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Text: Our SEC filings can be found in the Investors section of our website at unum.com.
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, an 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.
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.
So 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.
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 are raising our outlook for full year 2021 growth in 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 with the trajectory of that improvement dependent on the developing trends in COVID and the Delta variant.
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.
And rounding it out, we had favorable underlying benefits experience from our Closed Block business lines, both long-term care and the Closed Disability Block.
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 at our primary business lines within Unum US.
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 we 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.
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.
And 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 of $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 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.
We do have funds in excess of these needs, so 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.
Our goal is to help reduce the LTC discount in our stock.
And 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.
Results in our short-term disability line and leave services continue to be impacted by COVID-related claims, which remains 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.
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're taking -- 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 My Unum and Colonial Life's improved portal are steadily providing more self-service, real-time capabilities for clients and customers.
And new technology we're testing will enhance the digital enrollment experience, automate processes and allow people to interact with us in 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 groups facing discrimination.
These and many other efforts help place Unum among the Points of Light, Civic 50, and in Forbes 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.
We are proud of how it has helped us endure through the challenges of the past 1.5 years and how the engagement of our team will propel us going forward.
Now I'll ask Steve to cover the details of the second quarter results.
I'll start with the Unum US 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.
Within the Unum US 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 on 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 in the Delta variant, which we now believe will likely persist through the second half of the year.
Adjusted operating income for Unum US 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 expectations 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.
Non-COVID-related mortality had 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 40,000 compared to approximately 52,000 experienced in the second quarter.
Assuming the shift in the mix continues to more younger, working-age 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 increase in estimates for second half mortality expectations.
Now shifting to the Unum US 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.
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 recorded 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.
And then 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 US in total declined 3.1% in the second quarter on a year-over-year basis compared to a 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, 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 in the first quarter.
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% in the quarter, which is consistent with our view that these sales will take longer to recover.
Large case DB sales in particular have a longer sales cycle and are more concentrated around January one effective date.
Persistency for our major product lines in Unum US 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 and natural growth in our employee benefits 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 UK business, which generated adjusted operating income of GBP16.8 million in the second quarter compared to GBP18.6 million in the first quarter and GBP10.1 million in the second quarter of 2020.
We are pleased with these results, which showed improved underlying benefits experience particularly in our group life line.
The reported benefit ratio in Unum UK, 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 policyholders as well as higher net investment income from the inflation index linked yields 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 three million 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 the results in 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 block.
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 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 lines 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.
We're very excited with the rebound in sales activity we experienced in 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 one point higher than a year ago.
Then 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% to 90%.
Over the past four quarters, the benefit ratio for LTC was 70% excluding the impact of the fourth quarter 2020 reserve assumption update.
We continue to see higher mortality experience in the claim a 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 retained, performed favorably to our expectations 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 quarterly operating income for this segment will over time run 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 in the Corporate segment was $48.5 million in the second quarter compared to $38.9 million in the first quarter.
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.
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 watch list of potential credit concerns is now lower today than it was coming into the pandemic in early 2020.
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.
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 deals 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 to $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.
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 a 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 5 1/8.
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 of 4.5% issue that would have matured in 2025.
And you'll see the debt extinguishment costs 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 development recently was the finalization of the C1 factor changes, which have been under consideration by the NAIC for the past several years.
At our outlook meeting this past December, we indicated that our capital plan for 2021 -- 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 a 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% to 6% for full year 2021 after-tax adjusted operating income per share relative to the 2020 level of $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 2021 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, but COVID and the Delta variant will continue to be an important driver of results.
As you'll hear from the rest of the team, we continue to be very pleased with the operational performance of this 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 as the pandemic continues.
So let me ask the operator to be open up the session.

user
unum group q2 adjusted operating earnings per share $1.39.
q2 adjusted operating earnings per share $1.39.
full-year 2021 outlook increased.
sees decline of about 1% to 3% in after-tax adjusted operating income per share for 2021 relative to 2020.

assistant