Unum Group Q2 2021 Earnings Report

Unum Group EPS Results

• Actual EPS: $1.39
• Consensus EPS: $1.13
• Beat/Miss: Beat by +$0.26
• One Year Ago EPS: N/A

Unum Group Revenue Results

• Actual Revenue: $2.99 billion
• Expected Revenue: $2.94 billion
• Beat/Miss: Beat by +$48.42 million
• YoY Revenue Growth: N/A

Unum Group Announcement Details

• Quarter: Q2 2021
• Date: 8/3/2021
• Time: After Market Closes
• Conference Call Date: Wednesday, August 4, 2021
• Conference Call Time: 11:11AM ET

Unum Group (NYSE:UNM) (NYSE: UNM) is a leading provider of employee benefits in the United States and selected international markets, specializing in disability, life, accident and critical illness insurance. Through both fully insured and self-funded arrangements, the company offers group coverage designed to protect income and mitigate financial hardship for employees and their families. Its portfolio includes short-term and long-term disability plans, group life and accidental death & dismemberment (AD&D) policies, as well as critical illness and hospital indemnity products.

In addition to its core product lines, Unum Group markets voluntary benefits under its Colonial Life brand, allowing employees to purchase supplemental insurance such as accident, cancer, and dental coverage directly through payroll deductions. The company also provides absence management services that combine leave administration, return-to-work programs and workplace accommodation solutions to help employers manage workforce health and productivity.

Founded in 1848 and headquartered in Chattanooga, Tennessee, Unum has grown through a combination of organic expansion and strategic acquisitions. The company operates in the United Kingdom, Ireland and Germany, where it delivers workplace benefits and personal insurance products tailored to regional market needs. Unum serves millions of customers globally, with a network of distribution partners that includes brokers, consultants and direct-to-employer sales teams.

Since January 2015, Richard P. McKenney has served as President and Chief Executive Officer, guiding Unum’s focus on digital innovation, customer experience and disciplined underwriting. Under his leadership, the company has invested in data analytics and mobile technologies to streamline claims processing and enhance service delivery for policyholders and business clients alike.

Unum Group Q2 2021 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Unum reported 2nd quarter adjusted operating income of $286.2 million or $1.39 per share, up from $250.1 million a year ago, and raised its full‐year 2021 EPS outlook to a 1%–3% decline versus 2020.
• Positive Sentiment: The company’s strong capital position features $1.7 billion of holding company cash, a 375% RBC ratio, and a record‐low coupon 30-year debt issuance while refinancing higher-cost maturities.
• Positive Sentiment: Colonial Life achieved a record $95.8 million quarterly operating income and saw sales rebound 53.7% year‐over‐year, driven by improving face-to-face and digital enrollment activity.
• Positive Sentiment: Unum’s alternative investment portfolio delivered exceptional marks with $51.9 million of valuation gains this quarter, benefiting from robust credit, real estate, and private equity markets.
• Negative Sentiment: Persistently high COVID‐related claims in short-term disability and leave services and an elevated group disability benefit ratio near 74.7% pose ongoing claims cost headwinds.

Presentation

[Operator]

Good day, everyone, and welcome to the Unum Group second quarter 2021 earnings conference call. All participants will be on listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask your question, you may press star then one. Please note that this event is being recorded. I would now like to turn the conference over to Tom White, Senior Vice President of Investor Relations. Please go ahead, sir.

[Tom White, SVP of Investor Relations at Unum]

Great. Thank you. Good morning, everyone, and welcome to the second quarter 2021 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, 2020, and our subsequently filed Form 10-Q. Our SEC filings can be found in the Investors section of our website at unum.com.

[Tom White, SVP of Investor Relations at Unum]

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. In a presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found in our statistical supplement on our website in the Investors section. Yesterday afternoon, Unum reported second quarter 2021 net income of $182.9 million, or $0.89 per diluted common share, compared to $265.5 million or $1.30 per diluted common share in the second quarter of 2020.

[Tom White, SVP of Investor Relations at Unum]

Net income for the second quarter of 2021 included the after-tax cost related to the early retirement of debt of $53.2 million or $0.26 per diluted common share, the after-tax amortization of the cost of reinsurance of $15.5 million or $0.08 per diluted common share, and after-tax impairment loss on the right of use asset related to one of our operating leases for office space we are no longer using to support our general operations of $11 million or $0.05 per diluted common share, a net after-tax realized investment gain on the company's investment portfolio of $600,000 or $0.01 per diluted common share, and a net tax expense related to a U.K. tax rate increase of $24.2 million or $0.12 per diluted common share.

[Tom White, SVP of Investor Relations at Unum]

Net income in the second quarter of 2020 included an after-tax impairment loss on the right of use asset of $10 million or $0.05 per diluted common share, and a net after-tax realized investment gain of $25.4 million or $0.12 per diluted common share. Excluding these items, after-tax adjusted operating income in the second quarter of 2021 was $286.2 million or $1.39 per diluted common share compared to $250.1 million or $1.23 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 Mark Till, who heads our Unum International business, and Tim Arnold, who heads our Colonial Life and Voluntary Benefits businesses. Now I'll turn the call over to Rick for his opening comments.

[Rick McKenney, President and CEO at Unum]

Thank you, Tom, and good morning, everyone. I am very pleased with our second quarter results. We showed a 13% increase year-over-year in after-tax adjusted operating income to $1.39 per share. These improved results were driven in large part by the significant decline in COVID-related mortality this quarter and by excellent performance in our investment portfolio. Given our strong second quarter results, we're raising our outlook for full year 2021 growth in after-tax adjusted operating income per share to a decline of approximately 1%-3%, compared to our previous outlook of a decline of 5%-6%. We believe we're making good progress to returning to our pre-pandemic levels of profitability and margins over the coming quarters, with the trajectory of that improvement dependent on the developing trends in COVID and the Delta variant.

[Rick McKenney, President and CEO at Unum]

Embedded in our expectations is that COVID mortality will improve, but only slightly in the third and fourth quarters. In 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 in the economy. We also saw a record level of quarterly operating income for Colonial Life, along with an impressive recovery in sales. Rounding it out, we had favorable underlying benefits experience from our closed block business lines, both long-term care and the closed disability block. We'll cover these positive trends in detail throughout our comments this morning.

[Rick McKenney, President and CEO at Unum]

In addition to the positive trends we saw this quarter, I am pleased that our indicators continue to support our expectation of generating slightly positive growth in premium income in our core business segments this year, with further improvement expected into 2022. Sales trends are emerging in line with our expectations in 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 in the basic financial protection products we offer. It also highlights that the agency model of Colonial Life is quite resilient, as it saw some of the most pronounced headwinds in 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.

[Rick McKenney, President and CEO at Unum]

Finally, we're seeing a pickup in natural growth, primarily from higher wages in many sectors of the economy as we continue to build back premium income that was impacted by the sharp spike in unemployment in 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. In a competitive world for talent, employers are looking to ensure that they have competitive benefits package for their current and prospective employees. Turning to our capital position at quarter end, 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%.

[Rick McKenney, President and CEO at Unum]

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 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 in the growth of our core business segments, both organically and through capability-driven acquisitions. We like our position in the employee benefits market, and putting money to work to grow our core franchise is where we are focused. We also expect to be consistent in returning capital to shareholders through dividends, which will increase by 5.3% with the dividend to be paid this month.

[Rick McKenney, President and CEO at Unum]

We do have funds in excess of these needs. As we look to the future, we are constantly evaluating how to best deploy or hold on to 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 PDR. Our goal is to help reduce the LTC discount in our stock. In the future, this funding would be utilized in any risk transfer transaction that we explore on a portion of this block, should that become an option for us. While we are clearly optimistic looking forward, we do see areas of our business that continue to be impacted by the pandemic.

[Rick McKenney, President and CEO at Unum]

Results in our short-term disability line and leave services continue to be impacted by COVID-related claims, which remain stubbornly high. The Group Life and AD&D business within Unum U.S. returned to profitability in the second quarter after recording losses in the previous two quarters as COVID-related mortality in the U.S. declined materially from the peak levels experienced late last year through the early months of 2021. What we are watching now is that the Delta variant is impacting a younger, unvaccinated population that has different dynamics from what we have seen to date 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 in our own plans.

[Rick McKenney, President and CEO at Unum]

There is room for optimism, though, as we have started to see employers looking at the role that they might play in getting more of the population vaccinated. As we look at growth in our enterprise, the steps we've taken to run our business more efficiently have freed up funds that we're reinvesting in new products and capabilities that tackle some of today's 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 MyUnum and Colonial Life's improved portal are steadily providing more self-service, real-time capabilities for clients and customers. A new technology we're testing will enhance the digital enrollment experience, automate processes, and allow people to interact with us in new ways.

[Rick McKenney, President and CEO at Unum]

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 broadened the scope of our social justice fund to support even more groups facing discrimination. These and many other efforts help place Unum among the Points of Light, The Civic 50 and Forbes's Best Employers for Diversity, Best Employers for Women, and Best Employers for New Graduates. We're also happy to receive another perfect score on 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 the strong culture we have built.

[Rick McKenney, President and CEO at Unum]

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. I'll ask Steve to cover the details of the second quarter results. Steve?

[Steve Zabel, CFO at Unum]

Yeah. Thank you, Rick. Good morning, everyone. As I discuss our second quarter financial results this morning, 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 in the first quarter. These results improved significantly due to the improvement in 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 in the group disability line declined compared to the first quarter.

[Steve Zabel, CFO at Unum]

Within the Unum U.S. segment, the Group Disability line reported operating income of $59.9 million in the second quarter, compared to $64.1 million in 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 two 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 are seeing from COVID-19 and the Delta variant, which we now believe will likely persist through the second half of the year.

[Steve Zabel, CFO at Unum]

Adjusted operating income for Unum U.S. Group Life and AD&D showed a sharp improvement in the second quarter to income of $5.2 million compared to a loss of $58.3 million in the first quarter. This improvement is consistent with our expectation and largely explained by the significant reduction in COVID-related mortality in the U.S., which declined from approximately 200,000 nationwide observed deaths in the first quarter to approximately 52,000 in the second quarter. We estimate that we incurred approximately 800 excess claims from COVID in the second quarter, compared to an estimate of 2,050 COVID claims in the first quarter. Our average size of claim increased in 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.

[Steve Zabel, CFO at Unum]

Non-COVID related mortality had little impact on results this quarter relative to the first quarter, as lower incidence was offset by higher average claim size. Looking ahead to the third quarter, our current expectation for nationwide COVID related mortality of approximately 40,000, compared to approximately 52,000 experienced in the second quarter. Assuming the shift in the mix continues to more younger working aged individuals with a continued higher average benefit amount, we would estimate third quarter Group Life operating income to show a modest improvement over second quarter results to approximately $15 million. We are closely watching the impacts emerging from the COVID variants, which have led to increasing estimates for second half mortality expectations. Shifting to the Unum U.S. supplemental and voluntary lines, we saw an improved quarter with adjusted operating income of $114.2 million in the second quarter, compared to $109.9 million in the first quarter.

[Steve Zabel, CFO at Unum]

Looking at the three 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% in the second quarter from 42.4% in 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 in the second quarter relative to the first quarter, though it did remain consistent with the pre-pandemic results. The benefit ratio in the Group Critical Illness line increased, offsetting the improved experience in the life lines of business.

[Steve Zabel, CFO at Unum]

Finally, utilization in the dental and vision line was higher this quarter, as was the average cost per procedure, pushing the benefit ratio to 77.1% in the second quarter compared to 73.2% in the first quarter. dental and vision utilization has been volatile since the significant decline in utilization we did experience in the second quarter of 2020. Sales for Unum U.S. in total declined 3.1% in the second quarter on a year-over-year basis, compared to the decline of 10.3% in the first quarter. For the employee benefit lines, which include LTD, STD, Group Life, AD&D, and Stop Loss, total sales declined by 3.1% this quarter. We saw good activity and results in the core markets for Group Disability and Group Life, while large case sales were down year-over-year.

[Steve Zabel, CFO at Unum]

We are seeing a good level of quote activity in the group markets, which is back to pre-pandemic levels. Sales trends in our supplemental and voluntary lines showed similar improvement in 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 of the first quarter. Our recently issued individual disability sales increased 4.9%, and dental and vision sales increased 2.4% year-over-year. Voluntary benefits sales were down 7% in 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 are more concentrated around January 1 effective dates.

[Steve Zabel, CFO at Unum]

Persistency for our major product lines in Unum U.S. remained in line to higher this quarter relative to the first quarter of 2020, providing a good tailwind for premium growth for the full year and into 2022. We have also seen favorable trends in natural growth in 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 in the first quarter and $15.1 million in the second quarter of 2020. The primary driver of these results is in our Unum U.K. Business, which generated adjusted operating income of GBP 16.8 million in the second quarter, compared to GBP 18.6 million in the first quarter and GBP 10.1 million in the second quarter of 2020.

[Steve Zabel, CFO at Unum]

We are pleased with these results, which showed improved underlying benefits experience, particularly in our Group Life line. The reported benefit ratio in Unum U.K., which showed an increase to 82.5% in the second quarter from 75.3% in the first quarter, was impacted by the increase in inflation in the U.K. in the second quarter compared to the first quarter. Higher inflation triggers higher inflation-related benefits to certain of our policy holders, as well as higher net investment income from the inflation index-linked gilts in our investment portfolio. The rapid increase in inflation in the U.K. from the first to second quarter did distort somewhat the timing of these two factors and produced a net negative impact of slightly less than GBP 3 million to adjusted operating income this quarter. This short-term impact to income is expected to balance out over the course of the year.

[Steve Zabel, CFO at Unum]

Overall, we are very pleased with the results in our international business with benefit ratios adjusted for inflation for Unum U.K. 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 U.K. generated growth of 3%, with strong persistency in the ongoing successful placement of significant rate increases on our in-force block. 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.

[Steve Zabel, CFO at Unum]

Next, we are very pleased with the results generated by Colonial Life, with adjusted operating income of $95.8 million in 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% in the second quarter from 55.4% in the first quarter as experience in the life insurance block improved with the overall decline in COVID-related mortality. Experience in 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 out to the third quarter, we anticipate adjusted operating income to settle back to the low to mid $80 million range as some of this favorable experience moderates.

[Steve Zabel, CFO at Unum]

We're very excited with the rebound in sales activity we're experiencing Colonial Life this quarter, increasing 53.7% on a year-over-year basis. While this strong recovery comes off of a COVID-depressed result in the year-ago quarter, this quarter marks a return to year-over-year growth as face-to-face sales reemerge and we drive further 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 recovered. Persistency for Colonial Life continues to show an encouraging trend at 78.3% for the first half of 2021, almost a point higher than a year ago.

[Steve Zabel, CFO at Unum]

In the Closed Block segment, adjusted operating income was $111.2 million in 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 in just a moment, as well as favorable underlying benefits results in both long-term care and the closed disability blocks. Looking within the Closed Block, the LTC block produced a slightly lower interest-adjusted loss ratio of 74.6% in the second quarter compared to 77.7% in the first quarter, both results quite favorable to our long-term expected range of 85%-90%. Over the past four quarters, the benefit ratio for LTC was 70%, excluding the impact of the fourth quarter 2020 reserve assumption update.

[Steve Zabel, CFO at Unum]

We continue to see higher mortality experience in the claimant block in the second quarter and estimate that counts were approximately 5% higher than expected. LTC claims incidence was slightly higher in 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% in the second quarter and 68.9% in the first quarter. The underlying experience on the retained block, which 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.

[Steve Zabel, CFO at Unum]

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 quarterly operating income for this segment will, over time, run within the range of $45 million-$55 million, assuming more normal trends for investment income and claim results. Wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the corporate segment was $48.5 million in the second quarter, compared to $38.9 million in the first quarter. This excludes the special items we listed in our earnings release. We anticipate the quarterly losses in the Corporate segment will moderate in the second half of the year to the low-to-mid $40 million range. I'd now like to turn to our investment portfolio, where we are seeing very favorable overall credit trends.

[Steve Zabel, CFO at Unum]

First, there were no downgrades of investment-grade securities to high yield this quarter. In fact, we had net upgrades in ratings overall for the portfolio, which generated a small capital benefit to us this quarter. In addition, our internal watchlist of potential credit concerns is now lower today than it was coming into the pandemic in early 2020. As you have read in 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 two 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 of 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.

[Steve Zabel, CFO at Unum]

Over the past several quarters, this has been extremely volatile and difficult to predict from quarter-to-quarter. While these bond calls enhance current period investment income, it is a challenge to replace the lost yields in today's low interest rate environment. Second, as I mentioned previously, we continue to see strong performance in the valuation mark on our alternative investment assets, which totaled $51.9 million in the second quarter, following a positive mark of $35.9 million reported in the first quarter. Both quarters are well above the expected quarterly positive marks on the portfolio of $12 million-$14 million. This quarter's very strong returns primarily reflected returns for the period ending March 30, 2021, due to the lags in reporting typical on many of these investments.

[Steve Zabel, CFO at Unum]

The higher returns this quarter were generated from all three 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 returns for miscellaneous investment income, but the third quarter so far, we are seeing a continuation of favorable trends in 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 a 30-year senior note with a coupon of five and an eighth.

[Steve Zabel, CFO at Unum]

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 in 2025. You'll see the debt extinguishment cost associated with the redemption included in our net income this quarter. Importantly, 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 is 26.2%, providing additional financial flexibility. An important industry in development recently was the finalization of the C1 factor changes, which had been under consideration by the NAIC for the past several years.

[Steve Zabel, CFO at Unum]

At our outlook meeting this past December, we indicated that in our capital plan for 2021, we assumed a negative impact of approximately $225 million from the adoption of the factor changes. As you are likely aware, the NAIC concluded by adopting recommendation from Moody's Analytics, which are not as impactful to our capital plan as we previously had assumed. We now estimate the impact to our capital position to be less than $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%-6% for full-year 2021 after-tax adjusted operating income per share relative to the 2020 level of $4.93 per diluted common share.

[Steve Zabel, CFO at Unum]

Given the strong second quarter results and our updated view on COVID trends, we are revising our outlook upward and now look for 2021 after-tax adjusted operating earnings per share to decline by a range of approximately 1%-3% relative to 2020. Our underlying performance is expected to remain quite healthy, though COVID and the Delta variant will continue to be an important driver of results. Now I'll turn the call back to Rick for his closing comments and look forward to your questions.

[Rick McKenney, President and CEO at Unum]

Great. Thank you, Steve, for that summary of our second quarter. As you'll hear from the rest of the team, we continue to be very pleased with the operational performance of the company through what has been an extraordinary environment. We believe we are well-positioned to benefit from today's improving business conditions, and we remain vigilant. We're happy to be taking your questions today. Let me ask the operator to open up the session.

[Operator]

Thank you. We will now begin the question and answer session. To ask question, you may press star then one in your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We kindly ask you to please limit yourself to one question and one follow-up. And at this time, we pause momentarily for the first question. Our first question today will come from Ryan Krueger with KBW. Please go ahead.

[Ryan Krueger, Analyst at KBW]

Hi, good morning.

[Rick McKenney, President and CEO at Unum]

Hi.

[Ryan Krueger, Analyst at KBW]

Could you expand a little bit on your comments about potentially pre-funding the Maine premium deficiency reserve, and give us any sense of the potential timeframe you might look to pre-fund it over?

[Rick McKenney, President and CEO at Unum]

Sure, Ryan. Let me take you back a step, though, to talk about our overall capital position and capital deployment. You have to start out first that we come at all of this from a very strong position in the capital we've generated, both from how operations have done, but also going back to last year and with the individual disability reinsurance transaction. We start from a very strong position. The first thing, as we've said multiple times, is to put that money, put that generation into the core business. We're very happy. You'll hear about that probably some more this morning. Very happy about how the core business has responded in this environment. We want to put that money to organic growth and also have flexibility to do some capability-driven acquisitions where we see that opportunity, similar to what we've done over past times.

[Rick McKenney, President and CEO at Unum]

It takes you forward to what are our options with the excess, and we do have excess relative to our expectations. You start out with a little bit choppier environment that we see today, so you have the option to hold onto it. We've talked about share repurchase, and that option exists to us today. Then, as you mentioned, is looking at the PDR, the premium deficiency reserve that we have with the state of Maine. We look at that as something that's an obligation to us over a seven-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 today's market.

[Rick McKenney, President and CEO at Unum]

When you think about the pre-funding, think about it as well as this is an area which those funds will ultimately need to go to, and it's also addressing one of the bigger concerns that people have about the company today, and that's the overhang of our LTC obligation and liabilities there. That's the thought process. I really can't give you any sizing today or timing to that. Certainly, that's a thought process that we are in the middle of today.

[Ryan Krueger, Analyst at KBW]

Thanks. Just one follow-up. In addition to that, I just wanted to confirm that you are still planning to resume share repurchase near-term as well.

[Rick McKenney, President and CEO at Unum]

We've not made that commitment, Ryan. That's an option that's available to us, but we look at that in conjunction with those three options today. I think, in today's environment, is this the right time to be starting up a share repurchase program, one that we haven't been doing for some time? We look at all of those options of the excess, including holding onto the capital as real things. We are not committing to anything from a redeployment in the form of share repurchase. We certainly remain committed to our dividend and redeploying capital to shareholders in that form, but not on the share purchase as of today.

[Ryan Krueger, Analyst at KBW]

Got it. Thank you.

[Operator]

Our next question will come from Tom Gallagher with Evercore. Please go ahead.

[Tom Gallagher, Analyst at Evercore]

Good morning. Rick, just to follow up to Ryan's question. I guess up until recently, you sounded a little more positively inclined on buybacks. I think the pre-funding and everything you've said about LTC makes a lot of sense, but just curious why at least a tone change on buybacks?

[Rick McKenney, President and CEO at Unum]

Yeah, no, I think when you think about it, Tom, and what we're trying to accomplish, we have to look at buybacks as one form, and anything we would've contemplated there would've been quite modest. I don't think we've said there would be anything more than that. Now we're just given the facts as we see them today, as we've gone through this summer and the period of time looking at what's going on in the world around us. I mean, all those are influences. No one thing would cause us to change tone around that. Those are all things we put into the mill. We just want to be very clear that those options are out there. They're available to us.

[Rick McKenney, President and CEO at Unum]

We're going to have to make those decisions through the third quarter, through the fourth quarter, based on what we're seeing in the environment around us.

[Tom Gallagher, Analyst at Evercore]

Got you. Should we think about that as really just being driven by macro, the level of rates currently, and what's going on with the Delta variant? Or is it also more in consultation with rating agencies, regulators? You think this would be the more prudent path? What's the greater determinant for why you're considering pre-funding LTC?

[Rick McKenney, President and CEO at Unum]

I think all of those that you mentioned are all factors. We want to make sure all of our constituents are thought about through this process. The fact that the Delta variant is starting, I mean, it really hasn't come through in terms of what we've seen in our books of business as a risk that we have out there. I wouldn't want to overplay that has changed anything in the course of what we're looking at. 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. I wouldn't highlight any one factor greater than the other.

[Tom Gallagher, Analyst at Evercore]

If I could just sneak in one more for Steve. I guess you mentioned you're assuming the favorable trends at Colonial Life this quarter are expected to fade in the back half of 2021. Is that because you saw more of a return to normal claims utilization toward the end of the quarter, during the course of the quarter or during July, maybe? Is that just being more conservative that you're not assuming continuation of the favorability there?

[Steve Zabel, CFO at Unum]

Tom. Good morning. It's Steve here. I would say that low 80s would be more of a normal run rate, and second quarter is a bit of an anomaly. We had higher than expected bond calls there. I think we had about $3 million over our expectations. We also had very favorable expense levels that we don't think will probably continue into the back half of the year. I wouldn't say that we're in any way regressing. I just think that 2Q is a bit of an anomaly, and probably the low 80s is just a better long-term expectation, which is more consistent with what we've seen in the past.

[Tom Gallagher, Analyst at Evercore]

Okay, thanks.

[Steve Zabel, CFO at Unum]

Thanks, Tom.

[Operator]

Our next question will come from Jimmy Bhullar with JPMorgan. Please go ahead.

[Jimmy Bhullar, Analyst at JPMorgan]

Hi, good morning. First, just had a question on just your views on what you're seeing on long-term care claims submissions. Has activity sort of come back to normal? Are people still sort of reluctant to visit nursing homes and stuff, given the Delta variant? Obviously mortality is a tailwind in that product line, but are you seeing anything in terms of claims submissions as well?

[Steve Zabel, CFO at Unum]

Hey, Jimmy, it's Steve here. I'll take that one. I'll take us really back to what we've seen over the last five quarters. As you know, second quarter of last year, we really saw, I'd say, three things in our benefits experience. Number one, extremely high claimant mortality, specifically in nursing home. We were about 30% higher than our expectations. The second thing that we saw was lower than expected claims incidents as people were potentially reluctant to claim really in any situs, whether it's at home or in a facility. Then we also saw really a slowdown of transitions between situs, so slowdown of people moving from home care to facilities or vice versa. People pretty much just stayed where they were. What we've seen in those three over time, claimant mortality continued to be pretty elevated through the last several quarters, about 15% elevated.

[Steve Zabel, CFO at Unum]

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 would be concentrated. We would see that continue to moderate the latter part of the year. From an incidence perspective, we have seen incidence continue to kind of trend up more to our expectations. I would say that's where we are in the second quarter, maybe a little bit higher incidence, a little bit higher recoveries of those new claimants. Financially, I'd say we're back pretty much to our expectations.

[Steve Zabel, CFO at Unum]

Then the last would be transitions, and we have seen that open up a little bit, but I'd still say that it's probably a little bit light versus what we might have historically seen pre-pandemic as far as people moving between different situses. I'd say we're getting back to normal. We'll have to see what this next wave of Delta variant does within the block and how that affects those different dynamics. We do think that we'll be trending back to kind of that 85%-90% range, probably at this point by the latter part of the year into next year.

[Jimmy Bhullar, Analyst at JPMorgan]

Okay. On Colonial Life, just it seems like you're fairly constructive on an uptick in sales given sort of the return to face-to-face, people getting back to work. Do you think that recovery could be pushed back given that COVID cases have been picking up recently and some of the companies that had planned on having their employees back at work are pushing the timing of that back as well? Just any comments on what you've seen in terms of sales activity in Colonial Life recently and how that's affected by increasing cases.

[Rick McKenney, President and CEO at Unum]

Yeah, Jimmy, we are very pleased with the resilience of that franchise. I'll turn over to Tim Arnold to talk about some of the dynamics that we're seeing and how we're thinking about it going forward.

[Tim Arnold, EVP of Voluntary Benefits and President of Colonial Life at Unum]

Thanks, Jimmy. Appreciate the question. We are seeing really strong activity levels in all geographies. We're seeing strong results across industry segments and across product categories. We have tremendous agent retention. We currently have 19% more agents than we had at the same time in 2019. We're seeing great engagement among our agents and tremendous productivity. We're finding that technology paired with a really strong agency distribution force is the key to being successful in this environment, where we can enroll and provide benefits education under virtually any scenario. We are seeing a substantial increase in virtual enrollments. What we're also seeing is that even in states where there are high levels of the Delta variant, we're not seeing a return to the kind of shutdowns that we saw in 2020.

[Tim Arnold, EVP of Voluntary Benefits and President of Colonial Life at Unum]

We believe that we'll 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.

[Jimmy Bhullar, Analyst at JPMorgan]

Okay. Thank you.

[Rick McKenney, President and CEO at Unum]

Thanks, Jimmy.

[Operator]

Our next question will come from Humphrey Lee with Dowling & Partners. Please go ahead.

[Humphrey Lee, Analyst at Dowling & Partners]

Hi. Thank you for taking my questions. My first question is related to Group Life and AD&D. You talked about 800 excess claims in a quarter with average claim size of $55,000. That would mean kind of roughly $44 million, $45 million of excess claims in the quarter, and that would put your normalized earnings for the quarter closer to $50 million, which are still quite low compared to what you historically ran. I was just wondering, besides COVID, what else is driving the depressed earnings for the segment?

[Steve Zabel, CFO at Unum]

Humphrey, I'll take that. This is Steve. I've not completely following your math, but I'll just restate what our assumptions are and how we're thinking about the last half of the year. In the second quarter of 2021, we did have an estimated 800 COVID-related deaths, and that was on a nationwide count of 52,000.

[Steve Zabel, CFO at Unum]

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 in our experience as COVID starts to impact the younger, more working-aged individuals. We had that 1% rule of thumb. That's drifted up quite a bit. It's probably around 1.5% at this point. We do anticipate in the third quarter, and really in the fourth quarter, a nationwide level of about 40,000 COVID-related deaths. If you run the math through what we think the distribution of that's going to be, we do think earnings will probably be around $15 million for both third and fourth quarter. Now, as far as just the broader historical levels of earnings and that sort of thing, we do see fluctuations quarter-to-quarter, just in the average size and the count of claims.

[Steve Zabel, CFO at Unum]

That was pretty consistent between first quarter and second quarter, but that can fluctuate quite a bit period to period. I think what we just need to see is get through this uncertainty of pandemic and then re-baseline what the earnings power of the Group Life business is. We continue to feel really good just about the premium levels there and how that's resonating with the market. Probably more to come as we get into looking into next year.

[Humphrey Lee, Analyst at Dowling & Partners]

Okay. Got it. On the positive side, you talked about seeing some benefits of wage growth coming through. Can you size the uplift that you're seeing, and then as well as your forward expectation?

[Mike Simonds, COO at Unum]

Hey, Humphrey. It's Mike. I think I can take that. The question's about natural growth and what's coming through in the client base, and you are right. We've started to see that tick up a bit and on the backs of wage growth. Not yet seeing the employment side of that equation come through. Should economic expansion continue, should the labor market continue to improve, that would represent a bit of upside for us, particularly in the group insurance lines.

[Humphrey Lee, Analyst at Dowling & Partners]

Okay. Thank you.

[Steve Zabel, CFO at Unum]

Thanks, Humphrey.

[Operator]

Our next question will come from Tracy Benguigui with Barclays. Please go ahead.

[Tracy Benguigui, Analyst at Barclays]

Good morning.

[Steve Zabel, CFO at Unum]

Morning.

[Tracy Benguigui, Analyst at Barclays]

Could you confirm my understanding, any PDR pre-funding, would that be voluntary? Maine does not require you to accelerate the seven-year timeline if you hold excess capital?

[Steve Zabel, CFO at Unum]

Yeah. 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 seven years, going back a year. It would be voluntary. What form we put that in and timing, that is up to us. We're still maintaining moving along the path of the original PDR.

[Tracy Benguigui, Analyst at Barclays]

Okay. Great. I think you were also suggesting that any potential LTC block transaction may be contingent upon pre-funding PDR. I guess I'm just wondering if it's like a ModCo or funds-withheld structure, why that would matter?

[Steve Zabel, CFO at Unum]

Yeah. 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 in a transaction, that would get realized. It's not the technical nature of it in terms of how a transaction's done and how it moves around. It's just saying that the more funding we have behind our long-term care block, ultimately, what a buyer, when they look at it, there'll be a smaller gap now in that period of time. It's nothing technical, just saying there's more capital that's now within the LTC business, which would then be realized upon sale.

[Tracy Benguigui, Analyst at Barclays]

Okay. Thank you.

[Operator]

Our next question will come from Erik Bass with Autonomous Research. Please go ahead.

[Erik Bass, Analyst at Autonomous Research]

Hi. Thank you. Maybe first, just to follow up on Tracy's question, I guess, has anything changed in terms of what you're seeing in terms of the LTC risk transfer market and just the appetite for blocks?

[Steve Zabel, CFO at Unum]

Yeah. Maybe I'll step back from that a little bit, Erik. When you think of the prospects that we've talked about of an LTC transaction, I think that from our perspective, going back to last year-end, certainly we feel like we have the capabilities to do so. Our IDI transaction is a good indicator of that. We now see it a little bit differently, that we can actually perhaps customize some of the risks that a counterparty is willing to take on. I 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. That's probably the only thing that has changed.

[Steve Zabel, CFO at Unum]

That's the math of a deal, but I don't think any other dynamics have really changed to how we've talked about it recently.

[Erik Bass, Analyst at Autonomous Research]

Got it. Thank you. Can you talk a bit about activity levels and competitive dynamics in the U.S. group market, and how are these kind of feeding into your sales outlook for the second half of the year?

[Mike Simonds, COO at Unum]

Sure, Erik, it's Mike. I can take that. It might be a good opportunity to talk a little bit about a couple of our different geographies because we are encouraged on a broad basis about the recovery, and you see that quarter-over-quarter as both Rick and Steve highlighted in their remarks. In the group insurance market, to your specific question, we are encouraged about activity levels and what's coming through in the pipeline. The competitive realities are not terribly dissimilar from what we've seen in prior periods. I do think while no one 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 2020.

[Mike Simonds, COO at Unum]

2020, we're going to stick to our pricing and underwriting guidelines, are, again, pretty encouraged about the ability to differentiate on things like our investments in leave and our HR Connect capability. That's put us in that, I think pretty good stead. We'll play opportunistically in that large case market where I'd say the competition's probably the toughest. If you go down market, 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, if you go down into the small-end of 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 you're seeing in Colonial Life.

[Tim Arnold, EVP of Voluntary Benefits and President of Colonial Life at Unum]

Yeah. As I mentioned earlier, we're very encouraged by the activity levels we're seeing, by the results we had in the second quarter. We're very encouraged by the early trends we're seeing in the third quarter. Similar to Mike's comments, we see tremendous opportunity across both brands in the core and midsize markets. We do view large case a bit more opportunistically as well on the VB side. Again, very encouraged about the prospects over the second half of the year.

[Tim Arnold, EVP of Voluntary Benefits and President of Colonial Life at Unum]

Mark, I don't know if you want to comment.

[Mike Simonds, COO at Unum]

Yeah, Mark, maybe you can hit quickly what you're seeing in the international market.

[Mark Till, CEO of Unum UK and Chairman of Unum Poland at Unum]

We're seeing generally buoyant economies in both Poland and the U.K., such that quarter-on-quarter, certainly in dollar terms, sales are up 24%. I would say the U.K. market competitively is very similar, but with hardening of rates, which is encouraging. In Poland, we're seeing some competitor consolidation, but where the focus is on cost reduction, not on market penetration. Actually that distraction should be helpful to us both in terms of talking to clients and potentially for some staff recruitment ourselves. I think we're feeling pretty confident.

[Erik Bass, Analyst at Autonomous Research]

Great. All right. Thank you.

[Mark Till, CEO of Unum UK and Chairman of Unum Poland at Unum]

Thanks.

[Mike Simonds, COO at Unum]

Thanks, Erik.

[Tim Arnold, EVP of Voluntary Benefits and President of Colonial Life at Unum]

Thanks, Erik.

[Operator]

Our next question will come from Josh Shanker with Bank of America. Please go ahead.

[Josh Shanker, Analyst at Bank of America]

Yeah, thank you very much. I'm looking at the wonderful results in the closed block relative to the past and trying to figure out what's trendable versus what is unusual. First on the LTC side, obviously COVID has created some positive headwinds. Are we looking for a reserve study to conclude about the frequency trends in LTC before we know the impact and when we look at the numbers, should we expect what we saw this quarter to persist pending a more in-depth analysis of the impact on COVID on LTC?

[Steve Zabel, CFO at Unum]

Yeah, this is Steve. I'll take that one. There was a lot in there, so let me try to break it down a little bit as far as non-trendable items. I'll just start with the benefits experience. As I mentioned, from an incidence perspective, we're pretty much back to what our expectations would be. Claim mortality is still running a little high. You can think about from where we were from a loss ratio perspective in the second quarter. Over the next few quarters into next year, that'll trend back into that 85%-90% range. The other thing that I guess I'd 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's going to be in the closed block.

[Steve Zabel, CFO at Unum]

Our expectation would be more in the 12%-14%. That variance you can pretty much consider a little bit unique, and probably won't recur. Now, with that said, this tends to be pretty volatile as far as the marks on this portfolio. Over time, our expectation is that 12%-14%, but it can be a little bit higher or a little bit lower. The other would be bond calls, and I would say overall, we were probably for the organization, maybe $10 million over our expectation overall, and maybe half or a little bit less than half of that would have been in the closed block. You kind of boil that all up, and we're looking to the back half of the year to probably be in that $50 million all-in closed block earnings for the third and the fourth quarter.

[Steve Zabel, CFO at Unum]

As you know, things can be very volatile in this business line, both from a claims experience perspective as well as from miscellaneous net investment income. Your question about just taking into consideration our claims experience, and I'll add in there our mortality experience into how we think about reserve adequacy and our assumption review. We're 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 in those types of things. We're kind of treating this all as an anomaly. We feel good about the liability assumptions that we have in our reserve, and we'll go through our normal process at year-end. We're not seeing anything right now that would have us change our perspective there.

[Josh Shanker, Analyst at Bank of America]

Then on the individual disability portion, the lower claims submission, by phrasing that way, is that unusual? Is that COVID related? Is that a change in the nature of the book? Again, I'm just trying to figure out what's trendable in that.

[Steve Zabel, CFO at Unum]

Yeah. For that closed block IDI, really two things happened when we did our transaction with Global Atlantic. One was, we ceded the majority of our claims block to them, but we do still retain some smaller pieces of that block. We will continue to have some claim. It's basically claim termination risk, whether it's mortality or recovery. We still do have a bit of that risk. That's been pretty consistent with our expectations. We also retain the entirety of the active life reserve block, if you think about the risk there, it's really incidence on the active lives, and then how that claim performs over time. We have actually seen some pretty favorable experience around incidents over the last a couple of quarters. Again, that can be somewhat volatile.

[Steve Zabel, CFO at Unum]

I would just think about $5 million a quarter for the closed 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 when we retained the entire block. I think just for modeling purposes, that $5 million a quarter is a pretty good number.

[Josh Shanker, Analyst at Bank of America]

Just to put a bow on it, just so I understand, in first quarter, what day did the change in stat based on the Global Atlantic transaction? When did the transfer occur, on which day?

[Steve Zabel, CFO at Unum]

Yeah. Well, there was two phases of it. I'll take you back to fourth quarter of last year. We closed for GAAP purposes, the effective date was basically halfway through December. It was when we closed the deal. The way to think about that is we pretty much had the full block in our fourth quarter financial results. That would've been reflected on phase I, reflected in our first quarter, second quarter results. For phase II, that would've been effective really at the end of the first quarter. We really closed phase II in the latter part of the quarter. Second quarter was the first quarter we would've reflected phase II. The way to think about it is, second quarter is pretty much the block we're going to have going forward.

[Josh Shanker, Analyst at Bank of America]

Yeah.

[Steve Zabel, CFO at Unum]

Just to kind of summarize all that.

[Josh Shanker, Analyst at Bank of America]

Fantastic. Thank you for all the answers.

[Steve Zabel, CFO at Unum]

Yep.

[Rick McKenney, President and CEO at Unum]

All right, Josh.

[Steve Zabel, CFO at Unum]

Thank you.

[Rick McKenney, President and CEO at Unum]

Thank you.

[Operator]

Our next question will come from Mark Hughes with Truist. Please go ahead.

[Mark Hughes, Analyst at Truist]

Yeah, thank you. Good morning. Sorry if I missed this earlier. Do you have any comments on the recoveries in the Unum U.S. group disability line? Any change in behavior at the Social Security Administration around approving disability claims that might be noteworthy?

[Mike Simonds, COO at Unum]

Sure, Mark, it's Mike Simonds, appreciate the question. The first part of it, recoveries continue to be solid to favorable relative to our expectation. We've built a good deal of expertise into the folks that work with claimants, the claim and the book staff, and that's proved to be a really helpful asset for our clients and for us through the period, and really rock solid. The second part of your question, you mentioned SSDI, and it can move around a little bit. We have 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. Also, we're aware of some pretty significant increases in approved staffing for the staff at SSDI. We stay close to that inventory.

[Mike Simonds, COO at Unum]

We've got a couple of partners that we use externally that help us keep that inventory moving through. It was a little bit of a pressure point in the quarter, but probably too early to call a trend.

[Mark Hughes, Analyst at Truist]

Thank you.

[Mike Simonds, COO at Unum]

Sure.

[Operator]

Our next question will come from Tracy Benguigui with Barclays. Please go ahead.

[Tracy Benguigui, Analyst at Barclays]

Thank you for taking another question. I just want to make sure I'm thinking about your outlook update correctly. Just recognizing that you've had a pretty strong second quarter. Is this more right-sizing we've seen here?

[Steve Zabel, CFO at Unum]

Tracy, you cut out here in the middle of that question. If you could please repeat the question.

[Tracy Benguigui, Analyst at Barclays]

Sure. Yeah, I'm just trying to make sure I understand the outlook update guidance a little bit better. I think, just looking at the second quarter, just given your results with higher VII, I'm wondering if the guidance is more right-sizing what we've seen the first half of the year, or are you really thinking about better performance in the second half? Just trying to do the math on getting to your projected results relative to last year.

[Steve Zabel, CFO at Unum]

Tracy, this is Steve. I can take that one. Just to reground, our original guidance that we came out with in December of last year was down 5%-6% in any operating EPS year-over-year. We've adjusted that to down 1%-3%. I would say there's two offsetting factors. One is we performed in the second quarter well over our expectation that would've been in that 5%-6% down. Consider that kind of tailwind to the year-over-year compare. What we've done is we've changed our expectations for the back half of the year, really in two places. The most significant one is we have increased our expectation of both nationwide COVID mortality and then how that plays through our book. That's probably the most significant change to our outlook.

[Steve Zabel, CFO at Unum]

We give a little bit of the second quarter performance back there. The other thing is just looking at STD volumes, leave volumes due to the Delta variant. We 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've had in our original guidance just a bit. That also kind of backs off a little bit of the overperformance in the second quarter. Those are kind of the headlines on how we're thinking about it.

[Tracy Benguigui, Analyst at Barclays]

Thank you.

[Rick McKenney, President and CEO at Unum]

Great.

[Rick McKenney, President and CEO at Unum]

Thank you.

[Rick McKenney, President and CEO at Unum]

Thanks, Tracy. I think we're up on time. I'd like to thank everybody for joining us this morning. I hope you hear there's a lot of optimism in the team as we look to the second half of the year. We'll certainly take you through that as we go through it. That now completes our second quarter earnings call. Operator, appreciate everybody joining us. We will talk to you soon. Thank you.

[Operator]

And ladies and gentlemen, 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.

Participants

Analysts

• Erik Bass, Analyst at Autonomous Research
• Humphrey Lee, Analyst at Dowling & Partners
• Jimmy Bhullar, Analyst at JPMorgan
• Josh Shanker, Analyst at Bank of America
• Mark Hughes, Analyst at Truist
• Mark Till, CEO of Unum UK and Chairman of Unum Poland at Unum
• Mike Simonds, COO at Unum
• Rick McKenney, President and CEO at Unum
• Ryan Krueger, Analyst at KBW
• Steve Zabel, CFO at Unum
• Tim Arnold, EVP of Voluntary Benefits and President of Colonial Life at Unum
• Tom Gallagher, Analyst at Evercore
• Tom White, SVP of Investor Relations at Unum
• Tracy Benguigui, Analyst at Barclays