普登 (UNM) 2016 Q2 法說會逐字稿

Good day, and welcome to the Unum Group's second-quarter 2016 earnings 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 the Senior Vice President Investor Relations, Mr. Tom White. Please go ahead, sir.

Great, thank you, Gwen.

Good morning everyone, and welcome to the second-quarter 2016 earnings conference call for Unum. Our remarks today will include forward-looking statements, which are statements which are not of current historical fact. As a result, actual results might differ materially from results suggested from these forward-looking statements.

Information concerning factors that could cause results to differ appears in our filings with the SEC, and are also located in section entitled cautionary statement regarding forward-looking statements and risk factors in our annual report on Form 10-K for the fiscal year ended December 31, 2015, and are subsequently filed quarterly report on form 10-Q. Our SEC filings can be found in the investor section of our website.

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. 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 also in the investor section.

Participating in this morning's conference call are Unum's President and CEO Rick McKenney, and our CFO Jack McGarry, as well as the CEOs 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 for Rick for his opening comments.

Thank you Tom, and good morning, everyone.

Our second quarter results were excellent, with operating income per share of $0.99. This is an increase of 11% over last year. Together with our strong first quarter results, operating income per share grew 9% in the first half.

Our operating trends have been very strong across the Company with solid levels of premium growth in Unum US, Unum UK, and Colonial Life, coupled with stable benefits express a favorable expense management trends. I am particularly pleased that we are actually be strong results despite was many different historically low interest rates.

The reason that we can deliver these consistent to improving result is because we have a sound strategy and business plan in place. It is one that resonates well with our customers and the employee benefits marketplace both on our existing group solutions, as well as a growing voluntary space.

It is our execution of the strategy that is generating the strong financial outcomes. I'll discuss this in more detail in a moment before somewhat to provide a few highlights on the second quarter.

First the premium growth we regenerating in our core operations remains very healthy at approximately 5% in each of our business lines. For the second quarter, premium income growth in Unum US was driven by strong persistency cousin ourselves trends over the past several quarters.

Total sales increased slightly in the second quarter with very strong performance in the voluntary in supplemental lines offsetting a small decline in our employee benefits lines where markets remain competitive. Unum UK premium growth benefited from the national dental plan acquisition from last year, as well as growth in the group income protection like.

And finally premium growth at Colonial Life was driven by the excellent sales trends we have seen over the past few years which continued again this quarter, with growth in new sales of 13% bringing first half sales growth to just under 15%. Next I'm very pleased that we've maintained strong profit margins in our core business segments while building this positive momentum in premium growth over the last several quarters. This shows the discipline we're bringing to our markets and how we price, underwrite, and manage customer relations in order to maintain a balance between producing topline growth and maintaining industry-leading profit margins. These strong operating results drive a very strong level of statutory earnings and capital, which provides a substantial financial flexibility.

Our first half statutory operating earnings have been outstanding, increasing 29% year-over-year to $400 million, or just over. This enables us to continually generate free cash flow, which we have been used to create shareholder value for steady consistent share repurchases and annual dividend increases.

At the same time we're able to capitalize on attractive acquisition opportunities, such as national dental plan in the UK and Starmount Life Insurance Company, which is also in the dental market and we're able to capitalize them on when they are available. So in summary is has been a very strong first half of 2016 for the Company. This performance as a result of our steadfast focus on discipline execution of our business plan. This is reflected in many facets of our business. Starting with our customers it includes how we underwrite and price business, how we manage claims to help people return to work, how we administer and enroll business, and how we manage customer relationships.

Operationally we also continued to focus on disciplined expense management, which is evident in the favorable expense trends we have delivered in many of our business segments, which is also net of investment we're making in our businesses through such things as customer facing technologies. When you combine this disciplined execution with our market positioning and growing footprint we see a continuation of good profitable growth.

And finally, I can't say enough about our people who are responsible for this day in and day out. We're committed to developing our talent, billing our bench strength and ensuring our people continue to drive the change necessary to remain the leader in the employee benefits marketplace.

So with those highlights an excellent second quarter, I'll ask Jack to cover our result in greater detail. Jack?

Thank you Rick, and good morning everyone.

Rick provided a high-level overview of our second quarter results and now I want to provide a more in-depth view of the trends we saw in the quarter.

First, I want to highlight the composition of our after tax operating income per share growth of 11.2%, which was well-balanced between after-tax operating income growth and capital management. Operating income grew 5.9% over the year ago quarter. This quarter was one of the strongest and best balanced quarters we've seen. In addition, the benefit from our share repurchase activity reduced our average shares outstanding by 4.8% compared to the year ago share count.

A key driver of our success this quarter was the performance of Unum US. Second quarter operating income was very strong at $227.2 million, an increase of 12% from the year ago quarter.

Premium income growth continued its positive trend increasing, 5.1% over the year ago quarter. The benefit ratio for Unum US segment improved to six and up 1% in the second quarter compared to 71.2% in the year ago quarter.

In addition, our focus on disciplined expense management also contributed to operating results, with the other expense ratios declining to 20.9% in the quarter compared to 21.8% in the year ago quarter. The profitability of our Unum US segment remains very strong, with an operating our only of 15.1% for the second quarter of 2016.

Within the Unum US segment operating income in our group disability business was $74.4 million in the second quarter of 2016, an increase of 21.6% over last year. Premium income increased 5% over the year ago quarter, but pressure on net investment income continues, driven primarily by lower portfolio yields.

The benefit ratio was quite positive at 80% for the second quarter, compared to 83.4% in the year ago quarter as we continue to see lower new claims incidents and favorable claim recovery trends in our group long-term disability line, along with shorter claim duration periods in our group short-term visibility line. Group life and AD&D operating income improved to $56.9 million for the second quarter, an increase of 8.4% from the year ago quarter.

Premium income grew 3.9% over the year ago quarter with the benefit ratio improved to 71.5% for the second quarter, compared to 73.1% in the year ago quarter aided by favorable group life waiver premium benefits. Operating income in the supplemental and voluntary lines was also very strong at $95.9 million in the second quarter of 2016, an increase of 7.6% over the year ago quarter.

Premium income growth trends remain favorable, increasing 6.7% in the quarter compared to last year. From a benefits perspective overall results remain in line with our expectations, with favorable trends in the voluntary benefits line offset by mildly elevated benefit ratios in the individual disability lines.

Looking at Unum UK, operating income was 25.7 million pounds for the second quarter, an increase of 2.8% over the year ago quarter. Premium income increased 5.7% over the year ago quarter, driven by the acquisition of MVP in the growth of the group disability line.

The benefit ratio was 70.1% for the second quarter, a slight improvement relative to the 70.7% in the year ago quarter, as favorable risk experience in the disability line offset some unfavorable experience in the life line. Overall profitability of the Unum UK segment remains quite strong with an operating ROE of 20.9% for the second quarter.

It's too early to tell what the long-term impact of Brexit will have on our Unum UK operation. The lower exchange rate will impact our results immediately the third quarter.

We do not expect to see much, if any, impact to our risk results; however it implement trends and wage inflation so slowdown in the UK and interest rates remain under pressure, we did see some negative impact to our premium growth in investment income trends. We believe that the fundamental need for protection product in the UK has not changed as a result of the Brexit vote, but we will be monitoring very closely for any impacts in our markets over the next several quarters.

Colonial Life continues to generate strong steady results, with operating income of $77.9 million in the second quarter of 2016 compared to $77.6 million in the year ago quarter. Premium income increased 4.6%, and the benefit ratio was 51.1% for the second quarter compared to 50.4% for the year ago quarter, due primarily to less favorable mortality experience in the life product line.

Colonial Life continues to generate excellent margins with an operating ROE of 17.4% for the quarter. In the second quarter we completed our DAK reviews for both our Unum US and Colonial Life businesses with minimal impact from second quarter results.

Finally, for the closed block operating income was $32.6 million in the second quarter 2016 compared to the exceptionally strong $36.6 million reported in the year ago quarter. In the individual disability line, we saw very favorable underlying experience. The increase in the interest adjusted loss ratio to 84.3% in the second quarter from 83.6% in the year ago quarter includes a reduction in the reserve discount rate to recognize the impact on future portfolio yields from the high level of bond calls and bond tenders to the second quarter of 2016. Excluding this reduction in the discount rate, the interest adjusted loss ratio was below 80%, one of our most favorable results in years.

For the long term care line the interest adjusted loss ratio was 92.6% for the second quarter compared to the usually favorable 83.4% in the year ago quarter. The swing in result the volatility that this block is subject to on a quarterly basis and the importance of taking a longer-term view of the performance, which shows an interest adjusted loss ratio since our Q4 2014 reserve review of 88.6%. The result in long term this quarter were driven by an increase in new claim incidents and severity brought on in part, we believe, by the rate increase notifications that we've delivered to policyholders recently.

We expect that this is likely to continue in the near term and is consistent with the claim activity behavior we have experienced in the past following rate increase notifications to policyholders. As before, we expect these higher claim levels to remediate once we are through the rate increase notifications.

I'm pleased that we continue to make good progress on achieving rate increases in our in force long term care business. In addition to making good process with state regulators, we're also seeing strong take-up of the landing spot option.

The lending spot has a positive impact on reserves as rate increases, but also has the added benefit of derisking the portfolio. Since future claims will be smaller under the lending spot, the reserves will be somewhat less sensitive to future changes and reserve assumptions.

I'll move now to the growth trends we've experienced across our business this quarter. Starting with Unum US, total sales increased 1.4% for the second quarter compared to a year ago. We continue to see competitive market conditions, particularly in the core market segment, where we continue to increase our right to offset interest rate pressures.

In total for LPD, STD and group life we saw an overall decline in sales of 3.4%, with core market sales down 9.9% while large case sales increased 12.8%, reflecting continued success in our ongoing efforts to increase penetration within existing customers. The momentum in our supplements on voluntary segments remain very encouraging.

Our individual disability sales increased 12.3% compared to a year ago quarter driven by strong growth to existing customers. In the voluntary benefits topline total sales increased 14% with a good balance between core market and large case sales. Persistency for Unum US is at very healthy levels. For the employee benefit lines combined persistency was 89.6%.

This is important to us as we look to move price increases into our enforced block to offset the impact of low interest rates and reduce discount rate assumptions that have been implemented in recent years. Our sales force does an excellent job of managing this balance of posting rate increases with maintaining our enforced business, which is essential to our ability to grow while protecting the strong profit margins we have in our employee benefits block.

Likewise, voluntary benefits persistency of 76.7% was favorable to the prior-year results, as was individual disability persistency at 91.3%. Sales in Unum UK continue to rebound, increasing 19.4% in local currency, with favorable trends in the core market for group long-term disability and group life overall, along with the benefit of the MVP acquisition. Persistency was favorable at 85.5%, helping to drive premium income growth of 5.7% this quarter.

Finally, sales trends at Colonial Life remain very strong, increasing 13.3% for the second quarter and 14.5% for the first half of the year. Growth continues to be well-balanced between the commercial market sector and the public sector and between sales to existing customers and sales to new accounts. Persistency for Colonial Life with partly lower across all product lines in the quarter, but remains in line with our expectations.

As a result, premium growth is showing steady momentum, increasing 4.6% in the second can quarter compared to the year ago quarter. Overall, we remain very pleased with the growth trends we see across our core business segments, and as Rick highlighted earlier, the profit margins that we've been able to sustain.

Looking now at investment results, new money yields remained under pressure in the second quarter. However I'm pleased that we were able to again achieved the new money yield assumption that we had for a long term care portfolio.

We've exceeded our target of investing cash flows at 5% rate for every quarter since the 4Q 2014 reserve review. We remain well-positioned with our UNUM US long-term disability business from an interest rate perspective, as our interest reserve remains healthy. This is a great benefit to us as we navigate the dip in interest rates that resulted from the Brexit referendum.

It's too early to make a decision today on any future changes to the LTD discount rate, but new claim [incurls]. But we remain satisfied with our margin at this time and a well tested and proven ability to deliver the offset in rate increases into the market should an adjustment be needed.

The overall credit quality of our investment portfolio remains in very good shape. I'd like to highlight the further rebound in the net unrealized gain position of our energy holdings to $433 million at the end of the second quarter compared to a gain of $19 million a quarter ago.

It is impressive that the gross unrealized loss on energy holdings has declined to $89.5 million at the end of the third quarter, compared to $297.4 million at the end of the first quarter. Energy holdings in a loss position were trading at over 90% of book value at the end of the second quarter. I believe this validates the investment decisions and credit evaluation process we followed for the past several years, not just for our energy holdings but for our management of the overall investment portfolio.

Moving to capital management, it was another active quarter as we repurchased 100 million of our shares, consistent with our repurchase activity in recent quarters. Our holding company liquidity position remains very healthy at approximately $600 million as of quarter end, roughly twice the level we target for holding company cash coverage needs for one year.

This cash position is net of the $350 million we're holding for the debt maturity on September 30, (inaudible) contributions in the acquisition at Starmount Life Insurance company.

As a reminder, we issued a $600 million in senior debt back in early May in part to refinance this maturing debt. Our risk-based capital ratio for our traditional US life insurance companies remained at approximately 390%, well within our target range of 375% to 400% for this year.

Statutory after-tax operating earnings were outstanding at $228.4 million for the second quarter 2016, compared to $161.2 billion in the year ago quarter, an increase of 42%. This was one of the best statutory quarters on record, reflecting the favorable risk experience across our primary business lines.

For the first half of 2016, statutory after-tax operating earnings totaled $412.5 million an increase of 29% over last year. Our outlook for growth and after-tax operating income per share for 2016 is unchanged with an expected growth rate of 3% to 6%.

We now expect to be the higher end of that range as our first half after-tax operating earnings per share growth has been a very healthy 9%. While we're not believe that rate of growth into our expectations for the second half of the year we remain very encouraged by our first half trends.

So to wrap up my comments, I'm very pleased with our first half results. In fact, I'd say that their remarkable given the environment. We have executed very well on many parts of our strategy, including delivering rate increases and exceeding new money yield targets for long-term care, generating strong persistency in growth in our core business segments, and maintaining pricing discipline and delivering on renewals to help achieve strong profit margins.

Given this progress, we enter the second half of the year highly confident in our ability to continue to create value in this difficult environment.

Now I'll turn the call back over to Rick.

Great. Thank you, Jack.

As we go ticklish as of conclude by reiterating how pleased we are with the second quarter and first half results. We continue to see good premium growth, stable benefits experience, the benefit of disciplined expense management and strong capital generation. I am very encouraged by these trends, as I believe they will continue to serve us well.

Will not moved your questions so I'll ask Gwen to begin the Q&A session. Gwen?

Thank you.

(Operator instructions)

Ryan Krueger, KBW Investments.

Hey thanks, good morning. First question was the uptick in Long-Term Care claims that you mentioned you expected to continue while you're implementing the rate increases. Is that something that you anticipated and modeled into your reserve assumptions?

Great, Ryan. Let's turn that first question over to Jack.

Yes, we didn't model it into the reserve assumptions because it's such a small blip. It's only going to go on for a few quarters, so within the spectrum of $7 billion to $8 billion of reserves, it wasn't worth putting in there.

Okay. But you view it as more -- you view it as something that's a one off and not changing (multiple speakers)?

I think Ryan, I think it's incorporated. Whether we specifically modeled the blip over the timeframe of LTC is probably too refined, but I think in terms of --

It's immaterial relative to --

In the context of the broad, I would say it's included.

I would tell you though that we anticipated this and implementing the rate increases. It happened back in 2012 after the 2011, 2012 rate increase. And these rate increases are actually larger and more targeted than those were.

Okay, thanks. And then on Group Disability, the benefit ratio's kind of been in the low 80% range for the first half of the year. Is that a level you think is sustainable going forward?

Ryan, we had great Group Disability results. Jack, and then maybe Mike can comment on some of that.

Yes, I mean we're very encouraged by the trend. We're not necessarily declaring victory right now. We're continuing to actively manage that block with rate increases and price increases on new business.

But again, it's been happening for a couple of quarters now. We're very encouraged by it and the fact of the matter is there's actions that we've taken over the past year and a half that would support that trend.

Thanks. And then just one quick clarification. I think, Jack, you mentioned the subsidiary contribution, is that material or what is that related to?

I would say relative to our capital position. It's not terribly material. It's kind of the balancing of risk-based capital across our subs.

Okay. All right. Thank you.

Thanks, Ryan.

Suneet Kamath, UBS.

Thanks and good morning. So just wanted to start with Long-Term Care also. So as you mentioned since the charge you've beaten your bogey of 5% every quarter, your average loss ratio is 88.6, that's right in that range of what you assumed, and you're not seeing the benefit of the rate increases yet, although I think you express some confidence there.

So if I take all those things together, wouldn't that push out any kind of charge that you might have to take towards the latter end of that typical three to five year timeframe that you've used in the past?

We're very encouraged by the -- by where our investments have been over the last six quarters. I've talked about -- we've exceeded the 5%. We've exceeded it by a healthy margin. It certainly gives us latitude in terms of when we may face a charge.

The thing we haven't seen is the reversion to the norm, as yet. So we're still holding on for that. But I think it gives us some flexibility.

What does that mean, reversion to the norm in what?

Well, remember when we said we set the charge we anticipated a 5% flat interest rate environment for four to five years, and then reversion to the long-term average over the next five?

Okay, but we're still in that first window.

We're still in that five year period, and so we feel very good about where we are and we do believe that the investment results we managed to achieve to date do provide us some added cushion.

Okay, and this may be a tough one for Rick, but it seems like no matter how good your core results are the focus is always on the Long-Term Care business. And I guess I'm just wondering does it make sense for this Company to be part of a larger organization where you just don't get that volatility from this business that is a non-core business but is still a sizable portion of your capital base?

That's a fair question, Suneet, and I think that when we look at the Company overall, we focus very much on our core operations and making sure that we just run great companies in terms of the ongoing, and I think you see that quarter in quarter out. You've certainly seen it over the last several years, and we're going to continue to focus on that.

On the closed block and more particularly on Long-Term Care, it is a frustration to answer a lot of these questions. We think we do it very well, we're taking all the actions that we need to with regards to price increases, thinking about capital solutions, everything else. And so I think we're executing where we want to on that block, but it certainly does garner its fair share of questions, and although a frustration, we're going to keep working the same way we've been working.

To get to your broader question about the volatility and how that weaves into our position as a Company overall, I think we've been clear over time that we want to look at what's in the best interest of our shareholders as well as all of our other constituencies. And when we think about running our standalone Company, that's how we think about it because we have the wherewithal, the capital, and the opportunity to do so. So that's where we focus first.

But as we think about other opportunities if they came at us, we certainly would do the right thing from a governance perspective and entertain those. But we're still very focused on running those core operations to be the best business they can and taking all the actions necessary with regards to our closed block.

Got it. Appreciate that, Rick. And then just lastly for Jack. Any update on the closed block IDI? I know we talked about this last December in terms of some sort of capital relief solution. Just wondering six months after if there's any developments there?

Yes, you know there's nothing specifically. We continue to work on it. It's a complicated thing given that we already have securitization behind the block. But it's something we're continuing to actively pursue.

All right. Thanks, guys.

Randy Binner, FBR.

Hey, good morning. Thanks. Just a couple on the yield you've been able to earn against the Long-Term Care.

You mentioned it was over 5%. I was wondering if you could specify exactly what it was in the quarter. And you mentioned you were very encouraged by the yield and so that would be more bullish than the commentary we're getting from a lot of companies on yields. So I'd be curious what kind of assets you're buying that are able to give you good competence around the risk adjusted yield there?

So you got to remember in the Long-Term Care business we're a long duration buyer, so our sweet spot is in the 30 year. The 30 year you still have a reasonably steep yield curve. There's been a 70 to 80 basis point pick up in the 30 year.

You know, there's also a credit curve, and so the credit spreads at the 30 year are significantly higher than credit spreads at the 10 year. You know, the Barclays Index over the past six quarters were for BBB 30 year issuance has been well above 5% historically. We also use some other risk classes, asset classes whether it's private placements or other things to help boost that yield. So largely it's the fact that the longer end of the curve has maintained decent margins.

Just a couple of follow-ups. So what was it specifically in the quarter, just so we can track it better, the new money rate for that?

We don't disclose our new money rates for the quarter.

Okay, but it was well over 5%. And are the other asset classes, the alternatives you're looking at there, do they have a similar 30 year maturity, or would they be higher yield but shorter maturity than what you get (multiple speakers) with a 30 year?

I think one thing, Randy, I think you're isolating a small piece of investment, although very important to us and something we're focused on. You have to look at the overall construct of our portfolio as well and I think you won't see major shifts in our investment philosophy and how we run the portfolio, how we think about credit, how we incorporate private placements and other non-liquid assets in that mix.

When you take all those things together, as Jack said, we feel very good about how we've done it over the last 18 months. Even in the quarter we invested a little bit early as our investment team does. When they see the good yields out there they capture them. And so all those things come into play, and we're not going to get into dissecting every investment we put behind a particular line of business, particularly not in any particular quarter.

So I think those comments are good. The interest rate environment is challenging. We've mentioned that, but our Team continues to outperform and we'll keep you up-to-date every quarter on how we do.

All right, great. Thanks.

Humphrey Lee, Dowling & Partners.

Good morning. Thank you for taking my questions. Jack, in your prepared remarks you talk about the competitive landscape for the traditional Life seems to be picking up a little bit. Maybe can you go into a little detail in terms of what you're seeing in the traditional lines, and then also if you can comment on the [warrant trade] business as well that would be helpful.

Yes Humphrey, I'll actually look to Mike to respond to that.

Thanks, and good morning Humphrey. So you would have heard us start talking about the new client acquisition pricing market in the Group lines probably about three quarters ago.

We started to see it get a little bit more aggressive, and certainly we've seen this cycle many times before. We are not going to chase market share using price as a lever. And so we have seen some pressure on new client sales.

We can't really control the competitive pricing environment so we stay very focused on what we can control, which is first and foremost to take care of our clients. Rick and Jack mentioned it before, but persistency is over 90%. Sales into these relationships were actually up 10% in the quarter and helped to drive an overall increase in sales. And you put that together with persistency and you've got really nice earned premium growth.

A big part of what we're bringing into those client relationships, as you highlighted, is the Voluntary line of business,14% growth in the quarter. And really over the last several years it's been a consistent growth story for Voluntary as more and more the employees, the decision maker. We see that in the Unum branded business, we also see that in the really strong results coming out of Colonial Life.

You mentioned in terms of the aggressive pricing, is it a factor of you guys raising prices for the interest rate? Or are people actually lowering their pricing to get share?

Yes Humphrey, and I'll give you the wholly unsatisfactory answer of a little bit of both. So we have put low to mid single increases, particularly on the Long-Term Disability, but on the other Group lines as well into our new business pricing every six months or so over the last two years, and that's been gradual. And our sales and client management teams have done a great job in taking that into the market.

We would certainly that anticipate given low rates, that the competitive environment would need to follow suit. We haven't seen that happen. In fact, we've seen a few carriers come back a bit more aggressively into the market and try to recapture some share they've lost over the last few years. And the combination of the two is what's putting some pressure on the clientele. But again, the aggregate when you put together is actually consistent topline growth which we're pleased about.

Okay, got it. And then another question on Long-Term Care. Florida recently announced they're going to do another public hearing for Long-Term Care increase. Seems to be following Pennsylvania's footsteps.

Do you expect more of these kind of hearings from regulators as they try to strike a balance between protecting consumers and keeping the LTC business viable? And how do these kinds of hearings affect some of your rate increase decision going forward?

You know, in general these hearings have been positive for rate increases. I know Pennsylvania held the hearings, they approved the rate increase shortly thereafter. There was a successful hearing in Massachusetts. Maine actually held a hearing, was one of the first. So we're happy to attend those hearings. We're really engaged in them. We have a very good story about where our block is, the reasons we're chasing, that we're pursuing rate increases, the justification for them. You know I think the fact that we're not trying to restore original pricing profitability into the block, that we're pursuing a sustainability strategy resonates well.

And the landing spot option that gives people an option to maintain their current premium level while continuing to maintain extremely valuable benefits resonates well. So we're encouraged by the hearings and we think it's a catalyst for action.

Okay, thank you.

Thanks, Humphrey.

Seth Weiss, Bank of America.

Hi, good morning. Thanks for taking the question. Jack, I wanted to follow up on the commentary on the LTD discount rate. You mentioned in your prepared remarks you remain satisfied with the margin at this time. Can you just remind us where that is at this point?

Yes, we haven't typically disclosed that margin. But it's in the upper end of that 60 to 90 range.

Okay, great. And you mentioned it's too early to make a decision. Typically when do you think about making those decisions? Is it kind of going into that December outlook call, is that when we should take about perhaps an update on that?

Yes, we do our reserve review -- we start it in the third quarter and it culminates in the fourth quarter. So that would be typical.

Maybe actually, Seth, it's helpful to step back too, so the discount rate is fair discussion, but Mike, maybe you want to talk a little about the how the block is performing overall inclusive of anything we may look at on that front?

Yes, thanks Rick, I appreciate it. Thanks for the question. So I think we look at the discount rate on new claims incurred for LTD, but we look at it in a context for the overall health of the business as well.

We continue to see a good strong and favorable paid incidents trends, both in terms of count and severity. Very importantly the recovery experience, our benefits team, the [clinical] invoke our resources. We continue to invest there and to good affect, so recovery trends have been very good as well.

So there is no crystal ball; it is a risk taking business. But as we look forward we feel very, very good about those fundamentals and even if we were to need to make an adjustment on that new claim [incurred] discount rate, that it wouldn't have a material impact on the earnings trajectory for that Group Disability business.

Okay. I just want to make sure I'm interpreting that correctly. I mean is that similar to saying that as underlying experience and underwriting is improving you're willing to maybe move a little bit lower in that range to the upper part of that range in terms of the margin on the discount rate?

No, I think more the thing -- we've been continuing to [place] rate increases, we've had favorable underwriting results. I think more of what we're saying is if you look at the trend we entered the year on, the experience that's emerged underlying that block would keep us on that same trend even after taking a discount rate charge.

I see. Thanks very much.

Sure thing.

Tom Gallagher, Evercore ISI

Hey, good morning. I wanted to start it off just on the Long-Term Care claims side. So the higher claims that you're seeing following the rate increases, I guess you've seen that before, so the expectation here is that you expect it to be a temporary blip.

My question related to it is aren't you coming back, though, and you've been coming back at least every couple of years on these rate increase filings? And so shouldn't we expect, if that's in fact the cause and effect here on higher claims when you file for rate increases, shouldn't we think about that as more of a recurring issue if you keep coming back for future rate increases?

Yes, first of all I don't think future rate increases is up forever thing. We've kept on coming back because the interest rate environment has deteriorated. You get more recent experience not only within Unum but industry tables and things.

I don't -- this isn't always a get worse forever thing. I expect we will get very close in the current filing to being where we need to be to support the sustainability of the business. There may be some rate increase filings in the future. Those would be predicated on changes in our view of what the future of Long-Term Care will be.

So I don't see rate increases being a forever in our future thing. You do get a mild blip on rate increases when you do them. And that's what we're seeing now, but we believe it's temporary. We actually, I think, have a -- we are much more confident in where we are in Long-Term Care and our ability to manage through, not only the short-term with our current reserve position but manage through Long-Term Care in general than I think others are.

And Jack, the -- just related to that, are you then, in terms of the level -- I don't know, maybe just a broad question, the level of rate that you're asking for, are you actually getting around what you are requesting? It sort of sounds like you are based on that the way you responded to it. Because I guess what I've heard from some others is that they might request 50% and they might get half of that, but then it's spread out over three years.

Is that -- is my example still more the situation for you? Or are you getting much closer to what you're requesting in terms of rate increases?

We're getting what we expect to get, which is less than we request. But we didn't put what we requested into our reserve assumptions. We put our expectation. So in some states you'll get 50%, in some states it'll be spread out over three years.

In the scheme of things that's not terribly material if it's spread out over three years given the 40 years that the rest of it's going to run on. So it depends by state, and many states have approved a full rate increase, other states have approved the full rate increase but required it to be implemented over three years. But we have good data on how different states react, and we've built that data into what we're assuming in our reserve assumptions.

Okay. That's helpful. And then as you think about -- can you just remind us your process for this year, both timing -- is the actuarial review for Long-Term Care, is that conducted in Q3? And do you, as part of your process, do you factor forward interest rates? Do you look at the forward curve, or do you look at trailing? Because obviously forward rates matter a lot more than what you've accomplished for the last six quarters.

And do you -- based on I guess the claims you've gotten to date, how much does that factor in or is that less impactful? Is it really more of an interest rate issue at this point?

You know, we do our reserve not only on Long-Term Care but across the board. All of our [reservages] in the Company we start those in the third quarter. They culminate, they come to conclusion in the fourth quarter, so that we're confident in our year-end results. That would be the same timing for Long-Term Care.

In terms of what we look at going forward for the assumption underlying Long-Term Care, we told you exactly what it was last time. It was 5% for four to five years in a reversion to the long-term mean thereafter.

We will come up with, you know, should we -- when we test, we'll come up with a reasonable assumption that we believe in and that it's audited by external auditors. It's not necessarily the forward curve, but it's a reasonable assumption.

Okay, and just my final question is the -- I guess one of the things that surprised me a little bit was the increase in financial leverage. So pro forma, the debt pay down that you expect in Q3 you're going to be at a 27% debt to cap. And I guess what surprises me a little bit is there hasn't really been much in the way of extraordinary need. You've done a few small acquisitions, but nothing too big.

So why has the leverage gone up? Certainly, and it also sort of stands out when you just had a great statutory earnings quarter where the cash generation looked pretty good. But why the increased financial leverage? Is there a need for cash more, or what's happening?

No, you know, first of all we feel very comfortable with where we are at 27%. It's a comfortable place. We have great coverage ratios, so we don't view 27% as being problematic.

With that said, we did pre-fund the debt maturity in September when we announced the Starmount acquisition; we talked about funding a portion of that in debt. And just when we looked at, you know, our capital plans and where our leverage would end up, it made sense to make that a little bit bigger.

You know, debt issuance given the rates at the time and where things were, and given what we thought our equity growth would be through 2017. So we're very comfortable where we are. We expect it to come down over the ensuing few quarters, but there's nothing remarkable about it.

Okay, so no issues with the rating agencies with the higher level?

None whatsoever.

And then, sorry, last question if I can sneak it in. Do you guys expect to contribute to the Long-Term Care captive all this year in terms of Fairwind or the New York sub as well? And if so, what size should we expect in terms of capital contributions?

Yes, we would expect to contribute to the New York sub. You know, our guidance on that has always been look at the levels that we've historically contributed at as guidance.

We will keep the sub well-capitalized, that's our commitment. We'll see how much capital that requires when we get to year end.

And how about the captive?

I just talked about the captive.

That's a TBD?

Yes, we'll see what it requires at year end.

I think the key thing, Tom, is our capital plans remain very much intact, and so how things move around between different entities is kind of a moot point. We feel very good about our capital plans, where they are, how we've talked about them going all the way back to last year, and then you'll see us execute on those.

All those are built into our expectations, and the underlying free cash flow generation has actually exceeded our expectations.

Okay, thanks guys.

Thanks Tom, bye.

Michael Kovac, Goldman Sachs.

Great, good morning. Thanks for taking the question. Could you help us think about maybe some of the potential knock on effects in the UK from the Brexit. I know you mentioned clearly an FX headwind and potentially some premium and net investment income.

But as your Team works through the last month, in terms of what you're seeing from sort of future sales, and also sort of thinking about as well potential impact on the benefit ratio, on the Disability line in particular, if the UK does enter some sort of recession, think about that within the context of other GDP slowdowns that you've seen either in the US block or in the UK historically.

Okay Mike, that sounds like a full analysis of our UK business. I'd step back, one thing, and make sure that investors, analysts remember this is about 10% of our Company. We very much like our UK business. It's a fantastic business, but relative to the enterprise it is 10%. And with that maybe I'll turn it over to Peter to just give a quick overview of Brexit and how it's impacting us.

Thanks Rick, and thanks, Michael, for the question. So just to take you back, we decided to vote for exit late June, and the immediate impact was quite volatile. So we saw equities drop both on the FTSE 100 and the FTSE 250. They've pretty much come back now to where they were pre-Brexit. We did see the risk-free rate drop as well. That hasn't come back yet, and obviously the thing you're seeing, results, is the exchange rate dropping to around about $1.32.

I think one of the things that if it stays there you will see is a continued pressure, because our average exchange rates we're using at the moment is in the $1.40s, and so that would come down if it sticks at $1.32. What I would say it's uncertain environment, and it's moved from remainers, leavers, to now we're waiters to see what's going to happen to the economy.

Looking to the UK, if you take our investment portfolio, and Jack's talked about this already, we're very well positioned, defensively positioned to financial stocks and feel very good about the investment portfolio and the robustness of that. If you take revenue, we have got exposure to particularly some of the big financial services firms.

In talking to them, though, very few have definitive plans about what they're going to do yet. Again, they're more cautious, I would say, and we saw a bit of that come through our premiums in the first half. So therefore they're not investing in recruiting people, perhaps taking (technical difficulty) control on their benefits plans, but nothing material I would say yet coming through that would affect us.

To answer your question on benefits, actually in the last recession we didn't see a lot of impact on our benefit ratio. We saw something called presenteeism. People worried about their jobs and actually not going [off ill], so that was the bit of a counter-cyclical aspect for us. Our business model remains very robust, and so we're pretty happy that we've got a good focus on the risk we write and what the impacts of that might be.

The area that is more difficult to call is the new money rates. As I said risk fees dropped, clearly the 10-year bond is below 1% for the UK. And again, like the US, we've got a proven track record of putting rate through. Clearly that will probably dampen growth a bit because not all our competitors are as disciplined as Unum is both in the US and the UK. But we'll have to see how that works out.

Really as we go through the next few months and the government begins to set out its position, we'll get a clearer picture and be able to update you on the impacts as that becomes more clear. I just finished -- you know, we've got a strong business model that's well-positioned to manage Brexit.

That was great. Thanks, Peter.

Great, very helpful. And are those changes, particularly the FX and investment income impact, in the forward EPS guidance that you gave for the second half of the year?

Jack?

You know, I mean, we understood when we gave that guidance that that was an impact. So yes.

Yes, great, thanks. And then one last one. In terms of shifting gears to the US as you think about growth, can you maybe give us a little bit more detail in terms of what is driving the large case market success that we've seen [develop] the past couple of quarters? Is it mostly with current customers? Or are you winning share with some new customers?

Yes great question. I appreciate it. And you hit the nail on the head. It's almost entirely selling into those existing client relationships. And we talked about an aggregate persistency rate of about 90%. We're actually a tick or two higher than that in our large employer markets.

So these are long-term clients that we've been able to grow within quite effectively cross-selling, re-enrolling, contract changes and the like. So we're encouraged about that.

This is also selling season for the large employer market. Many of them make changes to their benefit plans with a January 1 effective date, and to be implemented those decisions need to be happening now, and we feel like we're competing effectively but maintaining our discipline here through the new case sales season.

Are you seeing any diversions in terms of the competitive landscape between the large case and maybe the core sort of middle to small case market?

Yes, I mean, I'd say across the board it's reasonably competitive. Where we feel it most acutely would be in the middle market. So that's typically employers in the, say, 250 employees up to, say, 5000. Typically you've got competitors in the space that focused in the large case, but they will go down into the mid and then you have small employer focused carriers that will go elephant hunting, and that takes them up into the mid.

And so pretty much it can get a crowded space, and when prices get a little bit soft, we find it's a difficult place to write business within our pricing parameters. But again, it's much work to be done between now and the end of the year, and we feel like we've got a good value proposition to take into the market. But that's where we probably felt it most acutely.

Thank you, Michael.

Thanks.

Yaron Kinar, Deutsche Bank

Good morning, everybody. I had a couple of questions. First, I heard you talk about the claims impact from raising pricing and then Long-Term Care. Can you explain the relation between the two?

Yes, it's been something we've seen -- you know, it's kind of like waking a sleeping dog when they get their rate notice. It's not only the policyholder, but very often the caregivers or children of the policyholder. Oftentimes, an old person can go into an assisted living facility and not even realize that they have the coverage even though they're still paying for it. And that rate increase comes out as a reminder. And that reminder sparks people to apply for the benefits.

You get some late applications with that, people who are already -- have been in a facility for a while who are looking for back payments, so that affects the loss ratio. And it just becomes an increase. We actually looked over the past couple of quarters at the incidence rate on people who received a notification versus the incidence rates on people who will being receiving them but haven't received them yet.

And there's a 10% to 15% difference between those two with the ones being notified being 10% to 15% higher. It impacts severity of claims as well because that landing [spot] notification is focused on people with inflation writers. And so they tend to have higher benefits.

We've seen it in the past. It's going to last for a while as we work through those rate increases. But we do believe that something that will abate over time

Okay. And I guess when speaking to others I often hear them discuss shock lapse once the rate increases come in. In the grand scheme of things are you seeing more of a favorable impact from shock lapse or more of a negative impact from waking these sleeping dogs?

You know, I think shock lapse is relative. If the lapse rate goes up 0.1 % or 0.2%, it's big relative to the lapse rate, but I'm not sure I would call it a shock lapse.

We really don't see kind of lapses with rate increases, maybe a little blip. And in particular because the landing spot provides the option to maintain their current premium, we would expect to see even a less of a persistency impact from these rate increases.

Okay. And then one quick clarification, if I can, with regards to the updated guidance. And I think you talked about it in the prepared comments. But is the move up to the top end of the prior guidance, is that pretty much predicated on better than expected results in the first half of the year?

Or is there also some expectation that relative to how you had thought of the year developing when you gave the initial guidance, is there some expectation that the second half results will be better than initially expected?

Yes, we've assumed that the second half of the results will be on plan. Which is very consistent with your consensus estimates.

Okay, thank you very much.

Thanks, Yaron.

Eric Berg, RBC Capital Markets.

Morning, Eric.

Mr. Berg, your line is open.

Yep, I'm ready. Sorry, I was on mute. I was surprised to hear that in response to an earlier question that in the last recession in the UK there had not been a material increase in claims experience because that would be at odds with the US experience.

Did I hear you and interpret you, Peter's, response correctly? And if I did, what was different back then that would explain this difference from US experience?

Eric, maybe I'll take that from a US perspective first. We actually did not see the increased level of claims coming through some of the financial crisis. What we would have seen maybe is a higher level of submitteds, but our paid claims were very stable through that period of time.

So I don't actually think there was a difference. I think the UK's experience was actually quite similar to that which we saw in the US.

Okay. And then secondly, finally, in the Long-Term Care area, Jack, I think you mentioned in your prepared remarks that the decision by many customers, many policyholders, to accept this landing stop or landing point or landing strip option, would have implications for either the volatility of or the rate of build of reserves, prospectively. Could you just go over that concept and maybe explain it a little bit further? Thank you.

Yes, so if you paid the rate increase your benefits continue to grow at 5% compound annual rate. So those who paid the rate increase have a bigger benefit bucket out there and that additional premium pays for that benefit bucket. If you take the landing spot, they compound at 3%, so the ultimate benefits that you pay down the road are significantly smaller than they would have been had you paid the premium.

As you realize fluctuations, whether it's interest rate fluctuations or underlying experience fluctuations, they don't affect premiums. They affect, you know, the benefits much more severely. And so by having a smaller pullout there, you're less sensitive to interest rates or mortality fluctuations.

But you also have lower premiums than would otherwise have been the case, right?

Yes, but the premiums are not as -- they're not as sensitive to those things as the benefits are. You know, if you're going to have higher incidents down the road, premiums don't react to that.

To be sure. All right then. (Multiple speakers) Thank you. Go ahead.

It's a little like derisking a pension plan.

I mean in general, have you said that you have been neutral towards, agnostic towards the landing? Does the landing spot leave you better off than if the customer does not elect a landing spot? Neutral or worse off?

It's relatively neutral. But you do get that benefit of being less sensitive to future changes and assumptions.

Thank you.

Yup, thanks, Eric.

Mark Hughes, SunTrust

Yes, Colonial sales have been quite strong. I wonder if you have any commentary on recruiting and sales force trends, what that might mean for second half sales?

Great, thanks Mark. We're happy to take that as our last question. I'll flip that over to Tim Arnold.

Mark, thanks for the question. We feel great about the results that we're delivering. And your point about recruiting, we're seeing a very nice uptick in recruiting, and probably more importantly very strong growth in our sales management team. So that new recruits who are coming on are getting a lot of attention and the success rate for those new recruits is improving.

We like the market environment a lot right now. The market dynamics are very favorable. Employers increasingly need the solutions that we offer, certainly working Americans need the solutions that we offer.

So we feel very good about our strategy. Terrific execution of that strategy especially in field distribution growth, very disciplined activity levels, incredible capabilities including what we believe to be unparalleled enrollment capabilities. We do a lot of core enrollments. For every dollar of Colonial Life benefits that we enroll, we enroll $10 of other benefits which helps us with creating a very strong value prop for small employers especially.

A tremendous breadth and depth of our products, capabilities, and services, and finally just an outstanding leadership team and strong talent throughout the organization. So we feel very good. We had a very, very strong second half of the year in 2015, so we're up against some big numbers but we're optimistic.

Thank you.

Great. Thank you, Mark, for that last question. I'd like to thank all of you as well for taking time to join us this morning. We look forward to seeing many of you at various investor conferences and meetings in the weeks ahead. So Operator, this now completes our second-quarter 2016 earnings call.

Thank you, everyone. That does conclude today's conference. We thank you for your participation.