Q2 2021 Unum Group Earnings Call
[music].
Good day, everyone and welcome to the Unum Group second quarter 2021 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by price in the store Keith by zero. After today's presentation, there will be and opportunity to ask questions to ask your question and you May Press Star then 1 please note that this event.
And is being recorded and a register.
Turning the conference over to Tom White Senior Vice President of Investor Relations. Please go ahead Sir.
Great. Thank you and good morning, everyone and welcome to the second quarter 2021 earnings conference call for Unum.
Mark's 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 low.
Hated and the sections titled cautionary statement regarding forward looking statements and risk factors and our annual report on form 10-K for the fiscal year ended December 31, 2020, and our subsequently filed form 10-Q.
Our SEC filings can be found and the investors section of our website at Unum Dot com.
And I remind you that the statements in today's call speak only as of the date. They are made and we undertake no obligation to publicly update or revise any forward looking statements and presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found and our.
Testicle supplement on our website and the investors section.
Yesterday afternoon, Unum reported second quarter 2021 net income of $182.9 million or <unk> 89 cents per diluted common share compared to $265.5 million or $1.30 per diluted common share in second quarter of 2020.
Net income for the second quarter 2020..1 included the after tax cost related to the early retirement of debt of $53.2 million or 26 cents per diluted common share the.
And the after tax amortization of the cost of reinsurance of $15.5 million or 8 cents per diluted common share and.
And after tax impairment loss on the right of use asset related to 1 of our operating leases for office space, We are no longer using to support our general operations.
$11 million or 5 cents per diluted common share.
A net after tax realized investment gain on the company's investment portfolio of $600000 or 1 cent per diluted common share and a net tax expense related to a U K tax rate increase of $24.2 million or 12 cents per diluted common share net.
Net income and the second quarter of 2020 included an after tax impairment loss on the right of use asset of $10 million from 5 cents per diluted common share and a net after tax realized investment gain of $25.4 million or 12 cents per diluted common share.
So excluding these items after tax adjusted operating income and the second quarter of 2021 was $286.2 million or 1 dollar and 39 cents per diluted common share compared to $251 million or 1 dollar and 23 cents per diluted common share in the year ago quarter.
Participating in this morning's conference call our units President and CEO, Rick Mckenney, Rick Mckenney, excuse me Chief Financial Officer, Steve Zabel and.
Chief operating officer, Mike Simonds, as well as Mark till who heads our unum International business and Tim Arnold who heads our colonial life and voluntary benefits businesses and now I'll turn the call over to Rick for his opening comments.
Thank you Tom and good morning, everyone I am very pleased with our second quarter results. We showed a 13% increase year over year and after tax adjusted operating income to $1.39 per share.
These improved results were driven in large part by the significant decline and Covid related mortality this quarter and by excellent performance and our investment portfolio.
Given our strong second quarter results, we're raising our outlook for full year 2021 growth and after tax adjusted operating income per share to a decline of approximately 1% to 3% compared to our previous outlook of a decline of 5% to 6%.
We believe we're making good progress to returning to our pre pandemic levels of profitability and margins over the coming quarters, where the trajectory of that improvement dependent on the developing trends and COVID-19 and the Delta Varian and.
And better than our expectations is that COVID-19 mortality will improve but only slightly and the third and fourth quarters.
And many ways results for this quarter played out in line with our expectations with declining mortality impacts solid underlying premium trends and further strengthening of our healthy capital position.
This quarter was also highlighted with some areas of positive upside relative to our expectations.
Most notably we saw continued excellent returns from our alternative investment portfolio, which is benefiting from the strong financial markets and growth and the economy.
We also saw a record level of quarterly operating income for colonial life, along with an impressive recovery and sales and.
And rounding out we had favorable underlying benefits experience from our closed block business lines, both long term care and the closed disability block.
And we'll cover these positive trends and detail throughout our comments this morning.
In addition to the positive trends we saw this quarter I am pleased that our indicators continue to support our expectation of generating generating slightly positive growth and premium income and our core business segments. This year with further improvement expected into 2020.2.
Sales trends are emerging in line with our expectations and our primary business lines within Unum U S and colonial life showed very strong results this quarter with over a 50% increase from the year ago quarter, a good indicator of consumer interest and the basic financial protection products, we offer.
It also highlights at the agency bottled colonial life is quite resilient as a source of and the most pronounced headwinds and the early stages of the pandemic.
In addition to sales trends, we remain very encouraged with the strong levels of persistency, we're seeing across the majority of our business, which provide a solid base to grow.
Finally, we're seeing a pickup and natural growth primarily from higher wages and many sectors of the economy. As we continued to build back premium income that was impacted by the sharp spike in unemployment and the first half of 2020.
The environment, we are seeing today is quite good for our core business.
We often talk about wage inflation, but you have to add to the mix. There is renewed recognition for the need to prepare for the unexpected.
And in a competitive world for talent employers are looking to ensure that they are competitive benefits package for their current and prospective employees.
Turning to our capital position at quarter and it remained very healthy as well with holding company cash at $1.7 billion and weighted average risk based capital for our traditional U S insurance companies at 375%.
Both of these measures are in excess of our targets and provide substantial flexibility for us going forward.
Additionally, this quarter, we successfully completed a 30 year debt issue and redeemed a shorter high coupon maturity, enabling us to further extend our debt stack, while reducing the overall coupon.
Leverage remains approximately 28, 26% and provides further capital flexibility for us.
This strong capital position creates options for us as we look to create value for our shareholders.
Our deployment strategy will first focus on continuing to invest and the growth of our core business segments, both organically and through capability driven acquisitions.
We like our position and the employee benefits market and putting money to work to grow our core franchise is where we're focused.
We also expect to be consistent and returning capital to shareholders through dividends, which will increase by 5.3% with a dividend to be paid this month.
We do have funds in excess of these needs and so as we look to the future. We are constantly evaluating how to best deploy or hold onto this capital.
A key question is how we can use these funds to lessen the challenge to our current share price from the overhang of our legacy LTC block.
Return of capital to shareholders remains an important option for us, but we are also considering pre funding a portion of the P. D. Our our goal is to help reduce the LTC discount and our stock and in the future of this funding would be utilized and any risk transfer transaction that we explore and a portion of this block should that become an option for us.
While we're clearly optimistic looking forward, we do see areas of our business that continued to be impacted by the pandemic.
Our results and our short term disability line and leave services continued to be impacted by Covid related claims which remained stubbornly high.
The group life and a D. A D business within Unum U S returned to profitability and the second quarter after recording losses, and the previous 2 quarters as COVID-19 related mortality and the U S declined materially from the peak levels experienced late last year through the early months of 'twenty 'twenty 1.
While we were watching now is that the Delta Varian is impacting a younger unvaccinated population that has different dynamics from what we have seen today from COVID-19.
Recently updated estimates for Covid related mortality for the third quarter and second half of 2021 are pointing to persistently high counts and only a marginal improvement relative to the second quarter.
We continue to watch these trends closely and are reflecting them and our own plans.
There is room for optimism, though as we have started to see employers looking at the role that they might play and getting more of the population and vaccinated.
As we look at growth and our enterprise the steps, we're taking we've taken to run our business more efficiently have free to funds that are we're reinvesting and new products and capabilities that tackle some of today is critical business workplace challenges.
During the quarter, we launched our new total leave and behavioral health solutions and we've logged our first sales for both offerings.
On the digital front platforms like my Unum and colonial life's improved portal are steadily providing more self service real time capabilities for our clients and customers.
And new technology, we're testing will enhance the digital enrollment experience automate processes that allow people to interact with us and new ways.
Equally important is the work we're doing to strengthen our culture and engage our employees across the enterprise.
We've taken steps during the quarter to accelerate and expand our inclusion and diversity journey.
And we broaden the scope of our social Justice fund to support even more group is facing discrimination.
These and many other efforts helped plays and Unum among the points of light civic 50, and enforce best employers for diversity best employers for women and best employers for new graduates.
We're also happy to receive another perfect score and the human rights campaign's corporate equality index and to be named a best place to work for disability inclusion.
These efforts and accomplishments reflect a strong culture. We have built we are proud of how it has helped us endure through the challenges of the past year and a half and how the engagement of our team will propel us going forward now I'll ask Steve to cover the details and second quarter results. Steve Yes. Thank you Rick and good morning, everyone as I discuss our second quarter financial results. This.
And I will primarily focus on analysis of our second quarter results relative to the first quarter of 2021, which will allow us to show how the company's business lines are recovering from the pandemic.
I'll start with the Unum U S segment, which reported adjusted operating income for the second quarter of $179.3 million compared to $115.7 million and the first quarter.
These results improved significantly due to the improvement and Covid related mortality in our group life business line, which I'll provide more detail on in a moment. We also saw improved operating income from the supplemental and voluntary line, while income and the group disability line declined compared to the first quarter.
Within the Unum U S segment. The group disability line reported operating income of $59.9 million and the second quarter compared to $64.1 million and the first quarter. The primary driver of the change was lower net investment income, which largely resulted from a lower level of bond calls.
Premium income was generally consistent between the 2 quarters and on a year over year basis increased 1.1% the group disability benefit ratio for the second quarter was 74, 7%, which is consistent with the first quarter benefit ratio of 74, 8%.
We feel the benefit ratio will likely remain at this level over the near term due to the impacts we're seeing from Covid and the Delta area, which we now believe will likely persist through the second half of the year.
Adjusted operating income for Unum U S group life, and a D and D showed sparked sharp improvement in the second quarter to income of $5.2 million compared to a loss of $58.3 million and the first quarter. This improvement is consistent with our expectation and largely explained by the significant reduction and COVID-19 related mortality and the.
<unk>, which declined from approximately 200000 nationwide observe deaths and the first quarter to approximately 52000 and the second quarter. We estimate that we incurred approximately 800 excess claims from COVID-19 in the second quarter compared to an estimate of 2050 Covid claims in the first quarter.
Our average size of claim increased and the second quarter by approximately 10% as we experienced a mix shift to a more younger working age policyholders, who typically have higher benefit amounts.
Non COVID-19 related mortality have little impact on results this quarter relative to the first quarter as lower incidents was offset by higher average claim size.
Now looking ahead to the third quarter, our current expectation for nationwide Covid related mortality of approximately 40000 compared to approximately 52000 experienced in the second quarter, assuming the shift and the mix continues to more younger working age and individuals with a continued higher average benefit amount, we would estimate third quarter.
Group wide operating income to show a modest improvement over second quarter results to approximately $15 million. We are closely watching the impacts of emerging from the COVID-19 variance, which have led to increasing and estimates for second half mortality expectations.
Now shifting to the Unum us supplemental and voluntary lines, we saw and improved quarter with adjusted operating income of $114.2 million and the second quarter compared to $109.9 million and the first quarter looking at the 3 primary business lines first we remain very pleased with the performance of the individual disability.
Recently issued block of business, both in the second quarter and throughout the pandemic.
Though the benefit ratio did increase to 48, 4% and the second quarter from 42, 4% and the first quarter. It continues to perform quite well compared to our pre pandemic experience as new claim incidence trends and recovery levels remain favorable.
The voluntary benefits line reported a strong level of income as well the benefit ratio increased and the second quarter relative to the first quarter, though it did remain consistent with the pre pandemic results.
And the benefit ratio and the critic group critical illness line increased offsetting the improved experience and a lifelines of business.
And then finally utilization and the dental and vision line was higher this quarter as was the average cost per procedure, pushing the benefit ratio and to 77, 1% in the second quarter compared to 73, 2% in the first quarter.
Dental and vision and utilization has been volatile since a significant decline in utilization, we did experience and the second quarter of 2020.
Sales for Unum U S. In total declined 3.1% and the second quarter on a year over year basis compared to a decline of 10, 3% and the first quarter for the employee benefit lines, which include L. T. D. S. T D group life, a D and D and stop loss total sales declined by 3.1% this quarter we saw.
Activity and results and the core markets for group disability and group life, while large case sales were down year over year, we are seeing a good level of quote activity and the group markets, which is back to pre pandemic levels.
Sales trends and our supplemental and voluntary lines showed similar improvement and the second quarter relative to the first quarter for this quarter total sales declined 3.1% year over year compared to the 22, 3% decline and the first quarter our.
Our recently issued individual disability sales increased 4.9% and dental and vision sales increased 2.4% year over year.
Voluntary benefit sales were down 7% and the quarter, which is consistent with our view that these sales will take longer to recover.
Large case VB sales in particular have a longer sales cycle and our more concentrated around January 1 effective date.
Persistency for our major product lines and Unum U S remained inline to higher this quarter relative to the first quarter of 2020, providing a good tailwind for premium growth growth for the full year and into 2020.2.
We have also seen favorable trends and natural growth and our employee benefit lines, primarily from higher wage growth at this point.
Now moving to the Unum International segment adjusted operating income for the second quarter was $24.8 million compared to $26.4 million and the first quarter and $15.1 million and the second quarter of 2020.
The primary driver of these results is and our Unum UK business, which generated adjusted operating income of $16.8 million pounds, and the second quarter compared to $18.6 million pounds, and the first quarter and 10.1 million pounds and the second quarter of 2020.
We are pleased with these results, which showed improved underlying benefits experience, particularly in our group Whiteline reported benefit ratio and Unum, UK, which showed an increased to 82, 5% and the second quarter from 75, 3% and the first quarter was impacted by the increase and inflation in the U K and our second quarter.
Third to the first quarter higher inflation and triggers higher inflation related benefits to certain of our policyholders as well as higher net investment income from the inflation index linked gilts and our investment portfolio.
The rapid increase in inflation in the U K from the first and second quarter did distorts somewhat the timing of these 2 factors and produced a net negative impact of slightly less and 3 million pounds to adjusted operating income. This quarter. This short term impact to income is expected to balance out over the course of the year.
Overall, we are very pleased with results and our international business with benefit ratios adjusted for inflation for Unum UK, improving both on a sequential and year over year basis.
Premium growth for our international businesses was also favorable this quarter compared to a year ago looking at the growth on a year over year basis and in local currency to neutralize the benefit we saw from the higher exchange rate Unum UK generated growth of 3% with strong persistency and the ongoing successful placement of significant rate increases on our in force.
And what.
And unum, Poland generated growth of 12, 4% a continuation of the low double digit growth. This business has been producing with this growth our unum International in force premium is now at its highest level.
Next we are very pleased with the results generated by colonial life with an adjusted operating income of $95.8 million and the second quarter compared to $73.3 million in the first quarter. This record quarterly income level was primarily driven by improved benefits experience and higher net investment income the benefit.
Ratio improved to 51, 7% and the second quarter from 55, 4% and the first quarter as experience and the life insurance block improve with the overall decline and COVID-19 related mortality experience and both the accident sickness and disability line and the cancer and critical illness line also improved relative to the first quarter.
Additionally, net investment income increased on a sequential basis, which was primarily driven by higher income from bond calls looking.
Looking after the third quarter, we anticipate adjusted operating income to settle back to the low to mid $80 million range and some of this favorable experience moderates.
We're very excited with the rebound and sales activity were experienced and colonial life. This quarter, increasing 53, 7% on a year over year basis. While this strong recovery comes off of the Covid depressed result in the year ago quarter. This quarter marks a return to year over year growth is face to face sales reemerge and we drive for.
And their utilization of our digital sales and enrollment capabilities.
As expected premium income declined 4.3% on a year over year basis, and will likely continue with negative comparisons for the next couple of quarters until sales volumes have sufficiently recover.
Persistency for colonial life continues to show an encouraging trend at 78, 3% for the first half of 2020, 1 almost a point higher than a year ago.
And then in the closed block segment adjusted operating income was $111.2 million and the second quarter compared to $97 million in the first quarter, both very strong quarters relative to our historical levels of income for this segment.
Results this quarter benefited from strong levels of net investment income due to higher levels of miscellaneous investment income, which I'll cover in more detail and just a moment as well as favorable underlying benefits results in both long term care and the closed disability blocks.
And looking within a close block LTC block produced a slightly lower interest adjusted loss ratio of 74, 6% and the second quarter compared to 77, 7% and the first quarter both results quite favorable to our long term and expected range of 85% to 90% over the past 4 quarters and the benefit ratio.
So for LTC with 70%, excluding the impact of the fourth quarter 2020 reserve assumption update.
We continue to see higher mortality experience and the climate walk and the second quarter and estimate the accounts were approximately 5% higher than expected.
OTC claims incidents was slightly higher and the second quarter, though we have seen higher recoveries on many of these claims which mitigates the financial impact.
Looking forward to the second half of the year, we anticipate that the interest adjusted loss ratio for LTC will likely remain slightly favorable to our long term assumption range as mortality and incidence trends continue to normalize from the impacts of Covid.
For the closed disability block the interest adjusted loss ratio was 69, 6% and the second quarter and 68, 9% and the first quarter the underlying experience on the retained block, which largely largely reflects the active life reserve cohort and certain other smaller claims blocks, we retain performed favorably to our expectation.
Primarily due to lower submitted claims.
So overall it was a very strong performance this quarter for the closed block segment, driven by both higher miscellaneous income and favorable underlying benefit experience.
We estimate the current quarterly operating income for this segment will overtime running within the range of $45 million to $55 million, assuming more normal trends for investment income and claim results.
So wrapping up my commentary on the quarter's financial results. The adjusted operating loss and the corporate segment was $48.5 million and the second quarter compared to $38.9 million in the first quarter. This excludes the special items, we listed and our earnings release, we anticipate the quarterly losses and the corporate segment will moderate and the second half of the year.
Here to the low to mid $40 million range.
I'd now like to turn to our investment portfolio, where we are seeing very favorable favorable overall credit trends first there were no downgrades from investment grade securities to high yield this quarter. In fact, we had net upgrades and ratings overall for the portfolio, which generated a small capital benefit to us this quarter.
In addition, our internal watch list of potential credit concerns is now lower today than it was coming into the pandemic and early 2020.
As you've read and our earnings release and heard through my comments. This quarter, we had a very high level of miscellaneous investment income this quarter, which you know is generated from 2 sources first we saw a high level of miscellaneous investment income from bond calls again this quarter as many companies look to refinance higher coupon debt and take advantage.
<unk> today's lower interest rates and tight spreads we had approximately $10 million higher investment income from bond calls this quarter relative to our historical quarterly averages.
Over the past several quarters. This has been extremely volatile and difficult to predict from quarter to quarter. While these bond calls and enhanced for a period of investment income. It is a challenge to replace the lost deals and today's low interest rate environment.
Second as I mentioned previously we continued to see strong performance and the valuation Mark on our alternative investment assets, which totaled $51.9 million and the second quarter. Following a positive mark of $35.9 million reported and the first quarter, both quarters are well above the expected quarterly positive marks on the portfolio.
<unk> of 12% to $14 million.
This quarter is very strong returns primarily reflected returns for the period ending March 32021, due to the lags and reporting typical on many of these investments the higher returns. This quarter were generated from all 3 of our main sectors credit real estate and private equity and reflect the strong financial markets and strong economic growth.
It is hard to predict quarterly turns for miscellaneous investment income, but the third quarter. So far we are seeing a continuation of favorable trends and bond call premiums.
Moving now to our capital position the financial position of the company continues to be in great shape, providing us significant financial flexibility the risk based capital ratio for our traditional U S insurance companies improved to approximately 375% and holding company cash was $1.7 billion as of the end of the second quarter, which are.
Both well above our targeted levels.
During the second quarter, we successfully completed a debt offering issuing $600 million of of 30 year senior note with a coupon of 5 and Nate.
This was the lowest coupon on a 30 year debt issue in our history. The proceeds from the issue were used to redeem the $500 million 4.5% issue that would have matured and 2025 and you'll see the debt extinguishment costs associated with the redemption, including and our net income this quarter and.
Accordingly, this transaction enabled us to extend the duration of our debt stack and reduce the overall coupon on our outstanding debt with the issuance and the redemption completed in the second quarter. Our leverage ratio currently has 26, 2% providing additional financial flexibility.
And important industry developed and development recently was the Finalization of the C..1 factor changes, which had been under consideration by the FDIC for the past several years and.
And our outlook meeting this past December we indicated that our capital plan for 2021 in our capital plan for 2021, we assumed and negative impact of approximately $225 million from the adoption of the factor changes as you are likely aware of any IC concluded by adopting recommendation from Moody's analytics, which are <unk>.
Not as impactful to our capital plan as we previously had assumed.
We now estimate the impact of our capital position to be less and $70 million rather than the $225 million. We had previously projected a very good outcome for us which provides upside to our capital expectations for year end 2021.
I'll close my comments with an update to our outlook for 2021 previously we expected a modest decline of 5% to 6% for full year 2021. After tax adjusted operating income per share relative to the 2020 level of $4.93.
And $4.93 per diluted common share given the strong second quarter results and our updated view on Covid trends, we are revising our outlook upward and now look for 2020..1 after tax adjusted operating earnings per share to decline by a range of approximately 1% to 3% relative to 2020.
Our underlying performance is expected to remain quite healthy the COVID-19 and the Delta variant and will continue to be an important driver of results.
And now I'll turn the call back to Rick for his closing comments and look forward to your questions. Great. Thank you Steve for that summary of our second quarter.
As Youll hear from the rest of the team we continue to be very pleased with the operational performance of the company through what has been and extraordinary environment and we believe we are well positioned to benefit from today's improving business conditions, and we remain vigilant as dependent debit conditions, we're happy to be taking your questions. Today. So let me ask the operator to be open up the session.
Thank you and we will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone.
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We kindly ask that you. Please limit yourself to 1 question and 1 follow up and at this time, we will pause momentarily for the first question.
And our first question today will come from Ryan Krueger with K B W. Please go ahead.
Hi, good morning.
Could you.
Could you expand a little bit on your comments about potentially pre funding.
The main premium deficiency reserve and give us any sense of the potential timeframe you might look to pre fund it over.
Sure Brian Let me Yeah, let me take you back a step out and talk about our overall capital position and capital deployment. I mean, you have to start off first that we would come out all of this from a very strong position and the capital we've generated both from how operations have done, but also going back to last year and with the individual disability reinsurance transactions. So we start from a very strong.
Position and first thing as we've said multiple times is to put that money put that generation into the core business. So we're very happy you'll hear about that probably some more of this morning very happy about how the core business has responded in this environment and we want to put that money to organic growth and then also have the flexibility to do some capability driven acquisitions.
We see that opportunity similar to what we've done over past times and so then it takes you forward to what our options with the excess and we do have excess relative to our expectations you start out with a little bit choppy or environment that we see today. So you have the option to hold onto it and we've talked about share repurchase and that option exists today and then.
As you mentioned is looking at the PDR the premium deficiency reserve that we have with.
With the with the state of Maine, and so we look at that as something that obligation to us over a 7 year period of time.
It is something we have to look at and we think pre funding a portion of that might make some sense in todays market. When you think about the pre funding.
Think about it as well as this is an area, which are those funds will ultimately need to go to and its also addressing 1 of the bigger concerns that people have about the company today and that's the overhang of our LTC obligation and liabilities. There. So that's the thought process I really can't give you any sizing today or timing to that.
But certainly that's a thought process that we are and the middle of today.
Thanks, and just 1 follow up.
In addition to that.
Wanted to confirm that you are still planning to resume share repurchase near term as well.
We've not made that commitment Ryan and so we will that's an option that's available to us, but we look at that in conjunction with those 3 options today and I think you know and.
In today's environment and is this the right time to be starting up a share repurchase program..1 that we haven't been doing for some time and we look at all of those options of the excess including holding onto the capital is real thing. So we are not committing to anything from a redeployment and in the form of share repurchase we certainly remain committed to.
Through our dividend and redeploying capital to shareholders and that form, but but not on the share repurchase as of today.
Got it thank you.
And our next question will come from Tom Gallagher with Evercore. Please go ahead.
Yes.
Good morning, Rick just a follow up to Ryan's question D.
I guess up until recently you sounded a little more positively inclined on buyback.
And I I.
And I think the pre funding and everything you've said about LTC and makes a lot of sense, but just curious.
Why why the at least the tone change on buybacks.
Yes, no I think when you when you think about it Tom and what we're what we're trying to accomplish we have to look at buybacks as 1 for them and anything we would've contemplated there would've been quite modest and I don't.
I think we've said there'll be anything more than that and so now we're just given the facts as we see them today as we've gone through this summer and period of time looking at what's going on and the world around US I mean, all of those are influences no no 1 thing with would cause us to change tone around that but those are all things we put into the mill. So we just want.
You're very clear that those options are out there they are available to us.
And we're gonna have to make those decisions through the third quarter through the fourth quarter based on what we're seeing and the environment around us.
Gotcha and then.
Is it.
Should we think about that as really just being driven by macro.
Level of rates currently and what's going on with that Delta.
Delta variant.
Or is it also more and consultation with rating agencies regulators you think this would be the more prudent path like what's what's the greater determinant for for why you're considering pre funding LTC.
Yes, so I think all of those that you mentioned are all factors and we want to make sure all of our constituents our thought about through this process. The fact that the Delta variant is starting and we are really hasnt come through in terms of what we've seen in our books of business and de risk that we have out there I wouldn't want to overplay that that that has changed anything and in the course of what we're looking at.
But when you look at the risk of that out there through the next couple of quarters. When you look at interest rates, which have come down pretty precipitously over the course of the summer those are all factors that play in but I wanted to highlight any 1 factor greater and the other.
And if I could just sneak in 1 more for Steve.
I guess, you mentioned youre, assuming the favorable trends at colonial this quarter are expected to fade and the back half of 2021 is that because you saw a more of a return to normal claims.
Claims utilization towards the end of the quarter during the course of the quarter or and to during July and maybe or is that just being more conservative that you're not assuming continuation of the favorability there.
Yes.
<unk>, it's Steve here I would say the kind of low <unk> would be more of a normal run rate and second quarter is a bit of an anomaly. We had a higher than expected bond calls there and I think weighted with about $3 million over our expectations.
We also had very favorable expense levels.
Don't think we'll probably continue into the back half of the year. So I wouldn't say that we're in any way kind of regrets and I just think that <unk> is a bit of anomaly and private low eighty's is just about our long term expectation, which is more consistent with what we've seen in the past.
Okay. Thanks.
Thanks, Tom.
And our next question will come from Jimmy Buehler with J P. Morgan. Please go ahead.
Hi, Good morning, So first just had a question on.
The just your views on what Youre seeing on long term care claims submissions has activity sort of come back to normal.
Or are people still sort of reluctant to visit nurse and nursing homes and stuff given the delta variant and obviously mortality that tailwind and that product line, but are you seeing anything in terms of claims submissions as well.
Hey, Jimmy and Steve here I'll take that 1 so I'll take is really back to what we've seen over the last 5 quarters. As you know second quarter of last year, we really saw I'd say, 3 things and our benefits experience and that number 1 extremely high claim and mortality.
Typically and nursing home and we're about 30% higher than our expectations.
The second thing that we saw was lower than expected claims incidents as people were.
Essentially reluctant to claim really and any situs, whether it's at home or or in AR and AR facility and then we also saw really a slowdown of transitions between site is so slow down and people moving from home care facilities or vice versa people pretty much just stayed where they were.
What we've seen and those 3 overtime claimant mortality and continuing to be pretty elevated through the last several quarters about 15% elevated we've seen that come down to about 5% elevated.
In the second quarter, we would think that that would continue to moderate when you think about vaccination trends pretty targeted towards the older population, which clearly is where our block will be concentrated so we would see that continuing to moderate.
<unk> part of the year from an incidence perspective, we have seen incidents continued to kind of trend up more to our expectations I would say, that's where we are and the second quarter, maybe a little bit higher incidents a little bit higher recoveries.
Those new claimants, but financially I would say we're back pretty much to our expectations and then the last would be transitions and we have seen that open up a little bit, but I'd still say that it is.
And probably a little bit light versus what we might have historically seen pre pandemic as far as people moving.
And between different sizes so.
I'd say, we're getting back to normal we will have to see what this next wave of Delta Varian does within the block and how that affects those different dynamics, but we do think that we'll be trending back to kind of day, 85% to 90% range probably at this point by the latter part of the year into next year.
Okay, and then on colonial.
Seems like you're fairly constructive on and up.
<expletive> and sales given sort of the return of face to face people getting back to work.
Do you think that that recovery could be pushed back given that COVID-19 cases had been picking up recently and some of the companies that had.
Planned on having their employees that could work or pushing the timing of that back as well, but just any comments on what you've seen in terms of sales activity and colonial recently and how that's affected by increasing cases.
Yes, Jimmy we are very pleased with the resilience of that franchise and I'll turn it over to <unk> tomorrow to talk about some of the dynamics that we're seeing and how we're thinking about it going forward.
And thanks, Jim I appreciate the question so.
We are seeing really strong activity levels and all geographies.
Strong results across industry segments and across product categories, we have tremendous agent retention and we're currently at 19% and more agents and we had at the same time and 2019.
Seeing great engagement, among our agents and tremendous productivity.
Finding that technology paired with a really strong agency distribution force is the key to being successful in this environment, where we can roll and provide benefits education and.
Under virtually any scenario and we are seeing a substantial increase and virtual enrollments.
And of what we're also seeing is and even in states, where there are high levels of.
And Delta variant will not seeing and returned to the cash shutdowns and we saw in 2020 and so we believe that we will be able to continue with face to face enrollments and also augment those with the incredible digital tools that we've built over the last few years.
Okay. Thank you.
Thanks, Jamie.
And our next question will come from Don <unk> with Dowling and partners. Please go ahead.
Hi.
Thank you for taking my questions.
Uh huh.
My first question is related to group life and <unk>, you talked about 800 access desk.
And as claims in the quarter with average claim size and 55000 and that would mean kind of roughly 44 million and 45 million excess com.
And claims and a quarter and that would put you and your normalized earnings for the quarter closer to $50 million, which are still quite low compared to what you historically low rent.
Just wondering besides COVID-19 what else is driving accounts.
<unk> earnings for the segment.
Yeah, I'm free I'll take that and its Steve.
Im not completely following your math, but I'll, just kind of restate, what our assumptions are and how we're thinking about the last half of the year and in the second quarter of 'twenty..1 we did have about 800, what estimated 800 COVID-19 related deaths and that was on a nationwide count of 52000, and I would say that.
It's kind of hard to do a rule of thumb calculation anymore, just because we are seeing a different population and in.
And our experience as Covid started to impact the kind of a younger and more working and aged individuals.
So we had that 1% kind of rule of thumb that that's drifted up quite a bit it's probably around 1.5% at this point.
We do anticipate and the third quarter and really and the fourth quarter net.
Asian wide level of about 40000, and COVID-19 related deaths and so if you kind of run the math through what we think the distribution of that is going to be we do think earnings will probably be around $15 million for both third and fourth quarter net now as far as just broader kind of historical levels of earnings and that sort of thing we do see fluctuations.
Quarter to quarter, just and the average size and the count of claims that was pretty consistent.
And between first quarter and second quarter, but that can fluctuate quite a bit period to period I think what we just need to see us kind of get through this uncertainty of pandemic and then kind of Rebase line, what the earnings power of the group life businesses, but we continue to feel really good just about the premium levels, there and how that's resonating with them.
So.
More to come as we get into looking into next year.
Okay got it.
On the positive side, you talked about seeing some benefit of wage growth coming through can you size the uplift that you're seeing and then as well as your kind of forward expectation.
And it's Mike I think I can take that and take questions about natural growth and what's coming through and the client base and you are right and we've started to see that tick up a bit and.
On the backs of wage growth.
And not yet seeing the employment side of that equation come through so.
Should.
Economic expansion continue should the labor market continued to improve that would represent a bit of upside for us, particularly and the group insurance lines.
Okay. Thank you.
Yeah.
Thanks Humphrey.
And our next question will come from Tresiba and Gregory with Barclays. Please go ahead.
Good morning could you confirm my understanding any PDR pre funding would that be voluntary.
And mean does not require you to accelerate 7 year timeline, if you hold excess capital.
Yes, the way we're looking at that Tracy is it would be voluntary. This is just something we're looking at like we said, it's an obligation over the next 7 years going back a year.
And so we would be it would be voluntary and what form you put that and timing and that is up to us we're still maintaining moving along and the path of the original PDR.
Okay, Great and I think you'll also suggesting that any potential LTC block transit transaction may be contingent upon pre funding PDR and I guess I'm just wondering if it's like a mako or funds withheld structure wise that would matter.
Yeah. So no that's not what we're saying I think what we're saying is as we put more funds to our long term care business ultimately and a transaction that will get realized so it's not that the technical nature of it in terms of how a transaction is done and how it moves around and just saying that the more funding we have behind our long term care block ultimately what a buyer when they look at it they will there'll be a.
Smaller gap now.
And that period of time, so it's nothing technical just just saying there's more capital that is now with within the LTC business, which would then be realized upon sale.
Okay. Thank you.
Okay.
And our next question will come from Erik bass with Autonomous Research. Please go ahead.
Hi, Thank you maybe first just to follow up on Tracy's question and I guess has anything changed in terms of what youre seeing in terms of the LTC risk transfer market and just the appetite for blocks.
Yes, and maybe I'll step back from that a little bit Eric and then when you think of the prospects and we've talked about of and LTC transaction I think that.
From our perspective going back to last year and certainly our we feel like we have the capabilities to do so our IDI transaction is a good indicator of that.
We've now see it a little bit differently that we can actually perhaps customize some of the risks that are counterparties willing to take on and I would tell you what has changed and which is just part of the dynamics of the market is just where interest rates are we've talked about that as being a headwind to any type of transaction and widening the gap and those certainly have come down here over the last quarter.
And so that's probably the only thing that has changed and that's the math of the deal, but I don't think any other dynamics that really changed to how we've talked about our recently.
Got it. Thank you and then can you talk a bit about activity levels and competitive dynamics and the U S group market and how are these.
Feeding into your sales outlook for the second half of the year.
Sure Mike I can take that it might be a good opportunity to talk a little bit about a couple of our different geographies.
We are encouraged on a broad basis about the recovery and you see that quarter over quarters.
Both Rick and Steve highlighted in their remarks, and the group insurance market to your specific <unk>.
Question.
Are encouraged about activity levels, and what's coming through and the pipeline the competitive realities.
Are not terribly dissimilar from what we've seen in prior periods I do think while no 1 carrier really stands out as being overly aggressive I think there are a number of players out there that are probably looking to make up for some lost ground after a challenging 2000.
<unk>, we're going to stick to our pricing and underwriting guidelines that are again pretty encouraged about the ability to differentiate on things like our investments and leaves and.
And our HR and that capability.
What it is and I think pretty good stead will play Opportunistically and that large case market, where I'd say the competition is probably the toughest if you go down market and it's literally almost linear down into the small case market things are really opening up and we are encouraged.
Core overall was up in the quarter and if you go down into the small and up core we're seeing nice double digit increases, there, which bodes well for us.
Going forward I think Tim maybe comment a little bit on the competitive market and what youre seeing and.
As I mentioned earlier, we're very encouraged by the activity levels, we're seeing by the results, we have and the second quarter or very encouraged by the early trends, we're seeing and and the third quarter.
Similar to the Mikes comments, we see tremendous opportunity across both brands and the core and mid and mid sized markets would you view large case, a bit more opportunistically as well on the <unk> side, but again very encouraged about the prospects over the second half of the year.
Great.
Mark maybe you can just quickly what youre seeing and the international market.
Yes, I mean, we're seeing generally blend economies in both Poland and the UK such that quarter on quarter. Certainly in dollar terms sounds are up 24% I would say the U K market competitively is very similar but with hardening of rates switches.
Encouraging in Poland, and we're seeing some competitor consolidation, but where the focuses on cost reduction our market penetration and actually that distraction should be helpful to us both in terms of talking to clients and potentially for some staff recruitment and ourselves so I think with free.
And I'm pretty confident.
Okay.
Perfect. Thank you.
Thanks, Eric and Eric.
And our next question will come from Josh Shanker with Bank of America. Please go ahead.
And thank you very much so im looking from wonderful results from a close block relative to the past and try and figure out what's trend the bowl versus what.
And what is unusual I mean first and the LTC side, obviously COVID-19 has.
And some positive headwinds or are we looking for a reserve study to conclude about the frequency trends and LTC book.
Before we know the impact and and and.
And we look at the numbers should we expect what we saw this quarter persists pending a more in depth analysis of the impact from Covid on LTC.
Yes. This is Steve I'll take that 1 and there was a lot and there. So let me try to break it down a little bit as far as kind of non tradable items and I'll just start with the benefits experience.
And as I mentioned from an incidence perspective, we're pretty much back to what our expectations would be claim and mortality is still running a little high. So you can kind of think about from where we were from a loss ratio perspective in the us.
Second quarter over the next few quarters and the next year that will trend back into that 85% to 90% range. Then the other thing that I guess I would focus on is just net investment income and specifically our miscellaneous net investment income.
Overall, we had about $52 million of alternative asset income during the period. The majority of that is going to be and the closed block our expectation would be more and the 12% to 14%. So that that variance you can pretty much and consider a little bit unique and probably won't recur.
Now with that said.
Tends to be pretty volatile as far as the marks on this portfolio. So over time, our expectation is kind of that 12 months to 14%, but it can be a little bit higher a little bit lower and.
And then the other would be bond calls and.
And I would say overall were probably for the organization, maybe $10 million over our expectation overall, and maybe half or a little bit less and half of that would've been and the closed block. So you kind of boil that all up and we're looking to the back half of the year and it'd probably be kind of in that $50 million all in and closed block earnings for the third and.
The fourth quarter, but.
As you know things can be very volatile and this business line both from a claims experience perspective as well as from from miscellaneous net investment income net now your question about just taken into consideration and our claims experience and all that and there are mortality experience into how we think about reserve adequacy and kind of our assumption review were really.
Viewing all of what's happened over the last year as an anomaly by and large unless we do see more permanent changes in behavior and and those types of things, but we're kind of street and that's all of an anomaly and feel good about the liability assumptions that we have and in our reserve and we will go through our normal process at year end, but we're not seeing anything right now that would have.
And this change are our perspective there.
And then on the individual disability portion or the lower claim submission.
And that way like that unusual is that over related is that a change and the nature of the book again, just trying for whats tremble and match.
Yeah, Yeah, so for that closed block IDI.
And it really 2 things happened when we did our transaction with global Atlantic What 1 was we seeded and majority of our claims blocks and them, but we do still retain some smaller pieces of that block. So we will continue to have.
Some claim it's basically claim termination rents whether it's mortality of recovery, we still do have a bit of that risk.
And thats been pretty consistent with our expectations.
We also.
<unk>.
And the entirety of the active life reserve block and so if you think about the risks there it's really incidents on the active lives and then how that claim performs over time and we've actually seen some pretty favorable experience around incidents over the last.
A couple of quarters again that can be somewhat volatile so.
I would just think about about $5 million a quarter for the close block disability business.
Over the latter half of the year again, we're kind of new to that block and what we have left and clearly because it's a smaller block it will probably be more volatile than what we saw and when we retain the entire block, but I think just for modeling purposes that $5 million and quarters of pretty good number and then just to put a bow on it and.
And so I understand and first quarter, what they did the change and separate from our global Atlantic.
<unk> when did the transfer occur and which day.
Yes, well there was 2 phases of it salt I'll take you back to fourth quarter of last year, we closed for GAAP purposes. The effective date was basically halfway through December is when we closed the deal and so the way to think about that as we pretty much had the full block and our fourth quarter financial results.
And then that would have been reflected on phase 1 reflected and our first quarter second quarter results for phase 2 that would've been affected really at the end of the first quarter and so we really close phase 2 and the latter part of the group quarter. So second quarter was the first quarter, we would've reflected phase 2 and.
The way to think about it is that second quarter is pretty much the block we're going to have going forward.
Kind of summarize all of that.
Fantastic. Thank you for all the answers.
And Josh and Keith Thank you.
And our next question will come from Mark Hughes with Truest. Please go ahead.
Yes, Thank you and good morning, sorry, if I missed this earlier.
You have any comments on the recoveries and the Unum U S.
Group disability line and any change in behavior.
<unk> security administration around the <unk>.
Moving disability claims that might be noteworthy.
Sure Mark it's Mike I. Appreciate the question. So the first part of it recoveries continued to be solid and favorable relative to our expectation.
Built a good deal of expertise into the folks that work with claimants claim and Bookstaff and that's proved to be a really helpful asset for our clients and for us through this period and.
Really rock solid.
And the second part of your question, you mentioned SSD I and it can move around a little bit we havent seen a little bit of a.
Slowdown it seems as though the working from home may have created a bit of a backlog I wouldn't put too much of an emphasis on it at this point because it does move around and also.
We are aware of some pretty significant increases in accrued staffing.
<unk> and SSD so we.
We stay close to that inventory, we've got a couple of partners that we use externally that help us keep that inventory and moving through it was a little bit of a pressure point in the quarter, but probably too early to call and trends.
Thank you.
Sure.
Yes.
And our next question will come from Tracy Bahl Gregory with Barclays. Please go ahead.
Thank you for taking another question I just want to make from seeking about your outlook update correctly.
And just recognizing that you've had a pretty.
<unk> strong second quarter.
Alright.
Sure.
And so when you cut out here for and all of that question. If you could please repeat the question sure.
I'm just trying to make sure I understand the outlook update guidance a little bit better.
So I think just looking at the second quarter.
And just given your results with higher <unk>.
I am wondering if the guidance is more right sizing what we've seen in the first half of the year or.
Are you really thinking about better performance and the second half just trying to do the math on getting to.
Sure.
<unk> results relative to last year.
Tracy This is Steve I can take that 1 so just to re ground. Our original guidance that we came out with in December of last year was down 5% to 6% and any operating EPS year over year, we've adjusted that down 1 to 3 I would say there's 2 offsetting factors..1 is we performed and the second quarter well over our expectation.
And that would've been in that 5% to 6% DAU, so consider that kind of tailwind to the year over year compare but then what we've done is we've changed our expectations for the back half of the year really in 2 places. The most significant 1 is we have increased our expectation of both nationwide Covid mortality and then how that plays through.
Book.
So that's probably the most significant change to our outlook. So we gave a little bit of the second quarter performance back there and then the other thing is just looking at STD Volte.
<unk> lead volumes due to the Delta Varian.
And do think that the group disability loss ratio is going to stay elevated kind of where it is right now probably for the remainder of the year and therefore that does dampen our earnings expectation that we would have had and our original guidance just a bit.
And that also kind of backs off a little bit of the over performance and the second quarter and so that those are kind of the headlines on how we're thinking about it.
Thank you.
Great. Thanks, Tracy I think we're up on time and I'd like to thank everybody for joining us. This morning, I Hope you hear a lot of optimism and the team as we look to the second half of the year and we'll certainly take you through that as we go through it so that now completes our second quarter earnings call. Operator, I appreciate everybody joining us and we will talk to you soon thank you.
And ladies and gentlemen, and the conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Your lines at this time and have a great day.
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