover how we think more broadly about risk management across our investment portfolio. I'll start just by saying, we've been very successful over the last four quarters in the environment that we're in, being able to exceed the 5.5%. When we look at 30-year yields, they've come down, but they haven't come down as much as maybe what we've seen in the 10-year part of the curve. We still feel pretty good about that, and they're not unprecedented. We've navigated through those types of yields before. Just as far as what we're investing in, we do not look to change our investment allocation against this line. We're in a combination of investment-grade, fixed maturity securities as well as high yield. We also sprinkle in some alternative investment assets.
Those tend to give us a little bit higher yield. The combination of those, we've been able to exceed the 5.5%. With our current allocation, we believe we could continue to do that in the current environment.
As Steve mentioned, I think when you look at the overall enterprise, Tom, our investment strategy and where we are really hasn't changed going back several years. Our credit quality overall, pretty stable. We have added the asset class of alternative investments, but it's very small relative to the overall portfolio. We think it's a good asset class. When you think of Unum as the overall franchise, our investment portfolio has been very consistent, and we're happy. When we see that today in terms of our watch list and other metrics that say the credit's still very good. I wrap that all around the work that's being done, particularly to long-term care, and we still feel pretty good about that.
Okay, thanks.
Thank you. We'll take our next question from Erik Bass with Autonomous Research.
Hi, thank you. You mentioned the pressure on net investment income in Unum US. Given where new money rates are today, how would you expect this to trend going forward, given the underlying growth in the business that you're also seeing?
Miscellaneous income, I think, was the driver of kind of the pure Q2 result in seeing a more significant drop off in net investment income than we have been prior periods. There's volatility to what is largely bond call activity backing that line, and we would expect that to revert to the mean over time. I think right now in today's environment, you'd still see those rates come down. It'll still provide a little bit of pressure on the investment income line, but as Mike said, we've been pricing for that for a while, and we have the margin there. You may see that investment income continue to come down a little bit, but that's factored into our forecast.
Got it. You also mentioned the strong premium growth in Unum US this quarter, really across the business. How much are employment growth and wage inflation adding to your premiums at this point?
Yeah. I think that overall, the natural growth, as we've talked about it before, has actually been pretty good. The economy in terms of employment levels, you see that, and the unemployment rate is good and stable. We do start to see some wage inflation. It's probably not as high as we might have historically seen it, but we think it is additive and it's probably reasonably good in today's environment. Despite many of the headlines you see about the economy, people are hiring people are seeing competition in the employment ranks, and as a result, they're having to increase benefits and raise wages. We think that all plays very well for us.
Got it. I think you'd historically said that added 1 to 2 points annually. Are we sort of at the lower end of that range now? Is that a fair kind of assessment?
I think it's still a good range. I think that it probably pushes towards the upper end of that range right now, closer to the two.
Okay. Thank you.
We will take our next question from Alex Scott with Goldman Sachs.
Hi, good morning. First question was just on Unum UK. I know there's a little bit of noise in the quarter with the bond call. I was wondering if you could just help us think through the kind of experience you're seeing and the environment. Any update on the impact that you'd expect as Brexit closes in?
Yeah. Peter, you want to handle that?
Yeah, great. I'm happy to do that. Yeah, as you pointed out, this quarter's benefit ratio is really an anomaly. There's been a number of things go on. We've had the bond call, sort of higher inflation, as Steve mentioned, and also underlying in GIP. We saw just a little bit lower debt. It does move around a bit. If we look at the year-to-date benefit ratio, it's not that far away from our assumptions. We had a good first quarter. Nothing in the economy is saying there's anything unusual happening there. We rerate all our schemes on an experience basis. We've been doing that over the last two years, and we think we're there or thereabout in terms of where the schemes are rated now.
I think from a Brexit perspective, obviously, the most noticeable thing you can see in the quarter results is where the dollar is trading. We obviously went below 1.30 on average for the second quarter. Now we're at 1.21, 1.22, and that is affecting some of the comparatives. If that continues into the third quarter, that's just a headwind against the numbers we're reporting for the U.K. business. Underlying, the business is performing well. We've got good premium growth. Sales, as the guys mentioned, were flat year-on-year, but actually we had a pretty difficult comparative. We wrote one very large case last quarter. When we look again year-to-date, sales are up quarter-on-quarter. We're happy with persistency. We feel we're in a very resilient position to trade through whatever Brexit throws at us.
Okay. Then, my follow-up is just on the FASB accounting rules. I know they got pushed back a year. Would just be interested to hear any kind of update, in terms of the way you're thinking about the impact, the timing of when you might be able to shed more light on that, if you're not able to today. Maybe just broadly, how you're thinking about leverage. I know that ticked up a little bit this quarter, and I think it was just the pre-fund maturity, but would be interested particularly if, Steve, you have any views on how to manage leverage around this business.
Yeah, Alex, good morning. I'll take the LDTI update first. Just to reground on that accounting change for how we handle reserving on our policies for mostly our long-duration contracts. Right now, the interpretation as we would read it would say it apply to active life reserves, which is about 40% of our overall reserve levels. Really for us, the biggest change is going to be around the discount rate, where we'll need to go to more of a single A type rate, which doesn't really match up with a lot of our portfolios. We view it as noneconomic. It's not going to impact our statutory cash flows. Overall, feel good about that. What has happened is, there was a preliminary vote to delay. It's been recommended to delay the implementation for a year to 01/01/2022.
That is pending a 30-day comment period. Then there'll be a final vote on that. We should have a kind of final recommendation or I guess a final vote in the coming month. I'll tell you, we can't really speak yet to the timing of when our evaluation is going to be done because what we believe there's still some important interpretations that need to be made before we really truly understand the scope of the new guidance and are able to evaluate that. We're really not trying to give any kind of update on when we might be able to give the results of our evaluation. What I'll say is we feel good about our process. There's a lot of process changes that need to be put into play with our evaluation systems. We're making great progress against that.
We feel good about the process, clearly we're happy that they're going to delay it a year. It'll give us that much longer to really work through it and work through the analytics on that. On the leverage side, yeah, you're correct. Our leverage went up a couple percentage points, and that was due to the issuance that we had in June of the $400 million term note. That is earmarked for the pre-funding of our maturity next September. We would view that leverage staying at the current rate, really until we get through that pre-funding. I think we would want to manage that down over time, though.
Thank you.
We'll take our next question from Andrew Kligerman with Credit Suisse.
Thank you very much. I'd like to go back to pricing on both the group markets and the voluntary. A few years ago, there were some companies that just weren't performing well, and they seem to have cleaned it up and repriced. Performance in general in that space in Group seems to be pretty solid. When we had the new tax legislation at the beginning of 2018, I think across the board, companies were saying they were going to have to give back some of that pricing to the consumers. On that front, I'm just wondering when that comes back, because the benefit ratios look really good at Unum, particularly in your group disability line and at your competitors. When does that come back?
In the same vein, in the voluntary area, across the board at your competitors, there's a real push into that product line. I'm wondering, do you think that pricing across those two broad areas will start to come down as we get into 2020? If so, how much?
Maybe I'll start off on just the overall pricing environment and talk a little bit about tax reform and how that's worked its way back into pricing. I think our view on that, and at the time when it was going in, we looked at that and said, "It may, but it will take some time, and we'll see how it does." The more we've looked at it, I think it's less of a factor. When you think about the tax rate impacts of the margins, what we see are margins that we're getting today, which are above our competition. It's really not going to work its way back into pricing. Just the sheer level of a 10% difference in a federal tax rate relative to our pricing is an immaterial input to that process. We don't see it because of that.
I would also say pricing in our market today are pretty rational, pretty stable, and I'm talking particularly to the group markets. There's always a point in time, and you referenced several years ago, where somebody's being more aggressive, pushing into the market, disrupting a little bit. We don't see that in a major way today. There's always somebody on the margin or a certain case that we scratch our head on a little bit. I think overall, the pricing environment is pretty good for Group across the board. Then on the voluntary side, I think there is much more competition. More people are getting into this market. It's a great market. We've known that for a long time. As they wade into it's not necessarily price. Prices are pretty standard to the end consumer in terms of what they see there.
There are ways they can package it, ways they work with carriers will work with customers, meaning the employer, to entice them into that type of thing. Tim talked a little bit about that in his comments in Colonial Life, I think that's true of the voluntary market. There is more competition there. We're holding our own, holding pricing, getting good margins, we see that continuing, it's certainly something we are vigilant for every day.
Great. Thanks for that. Just shifting over, in relation to the discount rate, one area that's allowing you to not reduce it might be the use of alternative assets. You mentioned that that asset class was very small. Could you give us a sense of how small it is and where you'd like to get it? Because I think I've heard dialogue that you'd like to grow that business. Also, what alternative assets? What specifically are you looking at?
Talking about the asset class overall, I think we talked about the discussion we had in particular to long-term care and the alternatives. I think our current number out there today is somewhere around $400 million on a $40 or $50 billion portfolio. It is a very small percentage, less than 1% of the overall portfolio. We do like the asset class. We'll grow it some. We've been growing it in a very rational way over several years, and I think that's important when you're looking at these type of deals to not load up in any one vintage. The last thing I'd say, these are more credit deals when you look at them out there, more akin to what we're used to investing in that are out in the market.
Without getting into specifics, I think it leans more towards the credit side than other alternatives.
I see. You wouldn't want to double or triple it or something like that, the amount?
If we did so, it would be over a very long period of time. We worked our way into that $400 million position over four or five years, maybe even a little bit longer than that. We'll continue to invest in the asset class. We think it's good, but I wouldn't see it doubling over the next year or two.
Got it. Thanks so much.
Thank you. We'll take our next question from Jimmy Bhullar with JP Morgan.
Hi, good morning. I just had a question first on the long-term care business. I think the loss ratio has been within your expected range since you took the charge last year. It seems like you're achieving your yields as well. How are the other factors, and have they been, that go into your reserves, have they been better or worse than assumptions? Things like price hikes, claims trends. Just trying to assess the likelihood of another reserve charge in the near term.
Thank you, Jimmy. I'll take that question. I think just a few grounding topics here. First of all, we go back to last year and the company went through a pretty comprehensive review of all of our assumptions in September. We looked at everything from interest rates to rate increase strategies to claims incidents, different types of claim terminations, policyholder terminations, and reset that based upon our experience that we had been observing over the last several years. We went through that process. It was rigorous. We had a lot of third-party review of that. We feel good about where we ended up through that process. You did mention that we've had a pretty good loss ratio experience since we reset those assumptions. For the four-quarter rolling average, we're at 86.7%.
I would say if you break those components down, you mentioned we feel good about the new money rate that we've been able to get on our portfolio. We've talked about that some. We also feel good about our rate increase strategy. I did mention that we're getting close to 50% of the $1.4 billion that we had in our reserve assumption. I think we had mentioned back in our year-end call that we were around $500 million against that assumption, most of that coming from California approval, as well as some exempt states on our group product. Since then, we've continued to see good success. I'm encouraged because we're seeing it both on those pending increases that had already been filed and have been on file for some time when we did our reserve assumption adjustments. We're continuing to see routine incremental approvals on those.
We have a good mix with some of those that we just filed more recently towards the end of last year into the first part of this year. As I mentioned back then, a lot of those new approvals were going to be on the group side of the business. Again, I'm encouraged that we're seeing good approval on those. All in, we feel good about where we are on the rate strategy, but again, this will play out over multiple years. We have a lot of these approvals that get approved on an incremental basis, on an annual basis. When it comes then to the underlying liability assumptions, again, I think a good guide is to look at our overall loss ratio. We've seen fluctuations from quarter to quarter on that.
If you remember fourth quarter last year, we had pretty good incidents on that. We were actually below our expected range of 83.2%. I just want to reiterate that we don't change our view of long-term assumptions based on just one quarter, whether they're very favorable or unfavorable. I think it's important that people understand when we think about the range, we're looking at the range of 85%-90%. Anything within that range, we view as satisfactory, and we view as being within our expectations. We're going to see fluctuations within that range. We may even see a few fluctuations outside of that range like we saw in the fourth quarter. We continue to feel pretty good about where our assumption set is, and it's played through in our loss ratio.
Okay. On the group disability business, your margins have sort of gradually continued to improve off of already strong levels. What's driving this? Is it incidents or recoveries? To what extent do you think, barring any change in the economic climate, to what extent should the margin sustain at these levels?
Sure, Mike.
Yeah, thanks, Rick. I'd say all the above. Incidents has been pretty good, but not outstanding. I'd say recoveries continue to be just rock solid and predictable. We have a great team that helps get claimants back to work in a really high-quality way. When we look at where the loss ratio has been, it's been favorable, and when we sort of look forward at the underlying components of that, there's no reason to think that that isn't a sustainable level going forward.
Okay. Thank you.
Thanks, Jimmy.
Thanks, Jimmy.
I think we'll take our next question from John Nadel with UBS.
Hey, good morning.
Hey, John.
I'm interested in the discussion too around sort of exceptional margins, really strong returns in, it's not just Unum US, but I'll focus there because that's where I guess there's more competitive pressure, generally speaking. I agree with Andrew's comment earlier. A couple of years into it now, it's not just you guys with strong margins and strong returns. Pretty much the entire industry is benefiting from this. I guess I'll take a different approach to the question, though. Mike or Rick, why not step on the gas a little bit more? Grow a little bit faster. I recognize this is cyclical business, but if economic conditions remain this good, if the Fed's on our side, if all these factors are in place and you're generating high teens return, that's so far ahead of cost of capital.
I don't understand why you wouldn't actually be more aggressive here to grow a little bit more quickly, particularly when you've got the opportunity to re-rate over time.
John, we really appreciate that question. It's a dialogue we have internally as well because we have seen very good margins. We've also been at this for a while. It's important that we talk about discipline because those good margins can go away very quickly in an undisciplined environment. You don't have to go back a couple of decades when we were part of that as well. We've seen many carriers do that over the last several years. We're hesitant to do that, but it doesn't mean that we're not pushing the growth side. When we're growing premiums 7% across the board and generating these margins, we think that's a pretty healthy mix. Although the temptation will be there, I think I give credit to our team that's been doing this for a long time.
Discipline's still part of what we do and part of the core of this franchise, and I think we're proud of that as well. Mike, I don't know.
No, I think you've got it. The one I would have, Rick, is where we are leaning in, John, is on capabilities. We continue to increase the investments that we're making, and we talked on this call and prior calls about the investments that we're making in the lead management business. We are continuing to invest in that and will do so over the coming quarters. Another big asset for us has proven to be the technology we've invested to integrate our processes into the cloud-based HR platforms that our clients are increasingly adopting. We've had great success with our integration with Workday and expect to have some more news on that front over the coming quarters, which we think could help provide a tailwind for us.
Okay. I appreciate the commentary. Thank you. If I could switch gears just to long-term care and the premium rate increases. In the first half of this year, in the closed block, LTC premium growth was about 1% year-over-year, maybe slightly less. Can you help us maybe understand what's happening with the actual policy count? Obviously, that's got to be declining. I just don't know how fast. Then, how much of these recently approved rate increases, for a very meaningful amount, do you think is already earnings through the premiums that we're seeing in the closed block? Or is that still on the comp largely?
Yeah, John, this is Steve. Good morning. Just from a timing, I'll give you a little bit of perspective just on the process of approvals and then the implementation of rate increases. You can usually look at a communication period, an implementation period that can stretch anywhere between four to six to even sometimes eight months on the individual side. We have certain technology releases, and then we make sure that we have good communications upfront to the brokers of record, as well as the policyholders, so that they can think about choices that they have to make. As an example, the California increase that was approved at the beginning of the year, that is just in the process of being implemented, and so you would not see any premium in the current financial statements related to California. That'll start to come through later this year.
On the group side, it's even a little bit more extended just because you have the factors that I described, as well as you have anniversary dates that you're working with, and those are implemented on the anniversary dates of the group. It takes time. It takes time. We've seen kind of steady increases from those that have been approved in past years. A lot of what we've seen so far on the newer program, you wouldn't have seen come through the financials yet.
Is it fair then if we thought about this from a modeling perspective, Steve, that the closed block LTC premium, we should probably see that growing over at least the next 12, if not longer, months, given the success you've had on the premium rating side?
Yeah. The one thing that I would say there is with certain of these increases, specifically California, we do continue to offer the option on the old individual side. Yeah, the buy-downs. We've had pretty good take-up on that historically with other states, and so I would caution you to build too much in. We need to see just how that behavior, the policyholder behavior plays through. That's something obviously we're very interested in and we'll track. I'll just end by saying we're very encouraged by the approvals that we have received and feel like we're well on our way to the reserve assumption.
Thanks very much. Appreciate it.
Thanks, John.
Thank you. We'll take our next question from Suneet Kamath with Citi.
Thanks. I'll just do two quick ones in the interest of time. On the Unum UK discount rate change, should we expect any ongoing earnings drag as we think about the next couple of quarters?
Yeah. This is Steve. I can take this one. I'll just give a little bit more color around the discount rate change. We had a pretty significant bond call overall in the quarter. It was about GBP 10 million that came through on that. We took about half of that and took the opportunity to adjust our discount rate, and we adjusted that by about eight basis points. We had about $5 million increase in the reserve. That pretty much resets our claim discount rate at that point, how we would view that is just going forward, that would pretty much match off with the accretion that we would have then on that claim reserve versus what we think we're going to yield on our portfolio. There might be a little bit on the margins, but I wouldn't see it being very material.
Okay, got it. Just the second one in terms of capital return, I think we still have maybe $50 million left in terms of carryover buyback from that quarter last year when you didn't buy back stock. Is the plan to execute that in the second half of this year?
Yeah, we'll continue to evaluate that. If you recall, we did catch up $50 million of the $100 million that we forewent in the third quarter of last year. We'll continue to evaluate that. I think how we're looking in the future, the kind of $100 million a quarter is probably a pretty good expectation.
Okay, thanks.
Thank you. We'll now take our final question from Joshua Shanker with Deutsche Bank.
Yes, thank you. One last LTC question before we end. Can you talk about the time lag between applying for a rate increase and receiving it? If we look at the rate increases that you've been approved for since taking your last charge, how many of them have been processed with a 2% 10-year environment in mind?
I'm not sure I followed the last part of that question.
Well, if you saw a rate increase, you saw a rate increase with whatever the prevailing interest rates were in the market and your interest rate assumptions. I assume your interest rate assumptions may, we don't know, but may have changed. If in January you sort of did the math and came to this is the price we need to increase in X state, and now we're six, seven months into the year and interest rates have changed. I'm just wondering, to what extent have prices that you've asked for been filed for in a very different interest rate environment?
I guess how I would look at that is just to go back to the process we take to file rate increases. It's a very long-term view of both our liability assumptions as well as interest rates. If you go back to how we were looking at it when we did our reserve assumption adjustment back in September, that would've been the basis for our rate increase requests. We take a consistent approach nationwide to that. We would've reset the assumption set, we would've factored that into rate increase requests, and then we filed those new ones through the last part of last year and the first part of this year.
Again, we still feel good about our long-term view of interest rates and don't feel like we need to reset those at this time, we wouldn't adjust those for the rate increase requests as well. Just the timing, that varies quite a bit. Some states we've had some states that have approved the increases that we filed the latter part of last year and the first part of this year, and they're approved and we'll be implementing those. Then there's other states that it takes longer, and it may take even several years, that they also may phase those in over time. The timing can vary quite a bit, but we factor that all into how we think about the value that we can get from those.
With long-term care, are there any file and use states that you can start charging and the state will get to your approval at some point?
Yeah. We mentioned back in the first part of the year, there are, I'll say, a couple states that there's an exemption from filing group long-term care rates. If you have a nationwide program, you can just begin charging those nationwide rates. It's pretty limited, and there's very few just file and use states. Most of them will go through a pretty comprehensive process.
Okay. Well, thanks for all the answers.
Great. Thanks, Josh.
Thank you. We'll now take our final question from Alex Scott with Goldman Sachs.
Hey, yeah. Thanks for taking the follow-up question. I just had a quick follow-up on the California rate increase. I think because of the way profits before losses accounting works, sometimes the premiums that come in from a premium rate increase aren't necessarily used to build reserves the way your typical premiums would. I was just interested in, do I have that right? Will those premiums kind of come in from that increase fall to the bottom line more so than premiums ex rate increases?
Yeah, I would say you get different answers depending on the accounting basis. When you look at GAAP accounting, we factored those increases into our reserve assumptions. There is a point where those reserves assume that you're getting the increased premium. Now, the timing of that may not always match up perfectly, because there is an assumption of the timing of the implementations. By and large, over time, those premiums are anticipated by the reserve itself, so there's less of that that will fall through. On a statutory basis, your statutory reserves kind of work independent of the actual premium collected. Those are kind of more locked in assumptions. More of that may fall through to the bottom line.
Got it. Thank you.
Yep.
Good. Thanks, Alex. I'd like to thank everybody for taking the time to join us this morning. Cody, I think that now completes our call for the second quarter of 2019. Thanks very much.
That does conclude today's conference. Thank you all for your participation. You may now disconnect.