普登 (UNM) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to the Unum 2Q 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tom White, Senior Vice President, Investor Relations. Please go ahead, sir.

Great. Thank you, Jenny. Good morning, everyone, and welcome to the Second Quarter 2017 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 SEC and are also located in the sections titled Cautionary Statement Regarding Forward-looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2016, and our subsequently filed Form 10-Q. Our SEC filings can be found in the Investors section of our website at unum.com. Also 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.

And the 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 also on our website in the Investors section.

Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; CFO, Jack McGarry; as well as the CEOs of our business segments, Mike Simonds for Unum US; Peter O'Donnell for Unum UK; Tim Arnold for Colonial Life; and Steve Zabel for the Closed Block.

And now I'll turn the call over to Rick for his opening comments.

Thank you, John, and good morning, everyone. The second quarter was another excellent quarter for our company. The positive business trends and favorable momentum we have been experiencing over the past several quarters continued through this one as well.

Our after tax operating income per share was $1.05, another in a series of record highs for our company and a very healthy increase of 7% relative to last year's second quarter. For the first half of 2017, our after tax operating income per share increased just over 8%. This performance exceeds our expectations coming into the year of growth of 3% to 6%. And as a result, we are increasing our outlook for the growth in the operating income per share to a range of 5% to 8% for the full year 2017. Jack will discuss the drivers of this performance in a moment.

Our financial performance remains very well balanced across our business segments. Unum US and Colonial Life continue to produce very strong results with good sales momentum fueling the company's 6% premium growth, adjusted for the individual disability reinsurance arrangement and FX. In addition we continue to see favorable benefits experience and well-managed expenses. Our Unum UK results continue to run slightly below our expectations, driven by the challenging U.K. economy. But I would highlight that Unum UK continues to produce strong margins and an operating return on equity in the 15% to 16% range. And finally, the Closed Block operations were stable again this quarter. When you bring it altogether, our capital generation was excellent, allowing us to raise dividends by 15%, buy back $100 million of stock while still building on our excess capital position.

Our first half results are a continuation of the solid momentum we have built coming into the year and are focused on the disciplined execution of our business plan. Our strategy has kept us in step with the changes occurring in the employee benefits market, and the investments we're making in our business as part of that strategy are clearly paying off. Our recent acquisitions of dental businesses in the U.K. and in the U.S. have given us a foothold in that dental market, which is a natural extension of our business. Colonial Life's territory expansion work is also showing positive trends towards accelerating the rate of sales and premium growth for that business, and our emphasis on improving the customer experience across the enterprise has made us easier to do business with while leading to better and more efficient ways of operating.

More broadly, our singular focus and continued reinvestment in the employee benefits market continues to be an advantage for us and is unique among our peers. As an example, as the market has shifted more and more towards employee engagement and shared funding, our business model has kept pace. The scale of our business is also an increasingly an advantage. It gives us depth of data in a price we can do business, scaled operations and the administration of our in-force business and industry-leading management of claims. And finally, the strength of our combined Unum US, UK and Colonial Life distribution systems provides unique reach into the broker and business-to-business benefits marketplace, allowing us to effectively serve employers of all sizes and industries.

Equally important in driving results and the execution of our strategy are the quality of our people and the strength of our culture. Because our ability to deliver on the promises we make to customers and shareholders rests with our employees, we continue to ensure they have the tools, technology and training to exceed expectations. We also understand the benefits of building a more diverse workforce. And while we're proud of where we are, we still have opportunity as we build out our culture of inclusion. It's a business imperative as we look to mirror our customer base and serve an increasingly diverse workforce. At the same time, social responsibility is important to us. In particular, our commitment to make our communities better is a cornerstone of our business. Last year alone, we contributed nearly $13 million and our employees volunteered more than 87,000 hours to charitable organizations throughout the U.S., U.K. and Ireland. And finally, we continue to elevate our stature as a voice for our industry, building partnerships with industry groups and policymakers that can move us closer to our goal of protecting the financial security of more working people and their families.

Now I'll turn it over to Jack to take on some of the details of the quarter. Jack?

Thank you, Rick, and good morning, everyone. Rick provided a high-level overview of our second quarter results, and I will provide a more in-depth view of the themes we're seeing in our business.

Overall, the second quarter was an outstanding one for Unum. Our after tax operating income per share of $1.05 is an increase of 7.1% over the year-ago quarter. We continue to experience strong balance between the operational performance drivers of our earnings per share growth and the capital management drivers. Our after tax operating income increased 3.2% to $240.4 million for the second quarter while our share repurchase activity contributed 3.9% to our after tax operating income per share growth relative to last year.

Our before tax operating income increased 5.6% while our tax rate was higher this year at 32% compared to 30.4% in the year-ago quarter. Our Unum US business segment continues to be the biggest driver of this performance. Before tax operating income for this segment increased by 9.1% over last year to $247.8 million. Within Unum US, group disability had another outstanding quarter with before tax operating income of $92.4 million, an increase of approximately 24% relative to last year. This growth in operating income was primarily driven by a strong improvement in the benefit ratio from 80% in the second quarter of 2016 to 76.5% this quarter. The benefit ratio includes the 50 basis point reduction in the discount rate for new claim incurrals that we implemented in the fourth quarter of 2016 and remains within the 76% to 79% range that we communicated to you at the December Investor Meeting. The favorable performance this quarter was primarily driven by lower incidence trends in the group's LTD product line and lower prevalence rates in the group STD product line.

Group disability premium income increased by 1.2% over the year-ago quarter as the benefit from recent quarter sales offset slightly lower persistency. The group life and AD&D line produced a strong quarter with operating income of $60.9 million in the second quarter, an increase of 7% over the year-ago quarter. Premium income increased 4.4% over the year-ago quarter, and the benefit ratio improved to 70.6% in the quarter compared to 71.5% last year, primarily driven by lower average claim size.

The supplemental and voluntary lines contributed $94.5 million to the earnings this quarter, a decline of 1.5% relative to last year. Premium income continues to grow at a healthy pace, increasing 10.5% in the second quarter compared to last year. I'll note that we executed a reinsurance transaction in the individual disability line in the fourth quarter of 2016, and this transaction lowered revenues by about $25 million, which was offset by a reduction in the sum of benefits, commissions and expenses of about $25 million. This results in a slight elevation of the benefit ratio but no material impact on the operating income of the line. Underlying performance in the individual disability line was favorable relative to last year as new claims in this line were lower. Our voluntary benefits business continues to show good growth trends with premium income increasing 5.6% for the second quarter. The benefit ratio was slightly higher at 43.4% compared to 42.4% in the year-ago second quarter as benefits experienced in the life product line was less favorable. Also, the acquisition of Starmount contributed $41.2 million in dental and vision premium income to the supplemental and voluntary lines.

Sales in the Unum US segment for the second quarter increased by 10.7% over last year with notable strength in the voluntary benefits large case segment and the group core market segment. Voluntary benefit sales in total increased by 10.7% for the second quarter as large case sales improved by 15%. For our group product lines, overall sales increased 4.6% over last year with our core market segments increasing by 5.7%, a nice improvement over recent quarters. The addition of the dental and vision product lines increased sales this quarter by $10.4 million, and we're very pleased with the productivity being generated in this product line. Persistency for our group product lines in Unum US remained lower than the year-ago levels, but improved relative to the first quarter levels and remained well within our expectations.

Unum UK continues to operate in a challenging economic environment, brought on by last year's Brexit vote. Second quarter before tax operating earnings reflected this challenge, declining by 12.1% to GBP 22.6 million compared to GBP 25.7 million in the year-ago quarter. Our premium income grew by 1% in the second quarter on local currency as favorable sales and renewal trends were largely offset by pressure on the in-force block. This trend is likely to continue as the U.K. works through the uncertainty surrounding Brexit.

The Unum UK benefit ratio was 75.6% for the second quarter compared to 70.1% in the year-ago quarter, driven by higher inflation in the U.K. this quarter relative to last year. Higher inflation impacts the inflation-linked benefits in certain of our products, but this is largely offset by higher net investment income generated from inflation index-linked bonds we hold to back these benefits. The benefit ratio was also impacted by the 80 basis point reduction to our discount rate for new claims, which we implemented in the first quarter, and I expect this to continue to pressure year-over-year earnings growth for the second half of 2017. The underlying risk experience was unfavorable for the group's long-term disability product line, due to lower claim resolutions while Group Life performance was favorable, driven by a lower volume of new claims.

The pressure on earnings we're experiencing in Unum UK is likely to continue for the second half of the year. It bears repeating though, that even with these growth challenges, the Unum UK segment continues to generate very good profit margins and an operating return on equity in the 15% to 16% range. Despite the economic headwinds, Unum UK's sales for the second quarter were very strong, increasing 24% relative to last year on local currency. This increase was primarily driven by success in the dental and group critical illness product lines. Our group LTD sales were down for the second quarter following a very strong first quarter. Overall persistency for our U.K. segment is in line with the year-ago and improved from the first quarter of 2017 and is also in line with expectations.

Moving to Colonial Life. We again had an excellent quarter with strong, consistent and stable results. Operating income increased 5% to $81.8 million in the second quarter. Premium income growth continues to build momentum, increasing 7.1% for the quarter, driven by the strong sales trends we've seen over the past several years. Colonial Life's benefit experience remain generally in line with our recent trends as well as our expectations with a benefit ratio of 51.3% for the second quarter compared to 51.1% in the year-ago quarter. In the second quarter, we also completed our DAC reviews for our Unum US and Colonial Life businesses with minimal impact on year-over-year results. Sales momentum for Colonial Life continues to be very strong, increasing 7.5% in the second quarter. Sales growth in the core commercial market segments were the big driver of this performance, increasing 13% in the second quarter, following growth of 13.2% in the first quarter. We also continue to see good balance with new account sales increasing 16.7% in the quarter while sales to existing accounts increased by 3%. Persistency for Colonial Life remained stable at 78.7%.

Finally, for the Closed Block, operating income was $32.6 million in the second quarter of 2017, in line with the year-ago quarter. In the individual disability line, the interest adjusted loss ratio was 82.3% in the second quarter compared to 84.3% in the year-ago quarter. The improvement was primarily due to the reduction in the claim reserve discount rate in the year-ago quarter to recognize the impact on future portfolio yields from the higher levels of bond calls and tenders realized. For the long-term care line, the interest adjusted loss ratio was 89.4% for the second quarter compared to the year-ago ratio of 92.6%. This improvement was driven primarily by lower claims incidence relative to last year's second quarter. Looking at interest rates and new money yields for the long-term care portfolio, we continue to exceed our new money yield objective of 5% in the second quarter.

With these strong operating results across the company, we again generated very strong statutory income with after tax statutory operating income for the second quarter totaling $225.2 million. Over the past 4 quarters, we generated $877 million of after tax statutory operating income, which is driving excellent capital strength for the company. The weighted average risk-based capital ratio for our traditional U.S. insurance companies is in excess of 395%, and our holding company's cash position, excluding amounts committed for subsidiary contributions, has increased to $757 million at quarter-end compared to a year-end 2016 total of $594 million.

Our capital position and cash generation capability are a source of great strength for the company. It provides us tremendous financial flexibility to grow and invest in our business while we continue to generate shareholder value by returning excess capital to our shareholders. Again, in the second quarter, we repurchased $100 million of our shares, consistent with the trend of past several quarters and in line with our outlook for the year. I'll also remind you that our -- at our annual board meeting in May, we will -- we raised our common stock dividend by 15%.

Moving now to investment results. Interest rates and corporate bond spreads were both somewhat tighter during the second quarter. Despite this -- the challenge this presents, we continue to maintain healthy interest reserve margins in our U.S. LTD product line and meet the new money yield assumptions for long-term care. In addition, our investment quality remains in very good shape. Our associate and retail investments in asset class, increasingly under scrutiny lately, is very manageable and well below industry average exposures.

Wrapping up, I'm very pleased with the second quarter and our first half performance for the company. Given our strong first half operating results, we are increasing our outlook for after tax operating income per share growth for the full year of 2017 from our original range of 3% to 6% to a new range of 5% to 8%.

Now I turn the call back to Rick for his closing comments.

Thank you, Jack. As you can tell, we're very pleased with the second quarter and our first half results. At the same time, we're also very encouraged by the financial position of the company and our strategic position in the employee benefits marketplace, and we are looking forward to the second half of 2017.

We'll now move on to your questions. So I'll ask Jenny to begin the question-and-answer session. Jenny?

(Operator Instructions) And we will hear first from Seth Weiss of Bank of America.

(technical difficulty)

Seth, we can't hear you very well.

Expanding on the U.K. and the pressure that you classified there, would you classify this primarily as a function of lower interest rates and the lower discount rate? Or are you seeing adverse claims pressures there driven maybe by employment trends similar to what we may see in the U.S.?

Yes. So it's a little bit of both. We do have pressure from the discount rate, but we also saw, actually in the first quarter and the second quarter, some volatility in underlying risk results. The first quarter was driven by higher average claim sizes in group disability that the second quarter was more driven by claim resolutions. We continue to think that most of that is volatility and would expect things to level out over the year. But again, I think most of it is a growth issue relative to the economy as well as lower interest rates.

Okay, great. And just a follow-up question on the timing of the cash position and cash needs. So with the cash position up over $150 million from the year-end level, is there perhaps an opportunity to accelerate share repurchase? Or are you holding a little bit of a maybe added buffer at the holdco for cash contributions or any other timing needs?

Well, as we mentioned at our December outlook, we were -- we expected that we would generate additional cash in 2017. We thought it was prudent, given the kind of the uncertainty around tax legislation and other things, to hold that buffer. We don't expect that, that's a permanent thing that we need to do, and we anticipate giving a lot clearer guidance about future capital plans at our upcoming December Investor Meeting.

And we'll go next to Suneet Kamath of Citi.

I wanted to start with Unum US. Just looking at the persistency there, it looks like you're down maybe 160 basis points first half of '17 versus first half of '16. Just wondering what the outlook there is, maybe when do you think persistency could stabilize. Or are you okay at these levels?

Mike?

Sure. Suneet, it's Mike. Yes, persistency is down. If you will recall, we talked a little bit about the abnormally high persistency that we had -- over that last couple of years, actually. And so where we find ourselves today is actually well within what we would sort of see as historical norms. That being said, we were encouraged to see a little bit of an improvement in 2Q over the first quarter of this year. And probably most importantly, we feel really good about the underwriting approach through the renewal process. So to give you a sense, the business that we lost ran about 9 points worse from a profitability perspective than the business that renewed through the cycle. So continue to feel good, in a competitive market, that customers see real value in the Unum proposition. And I'd certainly say we're in a range that we're comfortable with. And probably if there's any trajectory, it's slightly positive.

Got it. And then just maybe shifting to the U.K. Given the potential for Brexit to impact various sectors, can you give us a sense of maybe what your distribution is in terms of exposure to different corporate sectors, particularly financial services?

Suneet, we're going to go to Peter O'Donnell for that. Peter?

Yes. Thanks very much, Suneet. So yes, we have a sort of reasonable portion of the business around 20%, that's with financial services, but that covers quite a broad set of financial services. So it'd cover local banks as well as those with international exposure. I think our view on Brexit is, and what we're seeing as Jack referred to on the economic pressure, is that the banks aren't adding jobs And where they are -- where they can, they're subtracting jobs, and that's what's giving us this pressure on the in-force. A number have made announcements around transferring work, but it's quite small number of jobs to place, like Frankfurt and Dublin. So we're not seeing any significant shift of jobs as yet, and no one's talking about that. What they're talking about is perhaps cutting back on desks and things they would've set up and setting up small branch outlets or legal entity outlets that allows them to trade overseas as contingency plans. We need to watch that, because obviously Brexit is still pretty uncertain exactly how it's going to work. So it's important we get a deal. But at the moment, that's the kind of scale of the change we're seeing.

And our next question comes from Ryan Krueger of KBW.

I guess I had a follow-up. The -- for the persistencies, it does seem like it's starting to get a bit better again. Sequentially, you also had better sales in Unum US this quarter. I guess just curious on the update on competitive conditions. And are things starting to improve a bit?

Yes. Ryan, I can take it. It's Mike. I think your read is a good one. It remains a competitive market, for sure. I sort of commented at the last question about some of the persistency losses that we've seen at very low margins to actual losses. So competitive, but we are encouraged. Sales were up 11% in the quarter. Importantly, if you unpack that a bit, core market sales were up 6%. We saw coverage count increase nicely in the quarter, which is very encouraging as we turn towards the second half of the year. Voluntary benefit continues to roll along, up double digits at 11%. And importantly, while not a big contributor yet, the dental and vision lines are exceeding our expectations, which were pretty aggressive here for the first half. And usually, when we're writing dental and vision, that's come in package with other lines as well. So that's been a nice contributor.

Yes. Actually, why don't we turn to Tim Arnold too? Tell us a little bit about formulation there.

Sure, yes. The market for voluntary benefits continues to grow broadly. So there's capacity for more competitors to come into the space. We really like our value proposition across all of the market segments, and we particularly like our ability, which we believe is somewhat unique to serve all market segments with our field distribution system being agency distribution system. We have a great reach across the U.S. across every segment, and we can efficiently and effectively serve each segment. Jack pointed out that our core market sales were up 13%, again, in the second quarter after 13.2% in the first quarter. We really like that segment, and we think that our distribution system gives us a unique opportunity to reach it. So we feel pretty good about the competitive environment.

And then as a follow-up. For quite a number of years, you've been pushing through rate increases in Unum US. Are you still, I guess, targeting kind of the mid-single-digit rate increases, given kind of the strength and profitability in that business at this point?

Yes. Ryan, I'll take it. So you sort of think about the pricing 2 ways, one is just good care and maintenance of a book of business. So we'll always have a good robust renewal plan in place, where we're sort of calibrating to the risk experience at a client level. I wouldn't see that changing for the balance of this year or for the years to come. You think about the aggregate pricing of the book. I'd say we're really well tethered to the -- our point of view of what we've experienced and looking forward on the fundamentals of interest rate and new incidence and risk trends. So staying aggregate, we're in reasonable shape, but with ongoing care and feeding.

And then we'll go to our next question from Jimmy Bhullar of JPMorgan.

I had a couple of questions. First, just if you can talk about your view on your long-term care reserves. I think you've been earning yields relatively close to what you had assumed, but you're assuming a ramp-up in the next few years in interest rates. So what's your confidence in reserve adequacy? And secondly, just if you can comment a little bit about the initial reception you've seen in the market to your getting into the medical stop loss product line and how -- like what are the sort of long-term potential do you see in that market?

Okay. We'll start off, Jimmy -- Jack, you want to talk about...

Great. So from long-term care perspective, we've actually exceeded our new money bogey in every quarter since we took the reserve charge at year-end 2014. That's helped build some margin relative to the initial reserve assumptions. We do have interest rates increasing beginning soon and increasing over time. We're still hopeful we will see that happen. But time will tell with that. In any case, we feel very comfortable with where we are right now. We would also note, as we said many times, that we have a good buffer between our statutory reserves and our GAAP reserves. And so even if interest rates don't rise according to that projection, we feel comfortable that any event would be a GAAP event as opposed to capital event.

And Mike, do you want to take on stop loss?

Sure. So we officially entered the medical stop loss market as of 7/1, taking proposals for 1/1/'18 effectives. We're taking sort of a slow entry into that market, but we do like it overall. It's about a $14 billion industry. It's growing at a low double digit clips. Importantly, for us, a lot of the same underlying fundamentals of understanding the data that goes into actuarial pricing, translating that into good discipline case level underwriting, having a field force that understands the importance of balanced, growth and profitability, we feel like we've got some capabilities to bring to bear into that market. Also importantly, it gets us insight into what an employer is planning to do with their overall employee benefits program earlier in the cycle. So we get a good look at what the employee base looks like from a health perspective as well as what they're planning to do with things like health plan, design. Many, if not most of our products, wrap around that health decision. So it's good strategic insight at a case level. So -- well, I don't expect we'll be talking about large impacts to our P&L here in the next 12 to 24 months in the long term. I think it's got the potential to be a nice business for us.

And then lastly, just on your higher EPS guidance. Can you give us a little bit more granularity on what really caused -- besides the beat this quarter, how are you thinking about next -- the next -- the second half of the year? And is it more margin-driven or premium-driven, the upside versus what you initially guided to?

Yes. I would say that the beat this quarter is both. We have good, strong premium growth, which we saw BTOE grow both within Unum US as well as Colonial, consistent with that premium growth. That's what we've been shooting for, for a while now, kind of fighting the headwinds of interest rate and other things. We feel great about this quarter. It was just a really sound fundamental quarter, where everything contributed as the way we would hope. And it gives us optimism as we go into the second half of the year.

And we'll go to our next question from Thomas Gallagher of Evercore ISI.

So Jack, just in terms of thinking about capital management, you've been generating more than you've been spending on buybacks and dividends, building the holdco cash. And I know you mentioned sort of taking a wait-and-see approach based on tax reform, et cetera. But if we sort of fast forward to next year's plan and assume you keep building at a similar rate as you did in the first half, would that be enough of a buffer where you could then at least commit to 2018 higher cash flow being committed to higher buybacks and dividends? Is that sort of the way to think about it, that your -- the reason for not accelerating the buyback now is more building a buffer in case there is tax reform? And then from that point forward, you'd be able to use something more -- or is it more multi-varied than that?

So we have a buffer now, but we're extremely pleased with the statutory earnings that we've been generating, $225 million this quarter. That's been consistent through '16 and '17. That's what builds free cash flow generation. We're not in a position, where we think we're going to build a cash buffer forever. So we need to decide and understand, we need to decide what to do with that capital. We expect to make that decision at the end of this year. And so we have excess capital, and we will put that to work. We're not going to save it forever.

And would buybacks be the most logical -- sorry, go ahead?

I'm going to say, Tom, I think your timeframe 2018, as Jack said, over the course of this year. But just to reiterate what Jack said, we have good capital buffers. But we will make sure that we are using that capital effectively and also the -- to the advantage of shareholders.

Got you. And so would buybacks be the most logical source of -- if you do end up moving to a higher level?

Well, let me remind you of our capital management philosophy. The first thing we want to do is grow our organic businesses and make sure that we're investing in those. The second thing we would look at from a party perspective is mergers and acquisitions and being able to increase our shareholder value through those. Third, we look at dividend. We increased our dividend 15% this year, which is continuation of a trend of increasing dividend. And the final thing we'll look at is share repurchase. But in the absence of an acquisition opportunity or some other event, I think share repurchase would be a reasonable place to use our excess capital.

Got you. And the -- just curious if you guys have spent any time on the NAIC developments regarding long-term care, risk transfer solutions and some potential there and what your thoughts are.

Okay. Steve Zabel will answer that.

Okay, great. Thanks. Thanks, Tom. Yes, we have been the tracking activity there. I would say it's very early days. I know there was a meeting recently with the LTC task force. Those types of discussions have gone on before the NAIC, never really got any traction, as you can imagine. That'd be a pretty complicated structure to try to put in place, but we'll continue to track it. Definitely, it would not be a priority item for us as we're thinking about our action plans. So we continue to work the initiatives that we have, and we'll continue to monitor it. But I think it's pretty early days.

Got you. And then just one final question, should we still think of the U.K. as being a source of cash flow for the next few years? When I heard you describe what's happening in the environment, to me it sounds like an earnings issue, not a capital issue, not a balance sheet issue. Even if things get a lot worse on the claims side, I still wouldn't view that really as a balance sheet issue, but just wanted to confirm that.

Yes. I -- Tom, this is Rick. I think that's certainly the case. So what we've been talking about the U.K, the pressures we're having are about growth pressures. The capital flow has been very consistent. We've been taking dividends from the U.K. for a long period of time. That's been stable. The team there did a great job of working through Solvency II. So we've gone through the regulatory changes there, still able to flow capital to the company. So it's not a capital discussion, it's one of growth. And it's one of the great business that we would like to continue to grow. We're just feeling the headwinds of Brexit and the U.K. economy.

And moving on, we will hear next from Humphrey Lee of Dowling & Partners.

Looking at U.S. group disability underwriting, continue to be very good. When I think about the performance , do you think it's a reflection of your price and risk discipline in claims management? So without asking for kind of any update to your guidance, do you think you're enjoying the full benefits of all the things that you put in place and all the pricing that you've already put through? Or do you feel like there's more room to leverage to extract more margins?

Humphrey, it's Mike. Thanks for the question. I -- very consistent with the guidance we gave you guys heading into the year, we just got to the lower end of that range quicker. So that's kind of how I would describe what's driving that on the underlying. I'd say we would have seen ourselves sort of probably more gradually moving down through that range through the course of this year. That's as a reflection of the underwriting approach, being sure that we're priced for interest rates and incidence and the like. I would say getting to the range quicker is the volatility, which has been favorable for us, particularly around new long-term disability incidence.

Got it. And then just looking at your overall businesses, everything seems to be humming along pretty nicely. Just kind of thinking ahead, do you see anything that is on the horizon that could kind of pique your interest, pique your cautious, kind of looking a little bit longer term?

Yes. I mean, there's a lot of things that pique our interest. As we look longer term, I -- first of all, it's -- to reaffirm what you said, the business is running extremely low. It's broad-based. The team is doing a great job. We're going to continue to be focused on that. Our plans are still good and aggressive. As we look out over the next 18 months and beyond, we're going to pursue those plans, certainly thinking about what are the future opportunities. But we don't rest, and I think that's the important thing. We're always looking beyond what's changing, what's emerging in our world, in the employee benefits world, in the world of technology that we need to take advantage of. So at the same time, we're executing well today. We're investing for the future. So what's you'd expect of us, and that's what we're doing. But we are happy with how the business is performing today. But to be performing in the next year and the year after that, we're going to make sure we're constantly looking into the future.

Humphrey, I think good examples of that would be our investment in dental and vision businesses in both the U.K. and the U.S. and our entry into the stop loss market. Both we view as tremendous growth opportunities for the company.

And we'll go next to Erik Bass of Autonomous Research.

Just wanted to talk a little bit about voluntary benefits. I was hoping you could talk about the penetration rates for voluntary, both in terms of the adoption by employers as well the number of employees who are electing voluntary benefits.

Sure. And we'll start at Colonial Life.

Yes. So thank you for the question. We see both the adoption rates at the employer level and at the consumer level improving. The dynamics in the industry that create need haven't changed. In fact, they're accelerating. So more employers are moving to high deductible health care plans. We've shared statistics with you in the past. Roughly 40% of America's workers have adequate life insurance and disability insurance, so there's huge opportunity there. As employers are looking to continue to pass on cost to employees for benefits, they are increasingly looking at voluntary solutions. Our broker partners are increasingly looking to voluntary solutions as an opportunity to supplement their income as they've seen their income from health insurance back up. So we're excited about the opportunities. We think that the penetration rates at both the employer and the consumer level will continue to increase.

You want to talk about Unum US, Mike?

Yes, sure. I'd -- what I'd add to Tim's comment would just be -- within voluntary benefits, maybe 2 categories of products. The more traditional employee benefits lines, life insurance, dental, vision insurance, so we see penetration of those benefits pretty high once you get over 100 employees. So you'd be up in the 75% to 85% range. What's happening there, though, is more and more of the premium is going to employee pay. So it's becoming a more voluntary benefit. So things like the Starmount acquisition, that's exciting to us because we bring those employee pay capabilities into a well-established, highly penetrated business. And then the other half is what Tim is speaking to, the supplemental health products that wrap around health insurance as those deductibles go up. So really strong growth, but a lot of runway left in terms of penetration and lines, like critical illness, accident, hospital indemnity.

Can you also just quantify what the natural growth trends for premiums are, both in the U.S. and the U.K. businesses?

Yes. Maybe I'll start. This is Mike on the U.S. So the U.S. it's sort of a continuation of what we've seen over the last several quarters, so a little bit of job growth, a little bit of wage increase, probably not as aggressive as we'd like to see in that sort of 1% to 1.5% kind of tailwind to us in our traditional group insurance businesses.

And Peter, do you want to touch on the natural growth trends in the U.K.?

Yes. So as I sort of referred to earlier, it's sort of split actually between sort of our larger clients, which be 1,000-plus employees, 2,000 plus. Where what we've seen is we'd normally see around 2%, 2% to 3% natural growth, we're seeing slight negative, minus 1%. It hasn't gone through to the smaller markets, the SME sector as we call it, which is sort of under 1,000. And it's a little bit sectorial as well, because if you're exporters, you're doing better than if you're sort of exposed to the local market.

And we'll go next to John Nadel of Credit Suisse.

Mike, I found one of your comments, I think it was in response to an earlier question, pretty interesting. I think you were talking about the portion of the block that had not renewed, had them -- I guess it's a margin. I'm assuming it's a margin of about 9 points lower than the portion that had renewed. Could you just dive into that a little bit more? I mean, how -- do I have that right, that it's 9 points on the margin? Or is it -- how do we think about that?

No, that's it. So if we look at what's the terminated premium and where did that business run relative to the active that comes through the renewal cycle and persists, there's a 9-point spread between the 2. And maybe to just add a little color. Where we feel that most acutely is in, I sort of described, the mid-market, say, 100 employees up to 2,000 employees. That's where we see the most competition. You have carriers that focus at the small end that are trying to move up into that mid-market, carriers that have traditionally been in the very large employer space investing to try to move down, and it gets pretty choppy there in the middle. It was at 9-point spread in total, but the business that we lost in that mid-market was actually at a loss and a notable loss. So those are typically being taken at in-force rates. We're looking to move them up, and someone is willing to take them on where they're sitting currently.

And just as a -- is that 100 different cases? Is it 1,000 different -- like how big is that piece? I mean, would we be able to actually see it? If it showed up at one competitor -- I'm assuming it doesn't show up at just one. But if it did, would we be able to actually see it?

I think you would see it come through. I mean, we've got a pretty decent market share in that mid, but still it's going to be in the 12% to 15% market share range. So there's business moving that's certainly not coming just from Unum. So it'd be hard to drop linearly. But John, we've talked about it in the past. I mean, anytime in the group insurance space you see a carrier that outgrows the market at a multiple for an extended period of time, there's usually a lag effect to a pretty significant loss ratio hit.

You know I'm in agreement on that. The only other question I have is, Jack, I know for -- I guess it's about 10 quarters now since the long-term care charge at the end of '14 and the update on the sort of next several years' path of targeted new money yields and then the increase thereafter. Can you just -- I know you've said you've exceeded the 5%. But what's the actual number that you guys have achieved over the last 10 quarters or so? How much upside have you actually achieved relative to that 5%? And can you just remind us at what point does it -- do we start to need to see that gradually increasing from that 5% to -- I think it's towards 6% or 6.5%?

Yes. I mean, I'd say we haven't shared the actual number. We're not going to get in the business of sharing our actual quarterly new money rates against our portfolios, but it's been a reasonable beat. And so we feel good about where we are. If you look at our history over the last 10 quarters, the good news is our actual results are a little bit further up that curve than the 5%, and so we have a buffer. But in the next 1, 2, 3 years, we're certainly going to need to see an upward movement in interest rates or we're going to have to look at the reserves.

Okay. And then -- and maybe one more follow-up on LTC. Just I know you guys have had -- have been having a decent amount of success on the landing spot program. Can you just give us an update on how things are going as it relates to rate increases? And I guess we could characterize the landing spot as essentially a buy-down of benefits.

Yes. John, this is Steve. I'll take that one. So we continue to be very pleased with the take-up rate. I think we mentioned in the past, adoption, it's north of 50% on those increases. It clearly varies by the level of increase that was actually approved, where the higher increases -- the adoption rate is going to be a bit higher. We continue to feel good about the regulatory environment. There has been a lot of education, a lot of awareness over the last several years. I think regulators are much more open to the conversation. There's also a lot of alternatives that are put out there about how these rate increases are approved and implemented. And we've seen a lot of flexibility by the regulators, and we work with them at construct. So we're pleased we're still on pace with our original assumptions related to rate increases, and we'll just continue to work that with the regulators.

And we'll hear next from Mark Hughes of SunTrust.

Rick, in your comments, you had alluded to improvements, I think, with Colonial, that you suggested should support acceleration in sales. Any specifics you can share on that? When? How much?

Yes. I think the sales growth you've seen in Colonial Life is a result of a lot -- getting more feet on the street and how we're working that. I was referring to where we're continuing to focus on. We really like our Colonial Life business, but I'll let Tim talk about the things we're doing to continue accelerate the growth of that company.

Yes. Thank you, Rick. Thanks for the question, Mark. We have a plan to accelerate growth through territory expansion primarily, but also through some initiatives around persistency improvement. We did open 3 new territory offices in the first 6 months of this year, bringing us to 45 total offices, and we expect that to continue to grow. And over the next few years, we'll be in the upper 50s. Each of these new offices is already exceeding expectations that we had for the very early part of their tenure. We're excited about the talent available in the marketplace. Currently, we're excited about the people we're bringing in to the organization, and we're excited about the opportunities we see in some places where -- I wouldn't call it exactly whitespace, but we see some under-penetrated parts of the country, where we have opportunities to go and make a difference.

And with no further questions at this time, Mr. White, I'd like to turn the conference back to you for any additional or closing remarks.

Yes. This is Rick, actually. I'd like to thank everybody for joining us this morning. We look forward to seeing many of the investor meetings here over the next several weeks. For our investor friends, we know you have a busy day today. So we will end the call promptly. But we thank you for joining us, and we'll leave at that. Thanks.

Again, that does conclude our conference for today. We would like to thank everyone for your participation. You may now disconnect.