普登 (UNM) 2015 Q2 法說會逐字稿

Good day, and welcome to the Unum Group's second-quarter earnings results conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead, sir.

Great. Thank you, Lisa. Good morning, everyone, and welcome to the second-quarter 2015 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 & Exchange Commission and are also located in the section titled Cautionary Statement, regarding forward-looking statements and risk factors in our annual report on Form 10-K for the FY ended December 31, 2014 and also our subsequently filed Form 10-Q. Our SEC filings can be found on the Investors section of our website at unum.com.

I'll remind you that 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. As we discuss our financial results this quarter, I'll remind you that prior-period results have been adjusted for our retrospective adoption of the accounting standards update for tax credit partnership investments and qualified affordable housing projects.

Adjusted prior-period results are available on our website in a supplemental exhibit. Also, 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 Investor section.

Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; our CFO, Jack McGarry; as well as the CEO's of our core business segments, Mike Simonds for Unum US, Peter O'Donnell for Unum UK, and Tim Arnold for Colonial Life. And now I'll turn the call over to Rick.

Thank you, Tom, and good morning, everyone. The second quarter was another solid one for Unum with operating earnings per share of $0.89, slightly trailing the year-ago result of $0.90 per share. While this result showed somewhat higher volatility in some of our US group lines this quarter, we also saw the continuation of many of the positive operating trends we've seen in the past, most notably, strong premium growth in our core businesses.

In addition our statutory earnings remain healthy and capital position is strong, providing us with excellent financial flexibility. I want to cover a few of what I believe are the key highlights of the quarter, and then I'll turn to Jack to provide analysis of our results in greater detail.

I'll start first with sales, where, as expected, we experienced some moderation from the strong growth we've enjoyed over recent quarters to a more normal long-term level of growth. Unum US sales increased by 1% for the second quarter compared to the year-ago quarter. By market segment, we saw continued momentum in the core segment, which we define as less than 2,000 employees with year-over-year growth of 4%.

We did see sales decline in the large-case segment, which is a market we approach on an opportunistic basis and where sales can be more volatile. At Colonial Life, sales continued growth at very good levels, increasing almost 6% with solid performance in the core commercial segment and public sector. And finally, Unum UK sales continued to gain momentum, increasing 6% for the quarter in local currency.

Second, with continued good sales momentum, along with healthy levels of persistency across all of our business lines, we continued to experience very good growth in our premium income. Our core business segments on a combined basis generated premium income growth of 5% over last year, with the Unum US premium growth of 7%, Colonial Life at 6%, and Unum UK up 1% in local currency.

Next, our benefits experience overall remains within our range of expectations. But we did experience some pressure this quarter, particularly in our US group lines. On a year-to-date basis, our disability lines were in line with prior year, with a challenging second quarter mostly offsetting a very good first quarter.

And in group life and AD&D we saw pressure as well. Other lines of business benefited from favorable results, especially the Closed Block and Colonial Life. Importantly, our margins remain very healthy across our cores business segments, and Jack will detail these trends by business segment in his commentary.

With these ongoing solid results and good statutory results, we continue to maintain a very strong level of financial flexibility. This enables us to support our growth needs while also returning capital to our shareholders. This quarter we repurchased over $100 million of our shares and will implement a 12% increase in our dividend, effective with the payment to be made in the coming weeks.

And finally, as we've discussed with you for some time, the primary challenge we continue to face is the ongoing low interest rate environment. Interest rates and investment spreads were somewhat higher in the second quarter; however, they remain well below historical levels.

I'm pleased, however, with how we have been able to manage through this low rate environment over the past few years and with the actions we have been able to implement to maintain healthy profit margins in our business segments. So with those highlights on our second-quarter performance, I'll now ask Jack to cover our results in greater detail. Jack?

Thank you, Rick, and good morning, everyone. Rick gave you a high-level view of what we believe is a solid second quarter, and now I'd like to review in more detail the operating and growth trends we saw in the quarter. I'll start with Unum US, where second-quarter operating earnings were $202.8 million, a decline of 6% from the year-ago quarter of $215.8 million.

Premium income growth was strong, increasing 6.8% over the year-ago quarter. The benefit ratio for the US segment increased slightly to 71.2% in the second quarter, compared to 70.4% in the year-ago quarter, as we experienced negative volatility in our US Group lines of business. In addition, net investment income declined by 1.1%, primarily reflecting the ongoing decline in yields on our invested assets.

Within the Unum US segment, operating income in our group disability business was $61.2 million, a decline of 15.8% from the year-ago quarter of $72.7 million. While premium income continues to build momentum increasing by 7.1% over the year-ago quarter, we saw continued pressure on net investment income, which declined by 1.8% in the quarter, and a higher benefit ratio, which increased to 83.4% in the second quarter compared to 81.9% in the year-ago quarter.

The benefit ratio was impacted by higher new claim incidents and a higher average size claim in our LTD product line, driven in part by the 50 basis point reduction in the discount rate for new claim incurrals implemented in the fourth quarter of 2014. We believe this quarter's results reflect negative volatility that will occur in this line from quarter to quarter. Including the very favorable first-quarter experience, the benefit ratio for the first half of 2015 is 81.8%, compared to 82.5% for the first half of 2014.

Group life and AD&D operating income was $52.5 million for the second quarter, a decline of 13.4% from the year-ago quarter. Premium income continues to grow at very healthy levels, increasing 7.3% for the second quarter.

Earnings were negatively impacted by the increase in the benefit ratio to 73.1% for the quarter, up from 70.1% a year ago, primarily driven by an increase in the average paid claim size for the group life line. Again, this appears to be normal volatility and doesn't change our outlook going forward.

Trends in the supplemental and voluntary lines were favorable, with operating income at $89.1 million for the second quarter, an increase of 8% compared to the $82.5 million a year ago. Premium income growth trends also remain favorable for this segment, increasing 5.8% in the quarter compared to last year.

From a risk perspective, the individual disabilities line had a favorable quarter, as overall risk results remained stable. The voluntary benefit ratio declined to 43.1% in the second quarter, compared to 48.2% a year ago, as mortality experience was favorable in the life product line. And higher policy terminations in the critical illness product line generated a release of related active life reserves.

Moving to Unum UK, operating income was GBP25 million for the second quarter, an increase of 5.9% over the year-ago quarter of GBP23.6 million. The benefit ratio improved to 70.7% for the second quarter, compared to 74% in the year-ago quarter, as risk experienced in the group life line business was favorable, benefiting from lower new claim incidents and average claim size.

Unfortunately, mortality negatively impacted results in the group disability line. Although, the risk results remained within our long-term expectations. Margins remain in very good shape for Unum UK for the quarter and first half of the year. And the operating ROE was 19.1% for the quarter.

Colonial Life also continues to generate strong results, with operating income of $77.6 million, a 3.6% increase over the year-ago quarter of $74.9 million. Risk experience was favorable over the year-ago quarter, primarily driven by favorable mortality experience in the life line, as the benefit ratios declined to 50.4% from 52% in the year-ago quarter. Margins remained strong for Colonial Life, with an operating ROE of 16.6% for the quarter.

Finally, the Closed Block operating income was $36.6 million in the second quarter, flat with the very strong results from the year-ago quarter. This year's results were strong relative to our long-term expectations for both the long-term care line and the closed disability block, with good underlying risk experience in both business lines.

In a long-term care block the interest adjusted benefit ratio was 83.4% for the second quarter, favorable relative to our longer-term expectations of an 85% to 90% benefit ratio. Our long-term care had less favorable claims incidents rates in the second quarter of 2015, compared to the very favorable experience in the prior-year's second quarter.

In the closed disability block, we had a strong improvement relative to the results of the second quarter of 2014. The interest adjusted benefit ratio improved to 83.6% this quarter, compared to 89.4% a year ago, primarily driven by more favorable claims incidents and mortality experience.

I'll now move to the growth trends we experienced across the Company. As Rick pointed out, we saw a moderation in our rate of sales growth this quarter. This was to be expected, particularly in Unum US, where we continued to implement rate increases in the market to offset the effects of the low interest rate environment.

It's important to note that while sales growth levels may have moderated, we continue to see a very strong absolute level of sales. I'd remind you that it's the relationship between the size of our imports business and the volume of sales that drives growth in our premium income.

So starting with Unum US, total sales increased by 1% in the second quarter compared to a year ago. While this moderated from recent quarterly sales trends, we continued to see good trends in the group disability lines where LTD sales increased by 11% and STD sales increased by 39%.

We saw a decline in the group life and AD&D sales by 22% against a very strong second-quarter 2014. By comparison, the second quarter of 2014 sales increased by 71% over the second quarter of 2013 on very active large case sales activity. Overall for these lines of business, core market sales continue to show positive momentum advancing by about 4% for the second quarter.

Large case sales declined by 7% overall, which is typical of the volatile pattern we experience in this market segment. Growth in voluntary benefits sales have also been volatile, with sales declining a little over 1% for the second quarter, compared to the year-over-year increase of 20% plus for the previous two quarters. In addition, sales in individual disability line increased 11% for the second quarter.

Persistency for Unum US remains at very healthy levels. For the group lines combined persistency was 89.3% for the first half of 2015. With these sales trends and persistency levels, along with underlying management of enforced renewals, we generated premium income growth for Unum US this quarter of 6.8%.

At Colonial Life, new sales continued to grow at a strong pace in the second quarter, increasing 6% relative to last year. The composition of this growth was encouraging as the core commercial market produced an increase of over 4%, and the public sector increased 15%, offsetting a slight decline in our large case sector business.

New account sales declined slightly this quarter, so the growth of our Colonial Life was, overall, primarily driven by sales to existing accounts. In addition, new [REC] contracts increased by about 7% as we focus on building the pipeline of producers. Persistency for Colonial Life was higher year over year at 79.2%, helping to generate overall premium growth of 6% in the second quarter, our highest rate of growth in several years.

Finally, sales in Unum UK increased by 6% again in the second quarter in local currency. Persistency remained stable in the group disability line at 87.5% and continues on an improving trend in the group life line, up to 79.9% for the first half of 2015.

So overall, we remain very pleased with the growth trends we see in our core business segments. Quickly looking at investment results, interest rates and investment spreads were higher in the second quarter compared to the first quarter. And as a result, our new money yields were slightly higher as well.

However, our new money yields remain well below our existing portfolio yields, so the downward pressure on our portfolio yields and net investment income continues to impact our profitability. We're actively raising prices in the markets as a primary means of managing this impact.

Moving to capital management, the weighted average risk-based capital ratio for our traditional US life insurance company continues to be stable from quarter to quarter and remains at approximately 400%. Holding company cash and marketable securities was $481 million at quarter end, which reflects $103 million of share repurchases in the quarter.

Statutory operating earnings were $160 million for the second quarter, and for the past four quarters statutory operating income totaled $633 million, a healthy level of earnings which has also remained stable over time. Wrapping up, I want to affirm our 2015 outlook for growth in operating earnings per share in a range of 2% to 5%, up at [$3.51] in operating earnings for 2014 as adjusted for the accounting update.

Given our first half results, we would expect to be towards the lower end of that range. But we'll need to continue to see how business trends and interest rates play out for the remainder of the year. So overall, it was another solid second quarter for the Company. And now I'll turn it back to Rick.

Thanks Jack. I'll reiterate we're pleased with the second-quarter results. Our premium growth remains strong, and our margins are healthy. These solid results continue to drive good capital generation and strong financial flexibility for the Company.

This allows us to continue to invest in the growth of our business while we return capital to our shareholders. So we're happy with the results.

And now we will move to your questions. So I'll ask the operator to begin the Q&A session

Thank you, sir.

(Operator Instructions)

Suneet Kamath, UBS.

Thanks, and good morning.

I wanted to start with the rate actions that you're taking in the US. Are you now pricing your business to reflect the current interest rate environment, so all that's baked in the cake at this point? Or is there another round of rate action that you need to take on a go-forward basis?

Mike, you want to take it?

Yes, sure. Good morning, Suneet.

So I think on it at two fronts. First is new business pricing and where we would say, absolutely, new business pricing reflects our best view on interest rates, underlying risk, aging of the population, et cetera.

The renewal is, as you know, it takes a little bit of time to work through that. So just to give you a sense, in the larger end of the market, we'd see about a third of all of our large employers come through each year. And then in the core market it's closer to 20% to 22% that we put through a renewal program.

Each batch that comes through reflects the current view of interest rates. So we're making good progress, but even as we saw rates fall a bit last year, that would get reflected in the renewal program this year and in the next two years to come.

Okay. Got it. And then, Jack, on your comment about -- I think what you were getting at was the nominal level of sales relative to the in force. Is the take-away from that even if the growth rate of sales starts to moderate because just of the law of large numbers, that we should still expect premium growth because, essentially, you are outselling your lapses? Is that where you were going with that?

Yes, that's pretty much. So if you get to that point, normal growth in sales will be reflected in normal growth in premium. But we are -- we've gotten over the tipping point where the size of our sales is big enough to overcome the lapses and generate some really good top-line growth.

Got it. And my last question on top line is, is it still fair to say that you're not really getting much of a benefit from either employment growth or wage inflation?

Yes. It's turned from -- it had been negative in the past. It's positive. It's in the 1% to 1.5% range. So we haven't seen the lives and wage growth that, perhaps, the general economy has seen as yet.

And in a normal period, that 1% to 1.5% is typically what again? Could you remind us?

2% to 4%, depending.

One thing to add to that, Suneet, is we were seeing the lives grow. We really haven't seen the wage inflation. And so that's something that I think is true pretty much across the economy. It's very true in our books. So we're getting better employment, but not seeing what we would expect from an overall wage inflation. So that's something to look forward to.

All right. Thanks.

John Nadel, Piper Jaffray.

Hey, good morning, everybody. Maybe two quick questions for you. There are some who are reading the DOL proposal to potentially even have an impact on group insurance sales. Do you read it that way?

If so, do you have a view on this? Obviously, there's a lot of focus amongst the annuity writers and others selling business into qualified plans. But I'm curious whether Unum has a similar view that this could potentially stream over into the group insurance business.

Hey, John. This is Rick. Thanks for the question.

I think when you think about the overall, what's going with the fiduciary role from the department of labor, one, it's early days. So I think, like anything that we look at in Washington, we stay very involved with the discussion that's going on out there. And making sure that we have our views around, that is. Around what's going on and where those different rules might go. So I think we have to stay abreast of it in early days.

I think it's very clear, though, from the discussion, the questions, and the guidance coming out of the department of labor that this is very much about investment advice that goes on out there, which doesn't include us. So it's one of those things that we stay on top of. We don't think it's going to and we don't think it should apply to anything we do in the business. But it's one of those things, as you deal with ways of Washington, we stay on top of.

I totally agree with your view.

The second question is there's been M&A activity. There's at least one group insurance business on the block that is very publicly out there. Potentially other transactions that we don't necessarily hear about, but bankers might be bringing to you.

Should we read into the fact that your buybacks continue? That M&A is something you're not really looking hard at this point? Or are they mutually exclusive?

John, I appreciate the question. I think we've been very clear all along. M&A is a core part of our strategy when you think about that. So you wouldn't have seen us do any deals, but there wasn't a lot going on in the market. And that's how we would have voiced that.

So as you mentioned, the market is seeing greater momentum. We are definitely going to partake in that view of what we have out there. We'll be very close to whatever action is going on out there. I think that we're well known in the market at least that we're interested in growing our business through M&A. And that's a core part of our strategy.

That M&A could look like adding capabilities. It could look like expansion of our overall portfolio, but to be very clear M&A is a key part. Your second piece of the question is around the capital to do so. And I think that, as we look at it, we've been able to return capital to shareholders through share repurchase and through dividends.

But at the same time, we've kept our balance sheet in the space that we can react to an environment where M&A becomes better. That's been consistent. So we think we have the firepower to participate in these markets, and we'll be very active on that front. And they are not mutually exclusive. We think that --

Okay, and as a quick follow-up along those lines, obviously, you're carrying a risk-based capital ratio that at least for your business mix is significantly above, I think, some tiers and significantly above your historical levels. Should we think about that, Rick, as that's part of the capacity, if it were to be used for M&A as opposed to retiring equity? That the risk-based capital ratio could be a source, if you will, of funds?

I think we've been clear on that over time. That when we've been running at 400%, we've been at the top of our ranges that we've communicated externally. So there's room there. We carry a holding company cash, as Jack mentioned, at just under $500 million. There's room there.

And then when we look to our leverage ratio, we have a very clean debt leverage structure that provides us capacity as well. So we think we have a lot of capacity. And I'd take you back to the capital generation model. Every quarter we keep generating capital, as well, that can buy back stock or go towards certain type of transactions.

Yes, no question. Statutory earnings have been terrific. The last one I have is real quick is just a question for Mike.

There's been some other companies talking about some modest shifts in the competitive environment in US group insurance. And I think most notably this morning was more of a commentary from around the dental business, which I know is not necessarily something you're focused on. But can you give us an update on your views on the competitive dynamics?

Yes, sure, John. Thanks for the question.

I would say in comparison we certainly saw more favorable market conditions in 2014 than we had seen in a little while. We had a few carriers that need to address profitability issues, and that created some opportunity. We saw the market shake off some of the distraction from ACA that we had felt at the end of 2012 and into 2013. I'd say as I look at 2015, we probably see a little bit more of an aggressive stance around pricing in the market than we saw in 2014. But still reasonably good, and I would say pretty typical conditions.

Okay. Thanks very much. That's all I've got.

Jimmy Bhullar, JPMorgan.

Hi, good morning. I had a few questions.

First, if you could go into a little more detail on the few businesses where you saw weak margins, group disability and then group life. Just talking about what you saw in terms of incidents and severity trends. And how do you expect the loss ratios or margins to immerge in those businesses in the second half of the year?

And then also on long-term care, you had pretty good results this quarter. But given the level of rates that we are at right now, if we stay at this level through the end of the year, would you expect to add to your New York stat reserves again this year? Because you've been doing that in the past, for the last few years.

Mike, you want to take that?

Okay. Good morning, Jimmy. First, from the group disability and group life. It really -- we've taken a look, and it really looked like just normal volatility on the group disability side. The new claim instance rate was up slightly. Average size was up, and so it was a combination of those two things that drove the results. We'd, again, point you to the first half of the year. We had a very good first quarter, a less good second quarter, but year to date, we're pretty much where we would expect to be, and our outlook has not changed going forward.

Group life, it was absolutely an average claim size. So just higher-paid people happened to be the people that submitted claims. The claim size was up 6% for the quarter. And again, that's something that we wouldn't view as being the trend and wouldn't view as changing our outlook going forward.

From the long-term care side, where rates are and in the guidance that we've given in the past, we've talked about New York being a steady thing. And so we would expect to have contributions to New York at a similar level that we've had in the past.

Actually, rates are a little better than they were at year end. And so there has been a little -- modest improvement in that. But again, we'd expect it to be at similar levels, and it's clearly something that has been baked into our capital plans.

Okay. Thank you.

Steven Schwartz, Raymond James & Associates.

Hey, everybody. I'm not going to take up much time. Most were asked and answered. So thank you.

(Operator Instructions)

Colin Devine, Jefferies.

Okay, thanks very much.

A couple things. Just to clarify on the DOL situation, because I don't believe Unum submitted a comment letter on it. But I presume, then, you're participating with the ACLI. And you assume the welfare benefit plans will be carved out is, number one. Number two, with respect to Group life. In terms of if you look back over the last six to seven years, and I appreciate your saying it was just a severity issue, how many standard deviations were we off your average?

And then lastly, on the capital management, because it's getting this ROE up seems to be an ongoing challenge. My understanding is rolling over the closed block securitization doesn't make a lot of economic sense. Can you just walk us through why that is as that thing is getting paid down fairly rapidly? Thanks

Good, thanks, Colin. Let me just follow up on your first question. We are actually participating. When I talked about our activities in Washington, one, there is direct conversation that we have. Second is through our trade associations. ACLI would be one of those. So we did not send our own comment letter, but we are very much a part of the process. Let me turn it over to Jack to talk a little bit about Group life.

Yes, it's the Group life standard deviation. We did do an analysis of that. It was close to within one standard deviation. So we were clearly within a 75% confidence interval on the group life. So it was high, but not out of the realm.

On the securitization of the closed block, we are aware that's being paid down. We will continue to look at capital options for both the closed disability block. And we're actively looking for capital options on the long-term care block as well. So it's clearly something that we consider. And we will look for opportunities going forward.

Jack, can we just drill a little deeper though into the closed block securitization? Because, if I recall, when it was done -- and obviously, Tom White is there and goes back to this as well -- You freed up, I think, it was about $800 million of capital. And my understanding now is if you rolled it, the number might be $100 million or something.

What's changed? Is it the way you can use re-insurance, and how the [NEIT] regulators are looking at it. What's the difference today versus when you did it? If you could be more specific, that would be helpful.

Colin, this is Rick. Just a couple of things. One is the size of the relative blocks. When you think of the cash flows coming off that block, they reduce significantly as that block is run down, particularly as you look back seven years. So the cash that comes off that, which, generally, is part of the securitization, is what you're really securitizing is roughly half of what it was back then. So that's the biggest thing.

There's no change in the rules, no change in the views around that. The second piece is the opportunity around. It's a much lower interest rate environment, so you'd think you'd have much better debt ability to -- much lower financing cost.

It was done on a floating-rate basis, so that was matched up early on with floating-rate assets. So you don't have that juice, if you will, as well. So there is benefit. And I think there would be some benefits to re-looking at that. But it's more what is the magnitude of those sizes that we have out there.

Okay, well then, if that's not the option for you, practically speaking, are you exploring selling off, if you can, part of the long-term care block? Since that, to me, seems the only way the ROE is really going to start to move up.

We would certainly ascertain selling the long-term care block or re-insuring it. We are listening to the market. There are not a lot of buyers currently, particularly for big long-term care blocks.

There have been a couple of very small transactions. They've tended to be much older more mature blocks, so we are actively there. Particularly, if interest rates continue to rise, it makes that a more plausible option in the market. But from what we've seen, there just aren't the buyers yet on it.

Okay. Thanks very much.

Humphrey Lee, Dowling & Partners.

Thanks, good morning. Just a quick follow-up on your buybacks. So, year to date, you're running at a little bit north of $200 million and twisted lower end of your $400 million to $600 million target. How should we think about the pace of the buybacks for the remaining of the year? And what would make you maintain similar paces of the first two quarters? Or what would push you towards the upper end of the guidance?

Thanks, Humphrey. Jack, you want to take that?

Yes. We are very comfortable with our pace of buybacks currently. It is toward the lower end of the range. I think given our current stock price, given the current interest rate environment, and given the activity that's going on within the insurance space, we think our current level of share repurchases strikes a good balance between financial flexibility at the Company and good management of our capital levels.

Okay. Got it. And then just a follow-up on the long-term care part. You mentioned you'd been actively looking, but there is still not too many buyers. In your estimate are we still talking that the price difference is still a ways apart? And how does that trend over the year? Do you see that at least getting closer?

I think from my perspective, certainly, as interest rates rise, the price difference gets closer. In addition we've had two reductions in our discount rate on long-term care. So the spread between current rates and our discount rate gets closer. That makes that debt option look more viable.

I, frankly, think that it has less to do with interest rates right now and more to do with comfort with the liability side. And I think it's going to take some time and maturing of those blocks for people to get comfortable enough with it that they would consider a purchase.

Okay. Got it.

And then just on the interest rate part for long-term care. I remember a couple years ago you were thinking about potentially put in some interest rate hedges for your long-term care block, but at the rates now, it didn't come through. If we do see rates improve again, at what level would you consider actually putting in some interest rate hedges to shield some of the interest rate sensitivity to your long-term care block?

I think interest rates need to rise more. I think we were probably close at the end of 2014. We remember that the ten-year was just north of 3%. So it's within the realm, and, again, as we've lowered the discount rate, the hurdle rate for putting hedges on gets lower, as well.

Okay. Got it. Thanks.

Tom Gallagher, Credit Suisse.

Good morning.

Just a question on the relationship, and if there is any one on the 2014 very strong sales growth you had in US group and whether or not that's contributing at all to the elevated benefit ratios this quarter. Do you see that as a pricing issue at all? Or do you still have -- even if we remain around this level, is that still a good enough return where you wouldn't necessarily need to see rate action?

We actually looked at claims by year of issue, and there was no evidence that any of the problems that we saw are in the group lines were the result of recent sales. It was pretty random where that stuff showed up by year of issue.

Mike, you want to talk a little about pricing?

Yes, as Jack said, you look at it by issue year. Look at it by industry geography. And no concentration that would suggest that you had a underwriting quality or pricing issue. In terms of what the trajectory of rates, if we look at, particularly, I think, the disability market, you look at it and say, look, there's still work to be done pretty consistently on the interest rate front through the renewal program. Persistency has held up really nicely.

We would certainly plan to see that continue, but we'll be at it from a rate increase perspective to existing clients for the next two or three years. And then on new business, we moved rates up at the end of 2014 and nudged them up again here at the midyear. And that's just to get as current as possible on interest rates, and also just to reflect that we've got a slightly aging population. And that's going to drive incidents down the road for us.

Can you give some perspective on magnitude of rate for the renewals as they come through?

Yes. So it's mid to high single digits is pretty typical. And then, for any particular pocket or client, you're going to see variants around that. But on average that's where we are.

And does that change from where it's been, say, last year or the year before? The mid to high single digits?

Similar. It's edged up a bit. What we've seen is -- actually what we've done is expanded the program. So we're touching more clients than we had a year or two ago. But the average size increase is still pretty much in the range.

Okay. And then I also just had a question on the supplementary and voluntary business. Margins there have been quite good. First question is that, do you think that's a reasonable run rate from a margin standpoint, whether you look at the loss ratio or just the pretax earnings margin that you've been experiencing there?

And the second question is, just trying to wrap my head around looking at how good these loss ratios are. Individual disability, 30%. Interest adjusted loss ratio. Granted it's a much different business than your Closed block which is running in the [80s].

But I'm just trying to think about is that a number that's going to go up a lot over time? Or is that where the business is from a pricing standpoint?

Yes, sure. It's Mike.

In that supplemental segment across both the voluntary and individual, it's actually quite different businesses, but with a similar trend around your question. Which I would say, wouldn't expect any dramatic movement. I would say in general over time we would see loss ratios about at that level to slightly increasing over time.

And that would be offset by efficiencies gained. And so we'd see operating expenses come down a bit in those lines. And the net impact, to your question, is those are good healthy margins, and we'd seek to maintain those. But the mix will shift a bit over time.

And are there, just looking at the 43% voluntary benefits loss ratio, are there minimum loss ratio considerations at all? Or is that not applicable to these lines of business?

Yes, I think we are generally in good shape there. I would say in the quarter in particular we had elevated lapses in voluntary benefits. And so there was a release of active life reserves that pushed a more favorable benefit ratio there. So that is at play in the quarter in particular.

But, no, in general, we're in pretty good shape. That voluntary benefits portfolio there are product releases that are going on in a pretty regular stream. And those are going through all 50 state filings and looking at experience. And we don't really see issues there.

Okay. Thanks.

Yaron Kinar, Deutsche Bank.

Good morning, everybody.

I want to go back to the elevated disability claims for this quarter. And just want to get a sense, are there any pockets of the market where you are seeing the claim size or incidence rate picking up?

Really, as we looked at it by industry, by size, there wasn't really a pattern to it. It appeared to us to be pretty much pure volatility. The underlying piece too is the 50-basis-point increase in the discount rate is going to drive your average size up in and of itself. Now, it was a little bit elevated above that, but that had a role to play in it, as well.

Got it. And then can you also explain why the asset supporting group disability declined? I would have thought they would be up just given the sales growth and high persistency?

Yes. They declined because the assets are more related to the reserves behind the business than it is the premium. And so claim runoffs with good recoveries -- the actual reserves behind the business have been declining slightly, and so the assets have been declining, as well.

Okay. And finally, persistency is clearly still strong. But in the US, we're starting to see some declines in 2015 in short-term disability, Group life, voluntary benefits. Do you see this as part of a broader trend or just normal volatility?

I think it's normal volatility. It's something that we're going to watch very closely. Because linking it back into the re-pricing for interest rates, as we work through the block, it's the balance between placing the rate increases and retaining clients through that process. And at 89.3% feel very good about where it sits at the moment, but we'll continue to watch it really closely.

Great, thank you very much.

Ken Billingsley, Compass Point.

Good morning. I wanted to just follow up on your comments about benefits or not getting the benefit from employment growth and, particularly, of wage inflation. As employers and insurance brokers are not as focused on ACA, are you seeing a shift in their interest in pushing the benefit products? Or has that not actually translated yet?

Yes, sure. It's Mike. Thanks for the question. Actually demand for our products -- you could sort of think of them as financial protection benefits -- is growing. And so generally what we see is ACA has just been part of a long-term trend toward the consumer, the employee driving benefits decisions. And what we see is when you put an employee in front of a healthcare decision, they're going to buy down on the healthcare.

And usually that means higher-deductible, higher-co-pays type insurances, lower monthly premiums. They use some of that savings to buy products that help fill some of those gaps. So in general, we see consumers with more interest in living benefits in particular, supplemental health products, short-term disability, and the like.

Employers, I think just as the economy is improving, some of that slack is coming out of the labor market, and so the need to attract, retain talent is heightened. And so doing so with employee choice option is an economic way of to do it. So demand on the employer front is good.

And then, I think to your point in the question, what we've seen in a distribution channel with brokers is a pretty strong interest to diversify a way their revenue from such dependence on healthcare commission. And I would say, even as consolidation continues in that health market, that's going to put further downward pressure on healthcare commissions and create a demand for other sources of revenue. And that's where Colonial life Unum products fit very nicely.

And now, with the penetration in some of these employers from ACA, because they had to, are you seeing that this is, in transitioning, opening more doors for your products where maybe they weren't considered before? Or has demand not necessarily increased?

Yes, I think it's not an overnight sensation, but I'd say it's been a building sense of demand. One interesting corollary is ACA has brought a pretty stiff set of compliance and regulatory requirements, particularly around keeping track of time.

And so what -- more and more employers are looking to technology, benefit administration, cloud base, HRIF solutions, and the like. Those are platforms that we've worked hard to build a relationship over time with. And so that's opening up some interesting channels for us, that technology-driven distribution of benefits. And so, again, I don't think that's an overnight explosive growth. But it's a slow burn, which, I think, is getting to parts of the market we hadn't been to before.

Great. Thank you for taking my question.

Erik Bass, Citi.

Good morning. Thank you. Given where interest rates are currently, do you anticipate there would be any need to make further adjustments to the new claims discount rate in the second half of this year?

Yes. We will look at it. We'll come to the end of the year -- we do our annual claim reserve review in the fourth quarter. We have healthy margins currently in our interest margin. It's north of 90 basis points, so there's some room in there. And we're optimistic that if perhaps the Fed begins to move in the second half of the year, that a little lift in the interest rates would help that a lot.

So it's something that we're going to wait and see. But we're comfortable with where we are. We're comfortable with our margin being at the higher end of where we would like to see it. And so I think we have some flexibility coming into the end of the year.

Got it. Thank you. And just one question, maybe for Mike, going back to the competitive dynamic. Are you seeing or do you anticipate any impact from the recent or expected M&A in the Group market?

Time will tell, would be the quick answer. Generally though, when you see M&A, it's going to be a pretty considerable distraction both to acquiree and acquirer. So that usually creates some uncertainty and opportunity for players to stay focused through the period, but, again, time will tell.

Got it. Thank you.

Mark Hughes, SunTrust.

Thank you. Good morning.

The voluntary benefits sales is down a little bit. Was that consistent with the broader competitive pressure? Or was there just less take rate from individuals? What was the dynamic going on there?

Great. Thanks.

I think it's a little bit of quarter-to-quarter movement in sales trends. We had a really strong first-quarter. I think, year to date, we're up 20% in voluntary benefits sales. I wouldn't read too much into it. Second quarter tends to be a light quarter in terms of seasonality for that particular line.

In general, we feel good. Look at the pipeline; it looks good. I think demand for choice products is high, and we continue to invest in capabilities around product and distribution.

And probably have done a little bit more investing than we have in years past around consumer-centric capabilities and driving up take rates, participation rates for new and for existing plans. And we're starting to see some pretty encouraging things there. So a little bit of off during the second quarter, but I think the long-term trends are healthy.

Thank you.

Ryan Krueger, KBW.

Hey, thanks. Good morning.

I just wanted to follow up on the M&A commentary. I think you mentioned that you might have some debt capacity. Your debt-to-cap ratio is around 25%. Can you help us think about how high you could bring that up if you found a deal that was attractive that required additional capital to finance?

Sure, Ryan. When you think about the 25% we have today, that's pure senior debt relative to our overall capital position. So there are different forms that it could take on. And I think that the key about us being able to take it up from there is something we could do, but it's also about with a longer-term plan.

We've said we feel good about 25% longer term. If we take it up for a period of time for M&A and it comes back down at a pretty rapid basis, we think it's just fine. So I wouldn't want to throw a top-end range out there. It's much more about the trajectory and how we want to run it.

Understood. And then, it's been a while since you've done any M&A. Can you talk about your philosophy when it comes to evaluating M&A and accretion versus buyback and how you analyze that?

Well, I think the first thing, Ryan, is when we look at M&A it's got to be about what is the strategic fit that we have with the overall company. So you always have to start there, and then very quickly go to the economics of the deal that you see out there.

Think about [IRR], think about those things. Then you come to a relative use of capital, so we do comparative share repurchase, which has been very good for us over time. So we are going to be doing that as well.

And then when you look at accretion and dilution, I think those are all important metrics for shareholders. Those will be part of the mix, as well. But I'd take you back to number one is, where does it fit in the strategy. And number two, do the economics of the deal look good.

Is it also fair to assume that if you were evaluating an M&A deal relative to buyback, that you could probably deploy more capital into an M&A transaction and bring down your balance sheet metrics a little bit lower in an M&A deal than with buyback, given how rating agencies tend to look at this?

I think it goes back to the comment about, it is about the longer-term too. So it's not about metrics on day one. It's what their expectations of those trends look like, as well. So I think there is flexibility in there. It's not an exact science relative to share repurchase and things like that. But I think those are key barometers we'd use to help us think about different M&A transactions.

Okay. Thanks. Appreciate it.

Humphrey Lee, Dowling & Partners.

Thanks. Just a quick follow-up on M&A. You talked about you looked at different things. I was just curious, is there any particular business type that you would be more interested in over others? So maybe more voluntary over traditional group or anything in the sense of in terms of the business that would be more interest to you now?

Humphrey, as I said, we're looking at, how does it fit in with the overall strategy. So all those things that you mentioned are all part of our strategy. We are figuring out how we can reach more customers through the employer.

So when you take that as a broad scope, that's what we're going to look at. So I wouldn't want to get more specific than that, but we're going to stay true to working through the employer. But there are a lot of needs that can be provided through the employer, which we'll explore all of those.

Okay. Thanks.

And then, anther think about your critical illness book. I know one of your peers talked about seeing unfavorable claims experience related to critical illness, especially in the cancer coverage. Do you see anything unusual for anything adverse or kind of developing trend with respect to coverage for cancer treatments?

Maybe the best thing to go -- Tim Arnold, talk about Colonial life view around our cancer product in voluntary?

Yes, the cancer product continues to perform very well. We certainly stay abreast of the developments in the medical field around cancer treatment and the impact that might have on our benefits costs. But at this moment, we are pleased with the direction of that product. And increasingly, it's a differentiator for us because there aren't as many companies out there offering that specific product line.

Okay, but overall, the claims experience is largely in line with your expectations. And at least you don't see that elevated cost related to treatments?

Correct, no.

All right, thank you.

Operator, we're coming up on time. So I think we'll thank everybody for taking the time to join us this morning. And operator that now completes our second-quarter 2015 earnings call.

Thank you, sir. And, ladies and gentlemen, once again, this does conclude today's conference. We do thank you for your participation today.