Good day, and welcome to the Unum first quarter 2017 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tom White, senior vice president of investor relations. Please go ahead.
Great. Thanks, Tiffany. Good morning, everyone, and welcome to the first quarter 2017 earnings conference call for Unum. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the sections titled "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2016. Our SEC filings can be found in the Investors section of our website. I'll remind you that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements.
A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found in our statistical supplement on our website, also in the Investors section. Participating in this morning's conference call are Unum's President and CEO, Rick McKenney, and CFO, Jack McGarry, as well as the CEOs of our business segments, Mike Simonds for Unum US, Peter O'Donnell for Unum UK, Tim Arnold for Colonial Life, and Steve Zabel for the Closed Block. Now I'll turn the call over to Rick for his opening comments.
Great. Thank you, Tom. Good morning, everyone. Our first quarter results were an excellent start to 2017. We saw a continuation of many of the positive trends we have seen over the last several quarters. Our after-tax operating income per share, excluding after-tax realized investment gains and losses and the impact of the Guarantee Fund assessment, was $1.02. That is a record high for us and a strong increase of 8.5% relative to the year-ago quarter. This currently exceeds our full-year expectation for growth of 3%-6%. This strong performance was well-balanced throughout our business segments, with particularly strong results in Unum US and Colonial Life as premium growth and benefits experience remained favorable. Our Unum UK results were off slightly relative to our expectations this quarter, as our benefit results experienced some claim volatility.
I would note that our U.K. business continues to maintain a high level of profitability and operating return on equity. Finally, we saw stable results in our Closed Block operations. I believe that we have proven our ability to consistently produce strong results during these uneven business conditions, and that we remain very well-positioned in our markets. We entered 2017 with great momentum and a strong focus on the disciplined execution of our customer-focused business plan. I believe our first quarter results are a continuation of that trend. In addition, our strategy has kept us in step with the changes occurring in the employee benefits market, and our sole focus in this space is increasingly an advantage for us. An example has been that as the market has shifted more and more towards employee engagement and shared funding, our business model has kept pace.
The scale of our business is increasingly an advantage. It enables us to have a depth of data in the pricing of new business, scaled operations in the administration of our in-force business, and industry-leading management of claims. Finally, the strength of our combined Unum US, Unum UK and Colonial Life distribution systems provide unique reach into the broker and business-to-business benefits marketplace, allowing us to effectively serve employer groups of all sizes and industries. This is translating to our results. Let me give a little more context from what we saw in the quarter. Starting with the top line, our growth remains very good. Adjusted for foreign exchange and our recent reinsurance arrangement, we saw core premiums grow almost 6%. Unum US and Colonial Life continued their momentum with solid mid-single-digit premium growth for the first quarter, combined with good persistency.
Sales were solid as well in the first quarter, with Unum US and Unum UK increasing double digits and Colonial Life keeping pace with just over 7% growth. Overall, it was a great start. From an overall return perspective, our profit margins remain very strong in our core business segments, with operating return on equity for each of our core businesses above 15%. We believe this illustrates the disciplined approach we take to the fundamentals of our business, from pricing and underwriting of new business cases to the management of our ongoing business relationships. This continues to produce a good balance between solid top-line growth and strong profit margins. These growth trends and strong profit margins across our business lines continue to generate capital and free cash flow. For the first quarter, we generated approximately $180 million in after-tax statutory operating income.
Our risk-based capital levels and holding company cash position finished the quarter in excellent shape. As a result, we continue to have substantial flexibility to fund the growth in our business and continue to invest in our core operations to enhance our position in the employee benefits market. We also continue, as we have done for several years, to repurchase our shares and look to increase our dividend, which we have historically addressed at our May board meeting. In summary, it was a very good start to the year. Market conditions continue to present some challenges, but I believe that by focusing on the disciplined execution of our business plans to serve the needs of employers and their employees, we will serve our shareholders well. We remain optimistic that our actions to position Unum for a long-term sustainable growth will produce benefits for years to come.
With those highlights on an excellent quarter, I'll ask Jack to discuss our first quarter results in greater detail. Jack?
Thank you, Rick, and good morning, everyone. Rick provided a high-level overview of our first quarter results, I'll now provide a more in-depth view of the themes we're seeing in our businesses. First of all, it was an outstanding quarter for Unum overall. Our after-tax operating income per share of $1.02 is an increase of 8.5% over the year-ago quarter. We continue to be pleased with the strong balance we're experiencing between the operational performance drivers of our EPS growth and the capital management drivers. Our after-tax operating income increased 5.3% to $236.1 million for the first quarter, while our share repurchase activity contributed 3.2% to our after-tax operating income per share growth relative to last year.
Similar to last quarter, our growth in before-tax operating income was led by our Unum US segment, which produced operating income for the first quarter of $239.1 million, an increase of 10.7% over last year. Each of our Unum US business lines performed well. Group Disability had an outstanding quarter once again, with before-tax operating income of $88.7 million, an increase of approximately 26% relative to last year. The earnings growth was primarily driven by a strong improvement in the benefit ratio from 80.6% in the first quarter of 2016 to 76.6% in this quarter. This benefit ratio includes the 50-basis-point reduction in the discount rate for new claim incurrals that we implemented in the fourth quarter of 2016 and is within the 76%-79% range that we communicated to you in the December investor meeting.
This quarter's improvement was primarily driven by favorable incident trends in the Group LTD product line, lower prevalence rates in the Group STD product line, the cumulative benefit of rate increases on renewals over the past several quarters. Group Disability premium income growth was 0.7% over the year-ago quarter. The Group Life and AD&D lines produced another steady, solid quarter with operating income of $56 million in the first quarter, an increase of 1.1% over the year-ago quarter. Premium income increased 4.7% over the year-ago quarter, the benefit ratio was steady at 71.9% in the quarter, compared to 71.5% last year. Underlying risk results were generally consistent with our expectations, we did experience a slight higher average claim size in the AD&D product line.
The supplemental and voluntary lines continue to perform well and generate a substantial contribution to our earnings, with before-tax operating income of $94.4 million, an increase of about 5% over the year-ago quarter. Premium income growth trends remained very favorable, increasing 11.2% in the quarter compared to last year. I'll remind you that we executed a reinsurance transaction in the individual disability line in the fourth quarter. This transaction lowered revenues by about $25 million, which was offset by a reduction in the sum of benefits, commissions, and expenses of about $25 million. It caused a slight elevation of the benefit ratio but had no material impact on the operating income of the line. Our voluntary benefits business continues to grow, with premium income increasing 6% for the first quarter, while the benefit ratio improved to 42.2% in the first quarter compared to 43.8% a year ago.
In addition, the recent acquisition of Starmount contributed $41.5 million in dental and vision premium income to the supplemental and voluntary lines. Sales increased by 11% for Unum US in the first quarter. Driving this growth was our voluntary benefits line, which increased 17% in the first quarter. The addition of the dental and vision product line also benefited our sales this quarter, and we continue to see good acceptance in the market and strong quote activity from these new product offerings. Our group sales declined 4.7% this quarter relative to last year, with higher short-term disability sales offset by declines in group long-term disability and group life.
We are very pleased that we continue to see strong growth in our voluntary benefits offerings, both through Unum US, which focuses on the larger case broker market, and Colonial Life, which tends to focus on the smaller case market as well as the public sector market. The growth we're experiencing as a result of our approach to the VB market over the past several years continues to diversify our business and provide us with a strong and consistent source of earnings growth. Unum UK had a tougher quarter, with a before-tax operating income lower than the year-ago quarter and slightly under our expectations. For the first quarter of 2017, operating income was £21.4 million, compared to £23.5 million in the year-ago quarter.
Our premium income grew by 0.6% in the first quarter on local currency, continuing the trend we saw in 2016 of a lack of growth in the in-force block. This is likely driven by economic uncertainties brought on by Brexit. Our benefits experience overall was off from last year, with a benefit ratio of 71.4% for the first quarter, compared to 67.9% in the year-ago quarter. Approximately 2% of the increase in the benefit ratio was driven by the inflation-linked benefits, which was offset by higher net investment income. A higher average size of new claim incurrals in the group long-term disability line also contributed to the increase, while our group life business was generally favorable compared to a year ago.
In response to low interest rates in the U.K., we also lowered our discount rate for new claims by 80 basis points, which we expect to continue to pressure year-over-year earnings growth for the remainder of the year. As Rick mentioned in his opening remarks, while the Unum U.K. results were slightly below our expectation, this business continues to produce very good profit margins, and the operating return on equity was slightly under 16% for the quarter. The exchange rate remains a pressure point, with an exchange rate of 1.24 for the first quarter, consistent with the fourth quarter of 2016, but below the year-ago first quarter of 1.43. Our outlook for this year assumes an exchange rate of 1.25. We expect this to continue to impact our reported results in 2017.
Sales in Unum U.K. remain strong, increasing 24.2% over the year-ago quarter on a local currency basis. This increase was primarily driven by the success in the large case market. Persistency was lower in the first quarter at 84.5%, compared to 85.6% a year ago, but was in line with our expectations for the year and reflects our renewal efforts on in-force cases. Colonial Life once again delivered us strong and consistent results. In fact, we had record quarterly operating income of $82.4 million, an increase of 6.5% over last year. Premium income growth continues at a healthy pace, increasing 6.6% for the quarter, driven by the good sales momentum we produced over the past several years. Our benefits experience remained generally in line with our recent trends as well as our expectations, with a benefit ratio of 50.8% for the first quarter, compared to 50.9% in the year-ago quarter.
In addition, the momentum we've seen in our sales trends for Colonial Life remained positive with an increase of 7.2% for the first quarter. This is especially strong when you consider that the year-ago first quarter sales growth was 16%. This increase was primarily driven by growth in the core commercial market, which increased by 13.2% relative to the year-ago quarter. We also saw very good balance with new account sales increasing 3.2% in the quarter, while existing account sales grew by 8.9%. Persistency for Colonial Life remained stable at 78.5%. Finally, for the Closed Block, operating income was $31.6 million in the first quarter of 2017, compared to $33.7 million in the year-ago quarter. In the individual disability line, the interest-adjusted loss ratio was 83.6% in the quarter, compared to 84% in the year-ago quarter.
This slight year-over-year improvement was primarily the result of lower new claim incidents and favorable mortality experience. For the long-term care line, the interest-adjusted loss ratio was 88.6% for the first quarter, compared to the year-ago ratio of 88.9%. This slight improvement was primarily driven by favorable mortality experience. Importantly, the long-term care benefit ratio remains within our expected range of 85%-90%. Overall, we continue to be pleased with the progress we're seeing in managing the long-term care block. Our claims experience has remained generally in line with our assumptions since the end of 2014, when we updated our reserve assumptions to reflect our current view of the business. We are also making good progress on rate increase approvals on our in-force business.
This past quarter, we received several rate increase approvals, and though they tended to be in smaller states, we are tracking very well relative to the rate increase assumptions we've factored into our reserves. Our reserve assumptions only factored in rate increase requests related to our 2014 program. We also discounted our assumptions for what we thought we would realistically receive from state insurance departments. We have not factored in any benefit from rate increases that we expect to file for in the future. In addition, the landing spot continues to be viewed favorably by regulators, and policyholders are favoring this option in their elections. As for interest rates and new money yields, we once again exceeded our new money yield objective of 5% this quarter. Since our reserve adjustments in the fourth quarter of 2014, we have consistently exceeded this target, giving us incremental margin in our reserves.
All of these business trends have again resulted in excellent statutory income for the company. After-tax statutory operating income for the first quarter was $180.1 million. While this is a slight decline relative to the first quarter a year ago, when we exclude the Guarantee Fund assessment, our statutory income was $193.5 million, a 5% increase over last year and an excellent start to the year. As we've discussed with you, statutory results drive capital strength and free cash flow generation. We finished the first quarter with a weighted average risk-based capital ratio of our traditional U.S. insurance companies in excess of 390%. Our holding company cash position, excluding amounts committed for subsidiary contributions, totaled $648 million at quarter end, higher than our year-end 2016 total of $594 million. Our capital position and cash generation capability are a source of great strength for the company.
It provides us tremendous financial flexibility in our pursuit of optimizing the value of the company for our shareholders. Part of that flexibility shows up in our capital deployment strategy. For the first quarter, we again repurchased $100 million of our shares, consistent with the trend of the past several quarters and in line with our outlook for the year. Quickly looking at investment results, interest rates were improved in the early part of the first quarter, which allowed us to meet or exceed our assumptions for new yields. Although interest rates have softened somewhat since March, they're still significantly higher than last year, particularly at the long end of the yield curve. To wrap up, as we outlined for you in our investor meeting back in December, we continue to expect our after-tax operating income per share for 2017 to grow within a range of 3% to 6%.
Keeping in mind that our starting point is now $3.88 per share, reflecting the reporting of the amortization of prior period actual gains or losses on our pension plan as an operating item in our corporate segment. While our growth of 8.5% in the first quarter exceeded our expectations, it's still too early in the year to make any adjustments to our outlook. However, I'm very pleased with our results for the quarter and the momentum I see in our business. We are executing very well on our strategies, which remain focused on growing our core businesses in a disciplined manner to help us maintain strong profit margins and cash flow. This focus has served us well with shareholders in the past, and we believe will continue to do so in the future. I'll turn the call back to Rick for his closing comments.
Great. Thank you, Jack. I'll also reiterate how pleased I am with our first quarter. Additionally, I remain very pleased, not only with the financial position of the company that Jack described, but also the strategic position in the employee benefits market space. Now we'll move on to your questions, and I'll ask Tiffany to begin the question and answer session. Tiffany?
Thank you. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. We'll take our first question from Humphrey Lee with Dowling & Partners. Please go ahead.
Good morning. Thank you for taking my question. Looking at the voluntary benefit sales in the Unum US being very strong in the quarter, I was just wondering if you can provide some color in terms of what driving the strong sales in voluntary benefits.
Yeah, thank you, Humphrey, for that. Actually, we saw good voluntary benefit sales both in Unum US and in Colonial Life. Mike, specific to Unum US, you want to touch on that?
Thanks, good morning, Humphrey. Good strong sales quarter. It's important because for the Unum US brokerage voluntary sales, Q1 is our typically biggest sales quarter of the year, so it was good to see a strong result. I'd say the long-term story is unchanged, which is just a gradual but continued shift from employer towards employee choice and funding. We've worked hard to make investments in the product portfolio, distribution, enrollment capabilities, as Rick mentioned, to keep pace with that. I'd say within the quarter, it's actually broad-based. We saw a good number of new clients come on board from a voluntary benefit standpoint, as well as strong re-enrollment activity with existing clients. I would say at the large end of the market, we had some success. That can be a little bit volatile.
That probably elevated the result a bit in the quarter. Feel really good about the fundamental strength of the business.
That's great. Maybe we turn back to Tim Arnold, too. I think that Colonial Life had a good quarter as well. A continued series of good quarters. Tim, you want to touch on that?
Humphrey, thank you for the question. We think there are a number of reasons driving the strong consistent performance that I would point to the unique capabilities that our agency distribution system offers. As I think Jack or Rick said earlier, we have the ability to work on a business-to-business perspective and through brokers serving both the commercial and the public sector marketplaces. Last year's results were up 16%. That was driven very heavily by strong success in large case and in public sector. This year, our results were more heavily driven by success in the core market. We feel great about our ability to serve effectively all of the various markets in the U.S.
Great. Thanks, Humphrey.
All right. Just another question. Obviously, one of your big competitors has announced that they're looking into strategic alternatives for their employee benefits business. Has that announcement created any impact on the marketplace in terms of competition or pricing? Can you just kind of, in general terms, talk about the current competitive landscape?
Mike, do you want to talk about the competitive landscape?
Sure. Thanks, Humphrey. Generally, our policy isn't to comment on any specific transaction that may or may not be in the marketplace, but maybe to take your question more generally and talk about competitive trends. The group insurance market in particular remains a very competitive marketplace with a number of carriers, I think, looking to take some share. I wouldn't call it abnormally competitive, though. I'd say probably the one place that stands out is what we would term the middle market. That's, think employers between 200 and 2,000 employees. We have seen over the last couple of years, carriers that typically play in the small end of the market look to move up, as well as some carriers that play at the very high end of the market look to move down.
They sort of all converge in the middle market, and it's gotten a little bit choppy there. On balance, I'd say it's a pretty typically competitive market, and we see plenty of opportunities to find ways to distinguish ourselves and grow over time.
Okay.
Thanks, Humphrey.
Our next question comes from Suneet Kamath with Citi.
Thanks. Good morning. I want to swing to the U.K. for a second. Just want to get some more color in terms of what's going on there. I acknowledge the profitability remains quite strong, but just some questions in terms of what you're seeing there and if there needs to be some pricing actions taken to address some of the higher claims in Group Disability.
Peter, you want to take that?
Yeah. Thanks very much, Suneet. As Jack mentioned, Q1 saw higher severity for our GIP claims than we would expect
You also see the discount rate coming through. Now, we did have the discount rate factored into our guidance, and we are putting rate through to sort of counter that. The question is, what's happening with the severity? We've analyzed this, and whilst it's above expectation, it's within a reasonable range of expectations. Our income protection severity in the first quarter of 2017 was about 10% above the mean over the last 17 quarters. The last time we saw it at this level was around quarter 4 2013. During these 17 quarters, on three quarters, we've been about 10% below that mean. When we've analyzed it, we've also looked at by type, by industry, by scheme size, and we see no discernible trends at this stage. We're just marking this down to volatility.
We would expect over a number of quarters to see that come back. It's our watch area, obviously.
Got it. Then maybe just shifting to Group LTD in the U.S., obviously very strong results in the quarter. Just want to get a sense of, was there some favorable volatility that helped you guys, or should we be thinking about this maybe being a new base in terms of projecting going forward?
Hey, Mike, do you want to take it?
Yeah, sure. It was a good quarter from a loss ratio perspective in Group Disability. Right within that range that we talked about, 76%-79% at Investor Day. I'd say we probably are a bit lower in the range than we would have anticipated, that was on the back of favorable submitted new claim incidents, not abnormally so. The big drivers, recoveries, offsets in long-term disability are rock solid and right in line with expectation. All right. Great. Thanks.
Thanks, Suneet.
Our next question's from John Nadel with Credit Suisse.
Hey, good morning, everybody. A couple of questions. One, just on Group Life and Group Disability sales in the U.S. Maybe, Mike, you can comment on what, if anything, you're seeing in terms of a change or increase in the competitive environment there, given the modest, I get that it's modest and it's not your biggest sales quarter, but modest decline.
Sure, John, absolutely. Good morning.
Good morning.
I would agree. We're seeing pressure, particularly in the core insurance market in that mid component, of course. Core is everything under 2,000 employees in the mid-market has proven to be pretty challenging. We're, as you know, going to stay disciplined. We're going to write business when we can do so at a long-term sustainable level. If I look at both Group Life and Group Disability sales, I really think there's two slightly different stories. In the large end of the market, as you know, that's by nature, volatile kind of result quarter-to-quarter. As I look at the dynamics in that market and look at what we have in the pipeline, I feel optimistic about that business. I feel optimistic about the core as well, but it's probably a bit more of a watch area given the competitive environment.
Okay. Thank you. Then, Jack, I was hoping you could sort of give us an update on what, if anything, you guys are pursuing strategically, transaction-wise, structurally as it relates to the long-term care Closed Block. Looks like obviously results this quarter were pretty stable and rate increase filings continue to go through. I know you had touched on the idea of trying to wall off this business into a separate legal entity. Any further progress there in terms of at least the thoughts? I know it'll take some time.
Yeah. I guess my comment would be that we've thought of all the alternatives, I think, and Ben suggested some other ones around what we could do with the long-term care Closed Block. We are actively pursuing the reasonable alternatives. None of them are easy. None of them are basically things we can do alone. We do work with our regulator. We're happy with the progress we're making. Again, it's going to be a long-term process.
Yeah. Understood. Last one, Rick, I wouldn't ever ask you to comment on a specific acquisition opportunity, but I am curious, given some of the news of late, how you'd think about size of a transaction that you think Unum could be willing to undertake if you really decided that a target was a strategic fit, how you think about financing something larger than just with cash on hand.
Thanks, John. Actually, a lot of that's speculative, too, in terms of we did say we're not commenting on any market rumors out there. I would say M&A is a part of our overall strategy. You've seen us do a couple of smaller transactions here over a couple of years that fit very well strategically. As we think about other things, we'll play in the markets, we will make sure that we do so in a disciplined way. It's got to fit both strategically. It's got to be something that we do very well. We'll look at the other means, such as financing. Jack, maybe you could talk a little bit about M&A, though. It is one piece of our capital deployment strategy and how that fits might be helpful.
Yeah. John, we've always been active in the M&A market. We closed on two properties over the last two years, both were dental and vision properties, kind of strategic properties for us. We maintain the same view of our capital plans. The first thing we do is look to invest in our ongoing businesses and grow organically. The second priority is around mergers and acquisitions. We do believe with the strength of our free cash flow generation, the fact that we're repurchasing $400 million of shares a year, as we've talked about, we think our free cash flow generation with the strong statutory results we've had of late is on an improving trend that we could handle a reasonably sized acquisition with where we are. It would have to meet our goals. We're going to continue to be disciplined in the acquisition arena.
We're going to continue to look at acquisitions versus the very safe option of repurchasing our shares. We continue to think our shares are a good value in the marketplace. We continue to believe we have upside as a company. It would need to be more attractive than us in order to do that. The third thing we look at is our dividend, and maintaining paying our dividend. We've increased the dividend pretty consistently over time. I think we'll continue to look strongly at that as an opportunity to deploy capital. Finally, share repurchases is the final option if mergers and acquisitions and other things don't top share repurchase, it's been very effective for us. It's contributed to earnings per share growth. It's been a good return for our investment over time.
Yeah.
I hope that summarized it. We're not going to pinpoint what we're going to do or how we're going to do it, I think hopefully you get a sense from Jack's comments and mine that with our great capital generation, good operating businesses, we have a lot of choices, a lot of financial flexibility, we will deploy those, as Jack talked about, in a very disciplined way with a lot of thought going through that and how it fits with our overall franchise.
Yeah, no, really appreciate the commentary. Thank you so much.
Our next question comes from Seth Weiss with Bank of America.
Hi, good morning. Thanks for taking the question. I just want to touch on premium growth in U.S. Group Disability and, I guess to the U.S. as a whole, sort of in line with the trends you set out at the guidance call, but Group Disability looked like it suffered as we saw a little bit of a tick down in persistency. Could you just comment on these lower persistency levels, and the lower premium growth we saw year-over-year? Is this sort of a new normal, or is it more of a temporary phenomenon given the recent pricing actions you've taken?
Hey, Seth, it's Mike. I'll take it. Appreciate the question. You are correct. Persistency dropped by about a point. I think it's important to keep in mind that that's from a historical high that we've enjoyed over the last couple of years. In the high 80s across both group segments, we feel really good about where we're situated and the care we're taking of our clients, that they're staying with us at that rate. That tick down in persistency paired with a relatively flat sales year as we stayed disciplined on the new pricing front, combined to put a little bit of downward pressure on the Group Disability earned premium line for sure. Like I said, I am optimistic on the new sales front as we sort of look forward into the pipeline.
While I don't expect premium trends to change dramatically, I think the midterm outlook is positive for some improvement there. I do think it's important to take one step back, too, and when you look at the business in total, it is very good to see such strong both sales and earned premium growth in voluntary benefits. It's really exciting to see the early days momentum in the dental and vision benefits business. When you take all those lines together, sales are actually up 11% in the quarter, which is really encouraging. We're generating solid earned premium consistent with the optimism and the long-term growth story here.
Just to that point, in terms of, and this is a little bit more of a housekeeping question, the 2017 outlook for the total U.S. business is 3%-5% premium growth. Does that take into account the new contribution from dental and also the reinsurance transaction, or should I try to strip out those changes and think about this more of an apples-to-apples basis when I think about that 3%-5% premium growth outlook?
Yeah, thanks, Seth. It's net both those, you don't have to strip them out. It includes them.
Great. Thank you.
Our next question is from Sean Dargan with Wells Fargo Securities.
Thanks, good morning. Jack, I just wanted to follow up on the uses of cash. At the NAIC spring meeting, there was an update around the RBC factors for investments, the designations are going to increase to 19 categories from six. I'm wondering if you've done any work internally about thinking what this is going to mean to your RBC and if you're going to have to retain some cash to prepare for this?
Yeah. This has been around for a while. We're certainly contemplating it. Actually, it's less impactful to us because we have a really strong balance between our C1, C3 risk and our C2 risk, we're a liability-driven company, which makes that less impactful. It's easily absorbed within our cash plans, with the exceptional statutory earnings we're generating, feel very comfortable with cash. We're also at the high end of our range of the 375%-400% risk-based capital. We don't think this will be a significant hit to that risk-based capital. We're well prepared to absorb that.
Got it. Great. You and many of your competitors were assessed for the Penn Treaty Guarantee Fund. I'm just wondering if this serves as a wake-up call to regulators when you're asking for rate increases on the LTC in-force. Is this, I guess, drawing greater attention to the fact that the carriers do need to get rate increased?
I'm actually going to turn it over to Steven Zabel to talk about that.
Yeah, great. Good question. I would tell you that the Penn Treaty discussion has been ongoing for years, really at the regulatory level. I think most of the regulators have been aware of the issue. They've become much more educated around long-term care in general, I think, over the last years, and that's, I think, made it better for the carriers to have the discussion with them. I don't think the liquidation itself is going to generate much change in the environment, but I do think it's influenced it over the past years and will continue to do that.
Great. Thank you.
Thanks, Sean.
We'll take our next question from Erik Bass with Autonomous Research.
Hi. Thank you. Over the past several quarters, you certainly had favorable underwriting experience, but the whole industry has also had pretty good underwriting results in US Group. I'm just wondering, do you think this is a function of the improving economy, a recent hard market for pricing or some other factor? Mike, you touched on it a little bit earlier, but just given the strong margins, do you see risk that people do become more aggressive in pushing for growth?
Good question, Erik. Mike, do you want to take that?
Yeah, sure, Erik. Great. Actually, really good questions. I think it's a story that's actually, both are true. If you break down what trends have done, particularly in Group Disability, we have seen favorable new claim submission incidents. I suspect that some of that is a stronger economy and something that's felt industry wide. I would say, though, that when we look at things like the recovery trends and the offset levels that we've been able to maintain, that we feel pretty good that those are standout type performances. I feel good about that. I think in general will higher margins across the industry feed more aggressive competition? I think to a degree, but frankly, what we talked about in fourth quarter is we've been able to successfully price for the current interest rate environment, feel really good about the risk trends.
The degree of new price increases that we have to put in the market, frankly, is lower than we've had to coming into a new year. We suspect that on a relative basis, we'll be similarly situated to where we've been in years past.
Got it. As interest rates rise, would it be right to think that initially that will help your returns and that there will be a lag before people start to factor that into pricing?
Yeah, I think that's a fair assumption. It takes some time for that to burn in, right? You think about how much new money we're putting out relative to the portfolio. Overall, it took some time on the downside. It will certainly take time should interest rates rise. Yes, over time, we would see that as tailwind.
Okay. Thank you.
Actually, can I make a comment going back to Seth's question on long-term care and Penn Treaty? I think it's worth noting Penn Treaty's been around a long time among insurance commissioners in the rate increase discussion. What will be new about Penn Treaty is the premium tax offsets that you get for the assessments. This is going to bring the long-term care issue front and center on state treasuries and governors. And I think that may have a different kind of an impact of gaining support at the higher levels of state government for doing something about the long-term care issue. Good. You absolutely can do that, Jack. Thank you. We'll go next question.
Our next question comes from Thomas Gallagher with Evercore ISI.
Good morning. Just a follow-up on the competitive environment in Group. I guess if we look at both the sales and the persistency, both pretty good results, but a little bit softer than where they've been. Just given how high the margins have been in that business, should we be thinking in the next couple of years that you'd be lowering prices at all? Because I assume, just taking the midpoint of your range on Group LTD in the high 70s, that would imply like a very high ROE, if we kind of overlay that kind of result. I guess it's a long-winded way of asking, like, where is pricing now and where do you see that going? I assume it's no longer hardening, the question is: Would you consider trading better growth for giving up some margin going forward?
It does look like you have some room here from an ROE standpoint.
Thanks, Tom. It's Mike. Appreciate the question. I think you went to a productive place, which is the returns on the business are really strong, and they're in line with what our expectations would be for group insurance. We are probably more in a mode of maintaining those returns versus looking to expand those. I think that does present the opportunity for us On a relative basis in the market to continue to focus on growth. I do think there's a constant, it's important to keep in mind, there's constant work in your renewal program that even if on average, the block overall is performing, we're always working through the inventory of clients and looking at where each individual client's risk is performing. There's always going to be that work that happens, and it's sort of a critical component of being successful in this business.
In sum total, I think you're accurate. We're at or right within the range of targeted margins and don't see the need to further expand that.
Got you. Holding the line on pricing from this point forward would be a good outcome for you.
Yeah. We'll watch closely what the risk trends are. If risk trends are favorable over a sustained enough period of time that we get comfortable, then certainly we'll adjust pricing to maintain margins and be sure that we're delivering strong value to the customer.
Okay. Jack, just back on long-term care, any consideration on buying cash flow hedges? I know you'd had some, those had rolled off, rates had gotten real low, we've gotten a bit higher. Is that something that you're contemplating?
It's certainly something we keep track of that. We would think about doing it at some point. I don't think we're at a place right now where we're enticed to put on hedges and lock in the current interest rate environment. I think there's a lot of speculation around things that could happen that could drive interest rates higher. Certainly, the tax plans, the infrastructure spend, the fact that the Fed needs to reduce its balance sheet over the long term. If we thought it was an opportune moment, we would. I don't think we think currently it is.
Okay, thanks.
Thanks, Tom.
I'll take our next question from Jimmy Bhullar with J.P. Morgan.
Hi, good morning. First, just a question on long-term care, and if there's been a change in your views on reserve adequacy. I think you've said in the past that if given where rates were and given your success in getting price hikes, you don't feel the need to potentially take a charge this year on long-term care. Just considering the fact that rates are a little bit lower so far this year, has your view on that changed at all?
I mean, rates are a little bit lower. Remarkably, the 30-year has bounced back up to right around that 3% range. That's off less than the 10-year is. The first quarter, as we said, we exceeded our 5% target. As a result, we continue to build margin in our asset base and build margin in our reserves. I would view our position as having a lot of flexibility as to when and how much of a long-term care charge we may take. I don't think there's anything pressuring us at the moment to take a charge in 2017. Again, we're going to look at it holistically around how we manage the block and what we think is in the best interest of shareholders.
Okay. You entered the medical stop loss market a little while ago. What was behind that decision and what do you think you bring to the market? Also, what sort of the long-term potential do you see in this business down the road, like a few years out?
Hey, Jimmy. Thanks for bringing that up. I think medical stop loss has been a string of things we've looked at on how we leverage our capabilities, what we do very well, including our distribution system, and medical stop loss falls in that line. Mike, you want to talk a little bit more about it? We've just got some press releases out there, and we're looking forward to getting deep into the market.
Sure, absolutely. We looked at it and said, it's a growing market. We liked the trends. I think what we would bring to bear is a very good distribution into the brokerage market that distributes medical stop loss as well as a strong brand around service. Over time, we are acquiring the ability to risk manage in that business, starting with some strong partners as we enter the market in the latter half of this year. While I do not see it at all as a substantial contributor to our financial results in the current calendar year or likely well into next year, we think it's a really good long-term play. It's a way to leverage assets that we have.
While not the primary reason for entry, one of the other big advantages of being in that business is the decision the client makes around self-funding their health insurance and putting stop loss in place happen early when they're devising their overall benefit strategy. It puts us in a very favorable position to help be consultative around products and services we can wrap around those healthcare decisions. We are looking forward to it being a good, healthy business for us over the long term.
Okay, thank you.
Thanks, Jimmy.
Take our next question from Ryan Krueger with KBW. Please go ahead.
Hey, good morning. I had a question about Unum US expenses. The expense ratio came down 70 basis points in the quarter, which has continued the strong recent trend. Do you view this kind of level of expenses or expense ratio in the first quarter as sustainable for the rest of the year?
Yeah. Thanks, Ryan. Appreciate the question. It's Mike. Yeah, I would say we have a little bit of timing in the expense numbers. It'll bounce around a little bit. I think the important thing to keep in mind is the longer-term trend, which is a good, consistent, gradual decrease in that operating expense ratio. A lot of that contributed to by efforts across the enterprise we put Centers of excellence in place that multi-products and business units are using. We're getting great scale. Rick highlighted strong growth in voluntary. A lot of what we do to bring voluntary to market happens in one place for the enterprise, and then is taken out through different brands and channels. Moves like that, I think, have helped us.
Importantly, while we are focused on being good stewards of those resources, we're actually increasing the investments that we're putting into our business around new products coming to market under both Unum U.S., Unum U.K., and Colonial Life, as well as new technology capabilities, particularly around enrollment and benefit administration.
Thanks. Then on long-term care, I guess, when did you model the 2014 rate increase program to be complete? Can you give us a sense on a cumulative basis how the rate increases have come in relative to your modeled expectations so far?
This is Steve. Thanks for the question. I would say, the way to think about it is, it was modeled out over several years. As you might expect, you're going to get probably a majority or significant part of that kind of early on within the first two to three years. With some states, there's caps on the approval limits and those types of things. Those will be modeled out over more years. I guess what I'd tell you, just overall, we're still on track with what we put in our initial assessment within the GAAP reserve in 2014, and still really good about being able to achieve that level of rate increase.
Got it. Part of my reason for the question was just when, since you haven't modeled any further rate increases in your reserves past the 2014 program, I guess when you'd be potentially in place to put in a new round of requests.
That's hard to say. I think we just continue to monitor the experience that we have in the block. Clearly it has to be actuarially justified to go back to the states. It's just something we'll continue to monitor. Have no plans at this point.
Yeah. I'd note, Ryan, that they're independent decisions, too. We're still working on prior rate increases doesn't stop you from filing new ones.
That's right.
Got it. Okay, great. Thank you.
Our next question comes from Yaron Kinar with Deutsche Bank.
Good morning, and thanks for taking my question. Firstly, I want to go back a second to Group Disability and Group Life in the U.S. Sales persistency are both a little bit weaker than maybe I would've expected. Are you seeing greater competitive pressures than you had thought when you had kind of looked at the year ahead initially and when you provided the initial guidance? Or was this pressure already baked into numbers and you basically figured that the pressures in that core business would be offset by supplemental and voluntary?
Thanks, Yaron. It's Mike. Appreciate the question. A couple of things. First, I hope everyone keeps in mind, first quarter, while not an inconsequential quarter, is not the most critical as we get the year underway. There's a lot of ground to cover between now and the end of 2017. I think the guidance we laid out at the end of last year of 8%-10% sales growth is still the best guidance for us. We have an outstanding group of sales and client managers out there in the market, really strong partnerships from underwriting. Like I said, I feel optimistic about the pipeline as it comes together. Did we anticipate a less competitive market? I wouldn't necessarily say that.
I'd say probably the one place there that I've mentioned previously on the call is that middle market, which has proven a little bit more competitive and choppy than maybe I would have anticipated. I still am quite optimistic about the balance of the year.
Got it. Thank you. Also had a question on, excuse me, your holdco liquidity levels, which seemed very strong and certainly higher than any level I've seen in recent years. Is that a timing issue, or does that go back to our, I guess, the previous conversations around strategic flexibility?
I'd say it's not a timing issue. It's real. We have been building holding company liquidity. That's going to continue because of the strength of our statutory earnings. Dividends from our subsidiaries this year are based on statutory earnings last year, and we had record statutory earnings last year. We expect that to continue to build over time. We are exercising prudence with it, particularly this year, because there's a bunch of things going on. You have tax reform. If the corporate tax rate were significantly lowered, that'd be great for us long term, but you would have a deferred tax asset impact resulting from that. We're still working on our long-term care block. We wouldn't want to be caught short on capital should the opportunity to do something with that arise. There are some things out there that make sense to be a little more prudent.
I think logically, I would not expect a significant change in actions during 2017. We realize that is going to continue to build. Our expectation is, we'll come out with kind of some renewed comments on our capital plans at the end of 2017 at our investor day.
Great. I appreciate the answers. Thank you.
As a reminder, that is star one for questions. We will take our next question from Mark Hughes with SunTrust.
Thank you. Good morning. On the Colonial business, any updates on the recruiting trends? If we do have a little stronger job market, how does that impact your potential recruitment there?
Mark, thank you for the question. This is Tim. Our recruiting is right on plan. In fact, a little bit ahead of plan for the first quarter. We feel great about early second quarter results with recruiting. More importantly, we are seeing strong sales from those new reps. It is not just about bodies in the building, it is about their effectiveness, and we see increasing effectiveness from that group.
I do not know if you touched on this earlier, your natural growth, your kind of most recent sense in terms of payroll trends, hires, wages, are you seeing any uptick there?
Yeah, Mark, it's Mike. I would say not an uptick. Actually pretty consistent, little bit of a tailwind. If anything, while we've seen pretty consistent wage increases over the last several quarters, there's been maybe a tick or two drop in the new job growth, but it's not hugely consequential.
Thank you.
There are no further questions in queue.
Great. I think we're getting up on time as well. Thanks everybody for taking the time to join us this morning. We look forward to seeing many of you at various investor meetings over the next several weeks. Operator, that now completes our first quarter 2017 earnings call.
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