Unum Group (UNM) Q1 2020 earnings call dated May 05, 2020
Corporate Participants:
Thomas A. H. White — Senior Vice President of Investor Relations
Richard P. McKenney — President and Chief Executive Officer
Steven A. Zabel — Executive Vice President, Chief Financial Officer
Michael Q. Simonds — Executive Vice President, Chief Operating Officer
Timothy G. Arnold — Executive Vice President, Voluntary Benefits and President, Colonial Life
Peter G. O’Donnell — Executive Vice President, Unum International
Analysts:
Ryan Krueger — KBW — Analyst
Jimmy Bhullar — JP Morgan — Analyst
Mark Hughes — SunTrust — Analyst
Alex Scott — Goldman Sachs — Analyst
Erik Bass — Autonomous Research — Analyst
Humphrey Lee — Dowling and Partners — Analyst
Presentation:
Operator
Good day, and welcome to the Unum Group First Quarter 2020 Earnings Conference Call. [Operator Instructions]
And at this time, I would like to turn the conference over to Tom White. Please go ahead.
Thomas A. H. White — Senior Vice President of Investor Relations
Thank you, Savanna. Good morning, everyone, and welcome to the First Quarter 2020 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, 2019, and subsequent filings.
Our SEC filings can be found in the Investors section of our website at unum.com. I remind you that statements in today’s call speak only as the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. In the presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today’s presentation can be found in our statistical supplement on our website in the Investors section. So yesterday afternoon, Unum reported first quarter 2020 net income of $161 million or $0.79 per diluted common share compared to $280.9 million or $1.31 per diluted common share in the first quarter of 2019.
Net income for the first quarter of 2020 included a net after-tax realized investment loss of $113.1 million. Net income in the year ago first quarter included a net after-tax realized investment gain of $0.6 million. As a reminder, net realized investment gains and losses include changes in the fair value of an embedded derivative and a modified coinsurance arrangement, which resulted in an after-tax realized loss of $68.7 million in the first quarter 2020 and an after-tax realized gain of $4.4 million in the year ago quarter.
Therefore, the after-tax net realized investment loss from sales and credit losses totaled $44.4 million in the first quarter of 2020. So excluding these items, after-tax adjusted operating income in the first quarter of 2020 was $274.1 million or $1.35 per common diluted share compared to $280.3 million or $1.31 per diluted common share in the year ago quarter. Participating in this morning’s conference call are Unum’s President and CEO, Rick McKenney; Chief Financial Officer, Steve Zabel; and Chief Operating Officer, Mike Simonds; as well as Peter O’Donnell, who heads our international business, and Tim Arnold, who heads our Colonial Life business.
And now I’ll turn the call over to Rick for his opening comments. Rick?
Richard P. McKenney — President and Chief Executive Officer
Thank you, Tom, and good morning. As we talk to you today, we find ourselves in unprecedented times. We have the backdrop of a good quarter, while we are seeing the emergence of the COVID-19 pandemic and the resulting dramatic contraction of the economy. The current environment has created multiple uncertainties for the world. As we work through it, it reinforces the importance of Unum’s corporate purpose, helping the working world thrive throughout life’s moments. While we are in one of those life’s moments, I am very confident the Unum team is fulfilling our purpose in these times and providing excellent service to people at time of need.
It is a powerful differentiator for our company. We have built a reputation of providing best-in-class service, which only grows in importance in challenging times like these. I could not be more proud of the way our teams have responded and are performing on behalf of our customers. We think we are still in the early stages of the life cycle of this pandemic, and we don’t yet have the full picture of how the expected recovery will unfold. Scenario planning, including stress testing of our portfolio, is part of our standard practices and ensures we have a road map in place to take decisive action.
We have a strong financial position, a seasoned management team, which has successfully managed through stress scenarios in the past and a business with the resilience to weather the storm and emerge stronger on the other side. We have much to cover with you this morning, in addition to first quarter results. We’ll provide an update on the impact COVID-19 is having on our business, both in terms of what we saw in the first quarter and how we see potential impacts playing out throughout the year. This provides the basis for how we are positioning ourselves to manage through a variety of scenarios. We’ll also cover in detail the Maine Bureau of Insurance requirements to increase statutory reserves in our long-term care block over the next several years.
A move that will build additional margin over our best estimate assumptions and should address some of the market’s uncertainty related to this block. But let me begin by discussing the health of our franchise and the important role that we play. We are focused on delivering social value with the financial protection products and services we provide to employers and their employees in the time of need. Quality providers of employee benefits play a vital role at times like this. Providing financial benefits to millions of families at difficult times in their lives. The competitive differentiators we have outlined for you in the past are more important than ever today and will remain important as we emerge from this crisis.
These advantages include our excellent reputation with employee benefit decision-makers, superior and consistent distribution reach, technology connections with digital capabilities from the front end origination of new business through the servicing of claims and leaves, a disciplined risk management approach to pricing and claims, and our people and culture, which have proven time and again to demonstrate unwavering customer focus. In addition, given our leadership role in employee benefits, our business is well diversified by geography, industry and case size. These advantages are backed by our strong balance sheet, our capital position and liquidity, which we’ll cover in more detail this morning.
All this translates to strong core businesses with a track record of generating capital. We will continue to build on these advantages by investing in the service capabilities, digital enhancements and organizational structure, which underscore our commitment to our customers. Turning to the real-time view of our business. The COVID-19 pandemic has necessitated many changes to our workflows and processes over the past several weeks. Our emergency preparedness plans have served us well, and we’ve successfully made the transition to working remotely for almost 99% of our people within the first week of instituting a work from home policy.
I’m proud of the commitment, professionalism and resilience of our employees who have maintained consistent service levels for our customers and the can do attitude of our teams throughout this transition has been great to see. As other companies who are our customers have gone home and adjusted their workforce, one Implication is that generating top line growth will be challenging. While the depth and duration of the pandemic is still not yet known, we are planning for multiple scenarios, driving insights from previous stress situations, including the 2008 to 2009 recession.
As part of our ongoing risk management planning process, we have analyzed the potential impacts that a pandemic and resulting economic slowdown could have on our business. As an employee benefits and voluntary benefits provider, the level of employment and wages are the building blocks on which we provide protections and, in turn, generate premium levels. As a leader for many years in employee benefits, we have a well-diversified business profile.
While we expect pressure from decline in GDP and rising unemployment, these headwinds are buffered by the fact that we have limited exposure to part-time workers and lower exposure to highly impacted sectors like discretionary retail, oil and gas and restaurants and entertainment. One additional headwind to near-term growth comes from the difficulty in getting in front of that benefits decision-makers and their ability to engage when most businesses are at home. From a risk perspective, trends in new claim activity can vary by product line, with more pressure expected in short-term disability and lead management, and lower levels of utilization in dental and vision.
Sadly, in this environment, we also need to think of elevated mortality rates, potentially negative for group life depending on impacted age ranges, contrasted by claims cessation in long-term care and closed block disability. From what we see in external data, even though the younger people do not do get sick, they generally recover at a much greater rate. This environment could also affect claim processing activity where disruptions can occur as customers navigate the current state of the health care systems. This potentially impacts the flow of documentation required to file new claims to gather support for people to return to work and to receive the level of care required for some claim payments.
Given the overall dynamics, we have moved quickly to reallocate our resources and people to areas we expect higher volumes. Such as short-term disability claims and lead management while maintaining excellent service. The last area to explore is the impact from a rapidly growing rapidly slowing economy and actions of the federal government, particularly to how they impact our investment portfolio and overall. The declining interest rates we have seen continued to pressure portfolio yields and evaluations of discount rates. This latest move down in rates impact segments of our business in varying ways. We have historically managed our group over time with our pricing strategies.
Although our immediate focus is to work with customers to retain them through the sharp downturn. Over time, we will return to our approach of managing interest rates through pricing. Additionally, we actively manage and monitor the profile of our investment portfolio, which is comprised largely of corporate credit. Over many years in different credit cycles, we have consistently shown favorable default rates compared to the industry averages and have maintained a generally consistent overall credit rating.
There are pressures on many corporate issuers at the moment. But as we evaluate name by name, we see the portfolio continuing to perform in this environment. Based on these trends, our expectation is that the second quarter could be challenging. With most stay at home orders remaining in place through May. As these orders lift, we expect the environment to begin to slowly normalize. However, we simply do not know today when that will occur or how long full recovery will take.
Steve will discuss with you our view of how all these influences will impact our earnings and capital plan over the course of the year. Given the volatility all around us, we are not continuing to provide our outlook for the year. But today, we will give you more color on the trends that we’re seeing in recent weeks that we could see going forward as well, which should help give you a sense of how we see the year playing out. Bringing you back to the first quarter, our results were solid and generally consistent with our overall expectations. We did see some pressure from the current environment later in the quarter, which will likely continue into the second quarter.
We’ll highlight those trends throughout our discussion this morning. For the first quarter, after-tax adjusted operating earnings per share was $1.35 compared to $1.31 in the year ago quarter, an increase of 3%. These results were driven by an increase in before tax adjusted operating income of almost 4% from Unum US, which offset slightly lower earnings in Colonial and weaker results in Unum International. Additionally, and on a positive note, after tax statutory adjusted operating earnings, an important driver of cash flow was favorable at $326 million, an increase of 46% over the year ago quarter.
Our results also reflect after-tax net realized investment losses from sales and credit losses of $44 million, which Steve will cover in greater detail. Looking at premiums, while we did experience year-over-year growth in premium income in our core business segments of 2.5% in the first quarter, that is a slowdown from the pace we had seen in previous quarters, which had been in the 4% to 5% range. With the exception of Unum UK, we saw marginal declines in premium persistency as well as lower sales trends in our core businesses.
Sales trends were clearly more challenged in the month of March, and we anticipate this continuing into the second quarter. Our anticipation is that persistency going forward will be stable on a case basis in traditional group, but challenged in our voluntary benefits lines in smaller case business. Given all of this, we anticipate full year premium income to be relatively flat to 2019. Benefit ratios, generally speaking, were in line this quarter with the year ago quarter. We saw a favorable year-over-year results across the Unum US product portfolio, while Colonial had a slight increase in its benefit ratio and results in the International segment were more challenged.
Results in Closed Block long-term care were very favorable in the quarter with an interest adjusted loss ratio of 81% for the first quarter, well below our expected range of 85% to 90%, primarily driven by mortality on disabled lives. This takes our loss ratio to 86.2% over the past four quarters. Our capital metrics held in very well for the first quarter with the RBC ratio in our U.S. traditional life insurance companies at 365%. In cash at our holding companies of just over $1 billion, both in excess of our targets. We expect to continue to meet our capital targets throughout the year, and we will not repurchase shares in 2020 given the current environment.
One other important event this quarter is the announcement that the Maine Bureau of Insurance is requiring us to establish additional statutory reserves for our long-term care block. This is the result of Maine’s financial exam of Unum Life of America, which includes a review of our long-term care reserves by Maine’s external consulting actuaries. We respectfully disagree with Maine’s conclusion and see these additional statutory reserves further increasing margin over our best estimate assumptions. The added reserves will begin at the end of this year and will be added each year for seven years. The amount for 2020 is estimated by our actuaries to be within a range of $200 million to $250 million.
Steve will touch on more of the details. We plan to fund these additional reserves for existing cash flows. In addition, our business’ capital generation has provided substantial financial flexibility to the company. We believe that for 2020, we will continue to maintain our primary capital metrics in line with our targets, and we anticipate maintaining our current shareholding dividend. As we step back from the pandemic and look to the future, the products and services we provide have never been more important to employers, employees and their families.
While today’s environment is challenging and evolving rapidly, our business model has successfully navigated crises in the past, and I’m confident it will do so again. While growth rates for premium income and earnings may be impacted in the near term, we intend to act decisively and continue to invest in our operations and expand into new areas where we can best leverage our expertise and capabilities to capture growth opportunities as those opportunities reemerge.
At the same time, we’ll remain disciplined on where and how we spend our money being reflective of how the current environment emerges. Prior to the COVID-19 pandemic outbreak with Mike Simond’s new role as Chief Operating Officer, we had already begun work to transform our business model to ensure the proper alignment with the evolving needs of the market as well as changes in our own business. We see this period of time as an opportunity to advance that transformation and continue to look for improvements for our business model to better serve our customers.
When we think about the long-term care Closed Block, we also see the announcement we are making today, addressing concerns on our LTC business for the long-term and doing so in a measured way. We have a highly resilient franchise with tremendous core businesses that have successfully grown and maintained consistently strong margins over the last decade. We see ourselves getting through this period of time with a reinforced purpose of a high-quality, highly connected employee benefits provider.
I’ll now ask Steve to cover the details of the first quarter results. Steve?
Steven A. Zabel — Executive Vice President, Chief Financial Officer
Great. Thank you, Rick, and good morning, everyone. I want to cover first quarter results in more detail and while doing so, give you some insights into what impacts we’re seeing from the current business environment and how that might play out in the second quarter and deeper into 2020.I’ll also discuss what trends we’re seeing in the investment portfolio and the impacts we see it having on our capital position. And then finally, I’ll provide more details on the Maine LTC reserve review.
First, let me say that I feel good about the results we reported in the first quarter. Not only were the results solid, but we’re very pleased with the operational performance and productivity of our employees in what has been a challenging environment. Over 99% of our people have been working from home since the middle of March, and the adjustment has been very smooth with customer service levels and operating efficiency remaining quite good. First, looking at Unum US premium growth for the first quarter was 1.7% year-over-year, but did show a slowing rate of growth from previous quarters.
The current sales environment is challenging as evidenced by the 15% decline in sales we had in the first quarter, with the slowdown in March continuing into April. Persistency in Unum US was generally lower year-over-year with more pressure in voluntary benefits and the small case business. Case persistency in the mid and larger case blocks has not been materially impacted. These will clearly be watch areas going forward. Claims trends were generally good and in line with expectation. With improvement in the group disability benefit ratio to 73.2% from 74.7% a year ago, driven by favorable recoveries in group LTD.
This offset higher group STD claims, which increased significantly in March that have plateaued so far in April. Keep in mind that STD claims are generally smaller in dollar amount as they cover claim periods of two to three weeks on average. We saw favorable results in Group Life as well as supplemental and voluntary, although we did see pressure on premium growth compared to previous quarters. Overall, it was a good quarter for Unum US with strong with continued strong margins.
In the Colonial Life segment, premium income increased 3.7%, which is lower than the growth rates we have seen in the past. This is not surprising as we have seen pressure on sales and persistency trends, which have continued through April. The benefit ratio was slightly higher at 52.4% due to higher claims from the accident, sickness and disability product lines. Overall, it was a solid quarter from an earnings perspective, but we’re likely to see continued pressure on top line growth with lower sales and persistency.
We don’t expect to see a material impact to claims trends from either COVID or the recession and therefore, feel that benefit ratios will continue to be relatively stable for Colonial. Results in our International segment were weaker this quarter relative to last year’s results and our expectations. Premium income finished the quarter with an increase of 6.9% with positive sales and persistency trends in the U.K. segment. Benefit ratios in the U.K., however, were challenged with higher claims in group critical illness and weaker results in group disability as it was more difficult to get necessary documentation and certification for claim terminations given the disruption in our customers’ workplaces and the overburdened health care system in the U.K. for COVID-19.
We will be watching these trends as it pertains to all of our product lines in the coming months. Results from our Poland operation were very good with strong year-over-year increase in adjusted operating income. Poland is a small contributor to corporate results, but we are quite, quite pleased with its performance. Within the Closed Block, LTC had a very strong quarter. The interest adjusted loss ratio of 81% is the lowest we reported since the reserve update in the third quarter of 2018.
For the past four quarters, the benefit ratio is 86.2%, well within the 85% to 90% range. We expect, over the long term, as claim trends are tracking in line with our revised assumptions. The favorable results in the quarter were primarily driven by higher mortality experienced on the disabled lives, which was really spread fairly evenly throughout the quarter and not just concentrated in March.
New claim incidents was in line with our expectations this quarter. Net investment income for long-term care was negatively impacted by negative market value adjustments of approximately $17 million on two perpetual preferred securities that are mark-to-market quarterly and reported through net investment income, not as a part of realized investment gains or losses.
Additionally, miscellaneous investment income was higher than the year ago quarter and just slightly higher-than-average for the Closed Block overall. I should note that most of our alternative investments are allocated to the LTC investment portfolio. We received financial information on investments in partnerships, usually on a one quarter lag basis and expect to recognize losses of approximately $40 million in the second quarter as we receive the financial statements as of March 31 for these partnerships.
This compares to a positive first quarter mark of approximately $10 million. Also on long-term care, we had a very good quarter for rate increase approvals on in-force business and now are slightly over 60% to our ultimate goal of $1.4 billion. So far, we have not seen a slowdown in the regulatory review process for our requests due to COVID-19. The Closed Disability Block produced an 84.5% interest adjusted benefit ratio compared to 80.1% in the year ago quarter, driven by the impact of a onetime reinsurance cost related to a small block of policies, which also negatively impacted premium income.
Overall, we feel good with what we saw in the first quarter with relatively minor impacts from COVID related claims. Unum US STD claims were higher in the quarter with some evidence of COVID. But in April, we have seen that trend plateau. Unum US LTD claim trends have not exhibited much impact from COVID and were favorable with good continued recovery trends, more than offsetting a slight increase in incidents.
Overall mortality trends were generally favorable for the company with stable experience in Unum US Group Life and unusually elevated trends in the LTC Block, which have continued through April. We expect that the larger watch area for us will be the impact to sales and persistency going forward and how could impact future premium trends. As Rick indicated, we are suspending our outlook for 2020, which previously called for growth of 4% to 7% in adjusted operating income per share.
We feel it’s appropriate to hold back at this time as we assess the impact and duration of economic contraction. As I said, we believe the impact of COVID will be much less about the claims related activity we’ll experience and more about the impact from the economy and significant increase in unemployment. As a result, we now expect premium income growth to be approximately flat in 2020 compared to last year.
We believe that flexibility and agility will be critical in navigating the next several months. Accordingly, we are closely watching several dynamics that will impact such parts of our business as sales and persistency, the flow of information we need to process new claims and generate claim recoveries and impacts to the investment portfolio. This information will help us decide what actions to take. I’d like to now turn to our investment portfolio and the trends we experienced in the first quarter.
Specifically, I’ll outline what we experienced with ratings migrations and defaults and impairments within the portfolio and the resulting impacts on capital. In the first quarter, we had $336 million of downgrades of investment-grade securities to high-yield which contributed to the increase in our holdings of high-yield securities from 7.5% of our fixed maturity securities at year-end 2019 to 8.2% at the end of the first quarter on an amortized cost basis. On a fair value basis, the exposure was stable at 6.6% of the portfolio.
This increase created an approximately $14 million increase to required capital, which impacted the first quarter RBC ratio for our traditional U.S. Life Insurance companies by approximately two points. Reflecting in part the diversification benefit we have on such downgrades. In addition, we reported $44.4 million of after-tax net realized investment losses from sales and credit losses in the quarter. For the month of April, we have seen an additional $119 million of downgrades of investment-grade securities to high yield.
It appears that the Fed’s or of secondary market corporate credit facility program is benefiting the credit markets, producing a tightening in spreads in many of these crossover securities. This program is providing needed liquidity as a high-yield market and open the market for refinancing opportunities for many of these companies in the upper tier of the market. Overall, credit market conditions in April have improved from March, though a significant strain on Corporate America remains to be worked through, and conditions remain difficult.
In our scenario analysis for 2020, we are assuming a base case assumption for defaults and impairments of $85 million with downgrades of investment-grade securities to below investment-grade of $1.6 billion, including what we have experienced so far this year. With this impact on the investment portfolio, we still expect to continue to meet our capital metric targets for RBC and a holding company in liquidity throughout 2020.
We have analyzed our portfolio thoroughly and understand our exposures well. While some investors focus on our exposure to high-yield bonds, I remind you that our exposures to other risk asset classes, such as equities, commercial mortgage loans, CLOs, RMBS and many structured asset class categories are below peer company averages. Additionally, our fixed income exposure to consumer cyclicals, which have been stressed due to COVID related shutdowns, is approximately 3% of the portfolio.
Within this sector, we have no exposure to leisure or lodging. Our holdings in other stressed industries such as airlines is minimal at less than 0.25% of 1% the portfolio, and we do not have exposure to hotels or cruise lines. The energy exposure of the portfolio at quarter end was 8.2% of total fixed maturity securities and approximately 90% of these holdings were investment grade.
Half of our holdings are midstream or pipeline companies that are not as correlated to the price of oil. 18% of our holdings are in the large integrated companies. And only 2% of our holdings are in oilfield services companies that tend to be most impacted by low oil prices. Additional detail on our energy holdings is included in our statistical supplement and our supplemental filing. We have a robust research process and review our portfolio on a bottoms-up individual credit basis.
We believe our portfolio is well positioned and evaluate our names based on their credit fundamentals. We believe our portfolio will perform well compared to market trends as it did during the energy downturn in 2015. And interesting insights in our portfolio can be taken from a research piece that Fitch ratings published in mid-April, outlining their bonds of top concern list.
Their Tier one list of bonds of highest concern outlined 45 names, of which we held only three in our portfolio totaling $49 million. All of these three securities are on our current watch list and two were written down in the first quarter. In their Tier two list, which included an additional 54 names, we held positions in only three names with an aggregate exposure of approximately $70 million. two of these names are on our watch list. With limited exposure to these heightened risk names as outlined by Fitch, speaks to the quality of our research and diligence in making long-term fixed income investment decisions.
Now returning to our capital position. We finished the first quarter with a risk-based capital ratio for our traditional U.S. insurance companies at 365%, above the 350% targeted level. And holding company cash at just above $1 billion, up from $863 million at year-end 2019. We target maintaining holding company cash at greater than 1 times our fixed obligations, which is approximately $400 million. I’ll remind you, the $400 million of the current cash position is earmarked for the September maturity of a similar amount. And then the next debt maturity is in 2024.
In addition, an important driver of our capital position is after tax statutory operating earnings in our traditional U.S. insurance companies, which were quite strong in the first quarter totaling $326.1 million compared to $223.1 million in the year ago quarter.
Now let me turn to the Maine review of insurance’s financial examination that includes the target examination of our Unum America LTC reserves. As you saw in our release, Maine has concluded based on their consulting actuaries opinion that Unum America’s LTC statutory reserves are deficient by $2.1 billion as of December 31, 2018. Based on our comprehensive LTC assumption review in late 2018 and our subsequent experience, we respectfully disagree with Maine’s conclusion. However, given the position of our regulator, we have reached a resolution with Maine, to establish an additional $2.1 billion to our statutory reserves, which Maine has allowed us to recognize over a seven-year period.
This strengthening will be accomplished by our actuaries on incorporating explicitly agreed upon margins into our existing assumptions for annual statutory reserve adequacy testing. The resulting increase in statutory reserves will be primarily driven by adding more conservatism to assumptions related to three areas: those being interest rates, length of morbidity improvement and mortality related assumptions for older ages where experienced data is less credible. For interest rates, we are lowering the discount rate by approximately 50 basis points reflecting a reduced expectation for new money yields.
We anticipate this assumption change will account for roughly half of the reserve increase. For morbidity improvement, we shortened the period of improvement from 20 years to 10 years and reflect a wearing off at older ages. We estimate this change will account for approximately $400 million of additional reserves. Finally, the majority of the remaining reserve increase reflects a more conservative view on assumptions related to mortality in very old ages on both our active and disabled lives.
This is primarily for ages over 90 where experience is less credible and actual outcomes will not be known for many years. By addressing these assumptions in this way, that is, by this amount over an extended period of time, we believe we’ll be addressing many of the market’s primary questions related to this block. In addition, I think it is worth noting that during the examination, it was clear that Unum and the Maine Bureau of Insurance shared similar views on a number of reserve related points.
One such area of agreement was that statutory reserves are expected to peak at approximately the same level and that our new funding pattern will get us to that level more quickly. There is no impact to our current GAAP reserve assumptions at this time, though we will continue to review all of our assumptions on our normal annual cadence later this year through our reserve adequacy testing process. We have done extensive modeling to look at our ability to fund these additional reserves. We believe that even under a stress scenario brought on by the current economic downturn, that we’ll be able to fund it with our existing cash flows.
Our modeling suggests that we can maintain the current shareholder dividend and maintain the targeted capital metrics of an RBC ratio above 350% and maintain holding company cash levels of at least one-time fixed obligations. This modeling includes funding the extra LTC costs, absorbing a higher level of potential investment impairments and reflecting the recessionary impact on our operating results. Finally, I’d also highlight the book value per common share, excluding AOCI, as of March 31, 2020, was $49.28, an increase of 9.4% over the year ago quarter.
Now I’ll turn the call back to Rick for his closing comments and we’ll look forward to your questions.
Richard P. McKenney — President and Chief Executive Officer
Thanks, Steve. In closing, let me leave you with these thoughts. First, I would highlight the resilience of our franchise through numerous economic and business cycles. Our core businesses have proven to be solid growth generators, able to maintain strong margins and generate significant amounts of capital.
Second, we have a well-developed road map for managing through today’s environment with such proven capabilities as interest rate management in our core business lines, our ability to manage the investment portfolio through periods of stress, the consistency of our capital position and our ability to manage vital aspects of our business, such as claims management, underwriting and the management of our in-force block through disciplined sales and renewals.
Third, over the past 1.5 years, our LTC Block has been thoroughly examined by several outside consulting actuaries and state regulators. The reserve actions we announced today, we will, we believe, enable us to address many of the market’s uncertainties in a measured way over an extended period of time.
And finally, over the past several decades, we have built and maintained excellent brands and a strong reputation that benefits marketplace, which positions us well when the economy recovers. The team is here to respond to your questions.
So I’ll ask Savanna to begin the question-and-answer session. Savanna?
Questions and Answers:
Operator
[Operator Instructions] We’ll take our first question from Ryan Krueger with KBW.
Ryan Krueger — KBW — Analyst
Could you give us, I guess, maybe a more complete picture of what you’d expect for LTC capital uses, I guess, going forward over the next several years when you take into account the the new Maine reserve additions, but also including New York? And if there’s any additional amount in the casket?
Steven A. Zabel — Executive Vice President, Chief Financial Officer
Yes. Yes, great. Thanks, Ryan. Yes. So we’ve stated in the past, when we think about capital contributions for LTC, that those go down to both Fairwind and First Unum. We’ve mentioned in the past, over the last couple of years, those have been around $400 million, and we would expect them to continue at that level grading down to $200 million. So those are the statements we’ve made in the past. The resolution of the Maine exam will add to that. Those contributions will go down to Fairwind to fund those reserves. We noted that, that was going to we thought that the reserve increase would be between $200 million and $250 million in 2020.
Now take into account that there’s some offsetting dynamics that will be going on in Fairwind around the actual statutory earnings performance of that. The LTC portfolio had a pretty good first quarter on a statutory basis because of the level of mortality we saw there, that there’s also a tax benefit to those reserves in Fairwind. But that’s pretty it’s a pretty good number for 2020 as being additive to the guidance we’ve given in the past.
Ryan Krueger — KBW — Analyst
And can you give any more color on, I guess, how this all came about with Maine? It’s a fairly unusual step to occur out of a financial examination. So any more color on how that’s transpired and like how it evolved to be overall NAIC was, or if it was more kind Maine specific?
Steven A. Zabel — Executive Vice President, Chief Financial Officer
Yes. So this was part of a routine financial exam. We’re examined by all of our regulators on a three to five-year kind of rotating basis. As you can imagine, a focus of the exam was around our long-term care statutory reserves. So there was a lot of focus placed on that. Maine brought in their own outside actuarial consultant to perform the exam. And then they reach their conclusions. Those conclusions were agreed to by the other regulators in the country. So we view this as being a final resolution for all states, not just Maine as it relates to our Unum America reserves.
Ryan Krueger — KBW — Analyst
Thank you. That’s right.
Steven A. Zabel — Executive Vice President, Chief Financial Officer
Thanks. Ryan.
Operator
And we will take our next question from Jimmy Bhullar with JP Morgan. Please go ahead.
Jimmy Bhullar — JP Morgan — Analyst
Hi everyone. Question first on how regulators are reacting to request for price increases in long-term care, given sort of the weaker economy and rising unemployment? And then I had another one as well.
Steven A. Zabel — Executive Vice President, Chief Financial Officer
Yes, Jimmy, this is Steve. I’ll take that one. We feel really good about our rate increase strategy and the success we’ve had there. I mentioned in my comments, we’re up to 60% against our GPV expectation of $1.4 billion. That continued in the first quarter. We had a very strong first quarter approval levels. And what we’ve seen so far in the second quarter is really no slowdown. We’ve seen really good interaction with our state regulators. They’re open for business. There’s a lot of back and forth communication. And so I would say,to date, we have not seen a material impact on any of our interactions with the states as it relates to our rate increase program. So we’re optimistic going forward.
Jimmy Bhullar — JP Morgan — Analyst
And then if you think about your sales, they were down, I think, 15% in the US business, 9% in Colonial. I’m assuming most of that happened in March. And if that is the case, should we assume a significantly larger decline for 2Q?
Richard P. McKenney — President and Chief Executive Officer
Mike, you want to take that?
Michael Q. Simonds — Executive Vice President, Chief Operating Officer
Sure. Yes. Thanks, Jim, for the question. And I think your read on it is accurate. So if you took a look at where we were through the first two months of the quarter across most of our lines of business, particularly here in the U.S. tracking roughly in line with expectations. And then as we went through March, and certainly, the latter half of March and looking to close out that quarter, which is pretty important from a sales point of view, we saw a precipitous decline there. And I’d say, as we look through April, we continue to see significant pressure on proposal activity coming in and feeling it most acutely in the small business market for not surprising reasons as well as voluntary benefits, where a lot of our engagement is direct with the employee.
And obviously, with many, many businesses following workers closing and moving to remote, that’s proved more problematic. I’d say that decline has plateaued as we went through April and has actually started to slowly climb back. I’d say, to give you a little bit of a sense, “activity” in April was kind of down in the 30% range, again, most acutely in the small end of the market, which could drive a lot of that volume. Large case activity, for the most parts have been in line with historical norms. In the large connectivity…
Jimmy Bhullar — JP Morgan — Analyst
…probably benefits from this? Right?
Richard P. McKenney — President and Chief Executive Officer
Yes. I think persistency at the case level does tend to benefit if there’s less movement between carriers, the pressure obviously comes at the individual employee level. And so for lines like the voluntary benefit line, we’re going to see some pressure here in the second and third quarter.
Jimmy Bhullar — JP Morgan — Analyst
And then just lastly, on the Maine contribution, should we assume that in future periods, it will be in the roughly $300 million range annually? Or is it more likely to fluctuate?
Steven A. Zabel — Executive Vice President, Chief Financial Officer
Yes. I think that’s probably a good level just for planning. What we’ll go through an annual process where we will roll forward the inventory of the block. We’ll look at what the experience was for the block. We’ll apply these assumptions to our premium deficiency reserve testing. But for planning purposes, that’s probably not a bad place to be.
Jimmy Bhullar — JP Morgan — Analyst
Okay, thank you.
Operator
And our next question will come from Mark Hughes with SunTrust. Please go ahead.
Mark Hughes — SunTrust — Analyst
Yeah. Thank you. Good morning. How do we think about that capital management when we think about the 2021 with these incremental contributions in Maine? How much of your former kind of pace can you get back to?
Steven A. Zabel — Executive Vice President, Chief Financial Officer
Yes. When we look forward to 2021, obviously, there’s a lot of variables that will play into that. As we’ve mentioned, we did our stress testing on our capital plan for this year, incorporating what we thought impairments were going to be on the portfolio as well as credit downgrades. We’ll have to see how that plays out for 2020. We do think that with the lower level of sales, we should have a stronger statutory earnings, reflecting less statutory strain as we play out 2020, and we’ll have to see what that looks like. And then as you saw in the first quarter, we had very strong statutory results overall.
So we’ll have to look at how that plays out for the remainder of 2020. We did announce we’re suspending share buybacks for this year. That will provide some capital. And then the other thing to think about going forward is we’ve been running about $400 million of capital contributions over the last couple of years down to those subsidiaries. That will start to grade down closer to $200 million x the agreement that we have now with Maine. So going forward, that will help provide a little bit of leeway there as well as we go forward. But we’ll have to see how 2020 plays out, and then we’ll assess at that point.
Mark Hughes — SunTrust — Analyst
And then on the benefit ratio in Unum US, I think you’d said the STD plans had done a plateaued into April. Could you talk about what you might expect on the benefit ratio in the near-term here? And then also your experience in the last recession how that might play out over time?
Richard P. McKenney — President and Chief Executive Officer
It’s a good question, Mark. Mike, you want to take that?
Michael Q. Simonds — Executive Vice President, Chief Operating Officer
Yes. Sure. So it was good first quarter from a group disability point of view. And Mark, I think, you got it right. LTD recovery performance was strong, and that more than offset some pressure on short term disability. And we did see the fully insured short-term disability claims come in, COVID related at an increased pace at the end of the quarter. And then the first couple of weeks in April, as I think, Steve had earlier in the call, we did actually see those fully insured short-term disability claims plateau here in April to give you a sense.
Those are usually paying out a total benefit of an amount in the, say, $650 to $750 per claim range. So it’s really about just getting people some immediate dollars in their pockets, and we feel good actually about the ability to kind of manage within the group disability loss ratios we’ve been talking about. 1Q is probably a little bit favorable because some of those LTD recoveries. But being there in that 73, 74 kind of range feels, at this point at least, reasonable.
A couple of watch areas you highlighted. One of them, that would be the economic climate. So we looked closely at the last three recessions, actually. And what we found generally is that there is a correlation to disability incidents for social security, in particular, the private industry actually has a much more muted correlation to unemployment, usually with a 1.5 year lag.
And then I’d say, Unum has been pretty successful as at having even less of a correlation to the point where it’s there almost close to none after the financial crisis. Now that doesn’t suggest that there will be none in the economic challenge that we’re headed into, right now, but reasons, at least for optimism, you should think about pretty disciplined underwriting approach and benefits management approach.
The second thing we’ll watch pretty closely is just the more short-term impact of a lot of health care, very appropriately focused on response to the crisis. So Steve mentioned a little bit of problems in the U.K. just getting to the information that you need to adjudicate. Get people back to work. At this point, we’re managing through that pretty well here in the U.S., but we will watch that over the next couple of months as well.
Mark Hughes — SunTrust — Analyst
Thank you.
Operator
And Our next question will come from Alex Scott with Goldman Sachs. Please go ahead.
Alex Scott — Goldman Sachs — Analyst
Hi, good morning. First question I had was just on the $2.1 billion, if you could kind of shed a little more light on the interest rate piece of it. I know it was mentioned that it was as of year-end 2018. I’m sure lower rates has been contemplated to some degree, but rates are down 200 basis points at the 10-year level since then. So I was just interested by how it works in terms of the rate assumption? Is it starting at the current spot rate and grading up to some level? Any clarity you can give there would be helpful.
Steven A. Zabel — Executive Vice President, Chief Financial Officer
Yes. Alex, this is Steve. I’ll address that for you. Yes. So it’s interesting. The effective date, the financial statement effective date of the examination was 12/31/2018 just because of kind of the timing of when they kicked off the exam. But yes, we brought forward kind of how we thought about assumptions to more current levels. They’re both experienced in interest rate and just the market environment. So probably the best way to think about the interest rate assumption is, first of all, there’s no kind of regression to a longer-term rate.
It’s more of a flat rate forever that’s built into the new money assumption right now. The other thing to think about is it’s based more on short-term historical averages for the treasury and so it would bring into kind of the market environment at the end of of 2019. Now where we are now, obviously, is a little bit lower than that, but it did roll forward the treasury rate environment to the end of 2019.
And then it builds in just what our credit spreads, expected credit spreads would be for the types of investments, we invest in based on our portfolio investment strategy. So the way to think about it is somewhere in the high 4s for kind of an all-in new money yield.
Alex Scott — Goldman Sachs — Analyst
Got it. Okay. And then the follow-up question I had was, if you could just help us walk through how to think about the statutory capital generation and then sort of sources and uses, I think in the past, you’ve talked about I think it’s like $1.1 to $1.2 of stat earnings. And I just want to think through so you’ve got the 400 for the time being in Fairwind and First Unum, you’ve got this new reserve build to consider?
And then is there anything else we should be thinking about in terms of dividend coverage? And at what point if you do start to see credit, if you start to see the credit environment deteriorating, would you take a harder look at what you’re doing with the common dividend?
Steven A. Zabel — Executive Vice President, Chief Financial Officer
Yes. No, great. So yes, I’ll try to walk through all those pieces. So yes, our statutory capital generation, we have about $1 billion right now of kind of traditional life company income. We pull off another $100 million to $200 million of cash flows between investment management fees and other things from the operating companies up to the holding company. What we’ve seen so far this year is we had a really good first quarter of statutory earnings quarter. We were right around $330 million. In essence, what that did is it helped pay for the impairments that we had on a statutory basis. If you look at our income after the impact of impairments in the first quarter, it was about $250 million. So really, we’re right online to generate $1 billion of earnings so we kind of feel like we’ve paid in the first quarter for a lot of the impairments that we expect to see in our portfolio.
Then yes, you roll that forward to the end of the year at the end of the year, we’ll look at contributions down to the subs. We were expecting somewhere in that $400 million level. This the Maine exam resolution will be incremental to that. We talked about the range of the reserve increase. That will be somewhat less just because of the impacts of taxes and other things going on in Fairwind. The one thing, too, that I might note is it did become official recently that the NAIC has pushed off the implementation of their C1 risk factor changes.
So that does also give us give us some cushion against what our original capital forecast was. And then you layer in suspending share buybacks, and so that generates another $400 million. So we actually feel pretty good, knowing what we know now, we’re pretty confident in being able to hit our capital targets by the end of the year, building in what we expect for downgrades. I noted that we have about a $1.3 billion of downgrades built into that capital plan. And we did see some of that in the first quarter. We’ve seen a little bit more in April. I noted in my comments. But we’re planning for quite a bit of more and the increase in risk-based capital requirements that, that will entail.
Alex Scott — Goldman Sachs — Analyst
Thank you.
Steven A. Zabel — Executive Vice President, Chief Financial Officer
Thanks.
Operator
Our next question will come from Erik Bass with Autonomous Research.
Erik Bass — Autonomous Research — Analyst
Hi, thank you. Would you mind going into a bit more detail on your outlook for premiums across the different business lines. Maybe also talk about how the outlook could differ, I guess, in this recession from prior events, given that you have more voluntary benefits, maybe also what assumption you’re using for unemployment?
Richard P. McKenney — President and Chief Executive Officer
Do you want to take that, Mike?
Michael Q. Simonds — Executive Vice President, Chief Operating Officer
Yes, sure. Maybe I’ll start a little bit and give you a an overview of what the group insurance lines look like here in the U.S. and then Tim Arnold is on the phone, he can talk a little bit to voluntary. And Peter, if you want to hit International very quickly. And I’d say, we hit it a little bit at the beginning of the call, but I would say premium is going to be pressured at the individual member level, most acutely in the small end of the market here and in the voluntary lines.
I think when we look at that and we look at muted sales, particularly here in the first half, of the year, we would sort of be looking at a roughly flattish kind of premium number versus the kind of mid-to lower single-digit growth that we would have otherwise been anticipating. I think the good news for us is that we tend to be overweight sectors of the U.S. economy that are less economically sensitive. So if you took things like retail, travel, leisure, which might be 20% of employment here in the U.S. for our book of business, that’s going to be about 8% of our total exposure. So as we work our way through this downturn, I think we will be the impact on the book will be a bit more muted.
Tim, do you want to talk a little bit about voluntary benefits?
Timothy G. Arnold — Executive Vice President, Voluntary Benefits and President, Colonial Life
Sure. Yes. Our models follow most of the economic models that we’re seeing where the second quarter is going to be the most challenged quarter for growth and then recovery beginning in the third quarter and building over the balance of the year. We are definitely seeing pressure from a sales and persistent perspective for VB, both at Colonial Life and then Unum.
A couple of bright spots. So this environment, you’ve mentioned unemployment. And as we see uninforming increasing, we are seeing actual improvement increases in agent recruiting. And over the last three to four years, we’ve been busy building a digital toolkit that is enabling many of our agents to continue to be successful even in a very challenging environment. So even though it’s challenging, there’s a few bright spots on horizon.
Steven A. Zabel — Executive Vice President, Chief Financial Officer
Peter?
Peter G. O’Donnell — Executive Vice President, Unum International
Great. Thanks. Yes. So U.K. is slightly different than the U.S. So we’re seeing a longer lead time in terms of the impact on premium and sales. So actually, what this crisis has done is it’s really reinforced to people the value of our benefits. So we’re seeing persistency hold up well. We’re still seeing our ability to get price and rate increases through and that pipeline is helping helped in the first quarter, and I think it will help second quarter.
We do see the same trends that Mike and Tim talked about sort of smaller business core business sales is going to become quite challenging as we get into the second half. And we come back online effectively as an economy and businesses go back to work. So we’ll definitely see some fallout there. But overall, we still see premium growth driven by that rate and persistency in the year. Unemployment here is going to go up from that 4% to 7% is the latest prediction. Clearly, it’s hard to call exactly, but I think we feel pretty good about what premiums are go at the moment, given the environment we’re in.
Erik Bass — Autonomous Research — Analyst
And then if I could just ask one follow-up on that. I mean, as we look towards 2021, I think this year, people have made their benefit selections. So clearly, if you lose your job, that would affect kind of premium contributions. But do you expect any changes in kind of election behavior and what people may do for their benefits going into future years or into 2021?
Thomas A. H. White — Senior Vice President of Investor Relations
Mike, do you want to give an insight on that?
Michael Q. Simonds — Executive Vice President, Chief Operating Officer
Yes. It’s actually a really good and an important question. I’ll just pick up on a point that Tim just made that we’re seeing across a number of our lines of business. So I think a reality that’s emerging out of the current pandemic is increased awareness, sensitivity and demand for basic financial protection. And across the enterprise, that’s really what we do.
And so where we are getting in front of folks and increasingly doing that through digital means. But where we are getting in front of folks, we’re seeing good continued take up. I think that’s actually going to play really well for us as we get to the fall, whereas businesses start to reopen, people get back into the office and back to work. I think they’re going to take with them this tailwind around the need for financial protection. I think the other place that we see it is actually at the client or at the employer. So think about the HR person that’s navigating the current situation.
And what we’re seeing, we actually just did some did some outreach proactively through a survey to clients as we’re seeing it even for those clients that are needing to furlough workers, nearly half of them are going to continue the payments on their voluntary benefits at least for the first month or so. So I think our clients are also seeing and feeling firsthand the importance of these benefits. So it’s going to be a challenging year, no doubt about it and over the next couple of quarters. But I think the long-term impact is a very real one around reinforcing the importance of these benefits. And I’m optimistic about how the fall enrollment cycle and headed into 2021, how take-up rates are going to go.
Richard P. McKenney — President and Chief Executive Officer
I think it’s an important point, Eric, too. It’s just when you think about the overall business model, so we are withdrawing an outlook for the year. That’s not about our business model. We actually think we’ll perform pretty well in this environment, given everything. It’s just the noise in the environment around us. That’s telling us that’s probably the smart thing to do right now.
Because I think what you would have heard through the course of today is the business model still works and still provides key protections. People will need those protections, whether they go through a period of time of evaluation. And at the same time, overall returns in our business, our ability to manage through these periods of time, we feel pretty good about all that. So I want to make sure you realize that our removal of the outlook is much more about the environment than it is about our belief in the ability of our business model to perform through cycles.
Erik Bass — Autonomous Research — Analyst
Got it. Thank you.
Operator
And we will take our next question from Humphrey Lee with Dowling & Partners. Please go ahead.
Humphrey Lee — Dowling and Partners — Analyst
Good morning and thank you for taking my questions. The first one, just a clarification question for Steve. You mentioned that the Maine regulators agreeing with you in terms of the peak reserves but just essentially disagreeing on the timing of when to reach that? Is that a is that right?
Steven A. Zabel — Executive Vice President, Chief Financial Officer
Yes, that’s right. So if you think about one key point in all this is when we talk about adjusting our assumptions, to create margin, it’s in the assumptions that we use for a premium deficiency reserve. So it’s not the underlying statutory reserve assumptions. And as you might recall, our statutory reserves grow at a faster rate than our best estimate. So those were already planned to grow faster than our best estimate and then peak at a certain point. With incorporating these new assumptions that Maine’s prescribed to us, that’s going to grow at a faster rate, but it does peak at the same place and just peaked several years prior to what we had anticipated in our normal statutory reserve calculation.
Humphrey Lee — Dowling and Partners — Analyst
That’s helpful. And then in terms of the capital contribution to Fairwind in New York, I think you mentioned that you mentioned in the past that right it has been in the $400 million range, but it will grade down to $250 million over time. Does this change to how that grading pattern would be with this reserve build as well? So that essentially it takes longer to get to the $200 million? Or it doesn’t change?
Steven A. Zabel — Executive Vice President, Chief Financial Officer
No. I mean, if you set aside our need to fund this additional reserve, that pattern would be the same. But you can think about probably just layering this on top of that expected pattern.
Humphrey Lee — Dowling and Partners — Analyst
Got it. Thank you.
Steven A. Zabel — Executive Vice President, Chief Financial Officer
Yeah.
Operator
And with no further questions, I’d like to turn it back to Rick McKenney for any additional or closing remarks.
Richard P. McKenney — President and Chief Executive Officer
Great. Thank you, Savanna. I’d like to thank everybody thank you for taking the time to join us this morning. Savanna that now completes our first quarter 2020 earnings call. Thank you.
Operator
[Operator Closing Remarks]