Unum Group (UNM) Q2 2021 Earnings Call Transcript

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Unum Group (UNM 0.35%)
Q2 2021 Earnings Call
Aug 4, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Unum Group Second Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Tom White, Senior Vice President of Investor Relations. Please go ahead, sir.

Thomas A. H. White -- Senior Vice President Investor Relations

Great. Thank you. Good morning, everyone, and welcome to the Second Quarter 2021 Earnings Conference Call for Unum. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the sections titled Cautionary Statement regarding forward-looking statements and risk factors in our annual report on Form 10-K for the fiscal year ended December 31, 2020, and our subsequently filed Form 10-Q. Our SEC filings can be found in the Investors section of our website at unum.com.

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 in the Investors section. Yesterday afternoon, Unum reported second quarter 2021 net income of $182.9 million or $0.89 per diluted common share compared to $265.5 million or $1.30 per diluted common share in the second quarter of 2020. Net income for the second quarter of 2021 included the after-tax cost related to the early retirement of debt of $53.2 million or $0.26 per diluted common share.

The after-tax amortization of the cost of reinsurance of $15.5 million or $0.08 per diluted common share, an after-tax impairment loss on the right-of-use asset related to one of our operating leases for office space we are no longer using to support our general operations of $11 million or $0.05 per diluted common share, a net after-tax realized investment gain on the company's investment portfolio of $600,000 or $0.01 per diluted common share and a net tax expense related to a U.K. tax rate increase of $24.2 million or $0.12 per diluted common share. Net income in the second quarter of 2020 included an after-tax impairment loss on the right-of-use asset of $10 million or $0.05 per diluted common share and a net after-tax realized investment gain of $25.4 million or $0.12 per diluted common share.

So excluding these items, after-tax adjusted operating income in the second quarter of 2021 was $286.2 million or $1.39 per diluted common share compared to $250.1 million or $1.23 per diluted common share in the year ago quarter. Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; Chief Financial Officer, Steve Zabel; and Chief Operating Officer, Mike Simonds; as well as Mark Till, who heads our Unum International Business; and Tim Arnold, who heads our Colonial Life and Voluntary Benefits businesses. And now I'll turn the call over to Rick for his opening comments. Thank you, Tom, and good morning, everyone. I am very pleased with our second quarter results. We showed a 13% increase year-over-year in after-tax adjusted operating income to $1.39 per share.

These improved results were driven in large part by the significant decline in COVID-related mortality this quarter and by excellent performance in our investment portfolio. Given our strong second quarter results, we are raising our outlook for full year 2021 growth in after-tax adjusted operating income per share to a decline of approximately 1% to 3% compared to our previous outlook of a decline of 5% to 6%. We believe we're making good progress to returning to our pre-pandemic levels of profitability and margins over the coming quarters with the trajectory of that improvement dependent on the developing trends in COVID and the Delta variant. Embedded in our expectations is that COVID mortality will improve but only slightly in the third and fourth quarters. In many ways, results for this quarter played out in line with our expectations, with declining mortality impacts, solid underlying premium trends and further strengthening of our healthy capital position.

This quarter was also highlighted with some areas of positive upside relative to our expectations. Most notably, we saw continued excellent returns from our alternative investment portfolio, which is benefiting from the strong financial markets and growth in the economy. We also saw a record level of quarterly operating income for Colonial Life along with an impressive recovery in sales. And rounding it out, we had favorable underlying benefits experience from our Closed Block business lines, both long-term care and the Closed Disability Block. We'll cover these positive trends in detail throughout our comments this morning. In addition to the positive trends we saw this quarter, I am pleased that our indicators continue to support our expectation of generating slightly positive growth in premium income in our core business segments this year with further improvement expected into 2022.

Sales trends are emerging in line with our expectations at our primary business lines within Unum US. And Colonial Life showed very strong results this quarter with over a 50% increase from the year ago quarter, a good indicator of consumer interest in the basic financial protection products we offer. It also highlights that the agency model of Colonial Life is quite resilient as we saw some of the most pronounced headwinds in the early stages of the pandemic. In addition to sales trends, we remain very encouraged with the strong levels of persistency we're seeing across the majority of our business, which provide a solid base to grow. Finally, we're seeing a pickup in natural growth primarily from higher wages in many sectors of the economy as we continue to build back premium income that was impacted by the sharp spike in unemployment in the first half of 2020.

The environment we are seeing today is quite good for our core business. We often talk about wage inflation, but you have to add to the mix there is renewed recognition for the need to prepare for the unexpected. And in a competitive world for talent, employers are looking to ensure that they have competitive benefits package for their current and prospective employees. Turning to our capital position at quarter end. It remained very healthy as well, with holding company cash of $1.7 billion and weighted average risk-based capital for our traditional U.S. insurance companies at 375%. Both of these measures are in excess of our targets and provide substantial flexibility for us going forward. Additionally, this quarter, we successfully completed a 30-year debt issue and redeemed a shorter high-coupon maturity, enabling us to further extend our debt stack while reducing the overall coupon. Leverage remains approximately 28% -- 26% and provides further capital flexibility for us.

This strong capital position creates options for us as we look to create value for our shareholders. Our deployment strategy will first focus on continuing to invest in the growth of our core business segments, both organically and through capability-driven acquisitions. We like our position in the employee benefits market, and putting money to work to grow our core franchise is where we are focused. We also expect to be consistent in returning capital to shareholders through dividends, which will increase by 5.3% with the dividend to be paid this month. We do have funds in excess of these needs, so as we look to the future, we are constantly evaluating how to best deploy or hold on to this capital. A key question is how we can use these funds to lessen the challenge to our current share price from the overhang of our legacy LTC block. Return of capital to shareholders remains an important option for us, but we are also considering prefunding a portion of the PDR.

Our goal is to help reduce the LTC discount in our stock. And in the future, this funding would be utilized in any risk transfer transaction that we explore on a portion of this block should that become an option for us. While we are clearly optimistic looking forward, we do see areas of our business that continue to be impacted by the pandemic. Results in our short-term disability line and leave services continue to be impacted by COVID-related claims, which remains stubbornly high. The group life and AD&D business within Unum U.S. returned to profitability in the second quarter after recording losses in the previous two quarters as COVID-related mortality in the U.S. declined materially from the peak levels experienced late last year through the early months of 2021. What we are watching now is that the Delta variant is impacting a younger, unvaccinated population that has different dynamics from what we have seen to date from COVID-19.

Recently updated estimates for COVID-related mortality for the third quarter and second half of 2021 are pointing to persistently high counts and only a marginal improvement relative to the second quarter. We continue to watch these trends closely and are reflecting them in our own plans. There is room for optimism, though, as we have started to see employers looking at the role that they might play in getting more of the population vaccinated. As we look at growth in our enterprise, the steps we're taking -- we've taken to run our business more efficiently have freed up funds that we're reinvesting in new products and capabilities that tackle some of today's critical business workplace challenges. During the quarter, we launched our new Total Leave and behavioral health solutions, and we've logged our first sales for both offerings.

On the digital front, platforms like My Unum and Colonial Life's improved portal are steadily providing more self-service, real-time capabilities for clients and customers. And new technology we're testing will enhance the digital enrollment experience, automate processes and allow people to interact with us in new ways. Equally important is the work we're doing to strengthen our culture and engage our employees across the enterprise. We've taken steps during the quarter to accelerate and expand our inclusion and diversity journey, and we broaden the scope of our social justice fund to support even more groups facing discrimination. These and many other efforts help place Unum among the Points of Light, Civic 50, and in Forbes Best Employers for Diversity, Best Employers for Women and Best Employers for New Graduates. We're also happy to receive another perfect score on the Human Rights Campaign's Corporate Equality Index and to be named a best place to work for disability inclusion. These efforts and accomplishments reflect the strong culture we have built. We are proud of how it has helped us endure through the challenges of the past 1.5 years and how the engagement of our team will propel us going forward.

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

Steven Andrew Zabel -- Executive Vice President and Chief Financial Officer

Yes. Thank you, Rick, and good morning, everyone. As I discuss our second quarter financial results this morning, I will primarily focus on analysis of our second quarter results relative to the first quarter of 2021, which will allow us to show how the company's business lines are recovering from the pandemic. I'll start with the Unum US segment, which reported adjusted operating income for the second quarter of $179.3 million compared to $115.7 million in the first quarter. These results improved significantly due to the improvement in COVID-related mortality in our group life business line, which I'll provide more detail on in a moment. We also saw improved operating income from the supplemental and voluntary line, while income in the group disability line declined compared to the first quarter.

Within the Unum US segment, the group disability line reported operating income of $59.9 million in the second quarter compared to $64.1 million in the first quarter. The primary driver of the change was lower net investment income, which largely resulted from a lower level of on calls. Premium income was generally consistent between the two quarters and on a year-over-year basis increased 1.1%. The group disability benefit ratio for the second quarter was 74.7%, which is consistent with the first quarter benefit ratio of 74.8%. We feel the benefit ratio will likely remain at this level over the near term due to the impacts we are seeing from COVID in the Delta variant, which we now believe will likely persist through the second half of the year. Adjusted operating income for Unum US group life and AD&D showed a sharp improvement in the second quarter to income of $5.2 million compared to a loss of $58.3 million in the first quarter.

This improvement is consistent with our expectations and largely explained by the significant reduction in COVID-related mortality in the U.S., which declined from approximately 200,000 nationwide observed deaths in the first quarter to approximately 52,000 in the second quarter. We estimate that we incurred approximately 800 excess claims from COVID in the second quarter compared to an estimate of 2,050 COVID claims in the first quarter. Our average size of claim increased in the second quarter by approximately 10% as we experienced a mix shift to a more younger, working-age policyholders who typically have higher benefit amounts. Non-COVID-related mortality had little impact on results this quarter relative to the first quarter as lower incidents was offset by higher average claim size. Now looking ahead to the third quarter, our current expectation for nationwide COVID related mortality of approximately 40,000 compared to approximately 52,000 experienced in the second quarter.

Assuming the shift in the mix continues to more younger, working-age individuals with a continued higher average benefit amount, we would estimate third quarter group life operating income to show a modest improvement over second quarter results to approximately $15 million. We are closely watching the impacts emerging from the COVID variants, which have led to increase in estimates for second half mortality expectations. Now shifting to the Unum US supplemental and voluntary lines. We saw an improved quarter with adjusted operating income of $114.2 million in the second quarter compared to $109.9 million in the first quarter. Looking at the three primary business lines. First, we remain very pleased with the performance of the individual disability recently issued block of business both in the second quarter and throughout the pandemic.

Though the benefit ratio did increase to 48.4% in the second quarter from 42.4% in the first quarter, it continues to perform quite well compared to our pre-pandemic experience as new claim incidence trends and recovery levels remain favorable. The voluntary benefits line recorded a strong level of income as well. The benefit ratio increased in the second quarter relative to the first quarter, though it did remain consistent with the pre-pandemic results. The benefit ratio in the group critical illness line increased, offsetting the improved experience in the life lines of business. And then finally, utilization in the dental and vision line was higher this quarter, as was the average cost per procedure, pushing the benefit ratio to 77.1% in the second quarter compared to 73.2% in the first quarter. Dental and vision utilization has been volatile since the significant decline in utilization we did experience in the second quarter of 2020.

Sales for Unum US in total declined 3.1% in the second quarter on a year-over-year basis compared to a decline of 10.3% in the first quarter. For the employee benefit lines, which include LTD, STD, group life, AD&D and stop loss, total sales declined by 3.1% this quarter. We saw good activity and results in the core markets for group disability and group life. While large case sales were down year-over-year, we are seeing a good level of quote activity in the group markets, which is back to pre-pandemic levels. Sales trends in our supplemental and voluntary lines showed similar improvement in the second quarter relative to the first quarter. For this quarter, total sales declined 3.1% year-over-year compared to the 22.3% decline in the first quarter. Our recently issued individual disability sales increased 4.9%, and dental and vision sales increased 2.4% year-over-year.

Voluntary benefit sales were down 7% in the quarter, which is consistent with our view that these sales will take longer to recover. Large case DB sales in particular have a longer sales cycle and are more concentrated around January one effective date. Persistency for our major product lines in Unum US remained in line to higher this quarter relative to the first quarter of 2020, providing a good tailwind for premium growth for the full year and into 2022. We have also seen favorable trends and natural growth in our employee benefits lines primarily from higher wage growth at this point. Now moving to the Unum International segment. Adjusted operating income for the second quarter was $24.8 million compared to $26.4 million in the first quarter and $15.1 million in the second quarter of 2020.

The primary driver of these results is in our Unum UK business, which generated adjusted operating income of GBP16.8 million in the second quarter compared to GBP18.6 million in the first quarter and GBP10.1 million in the second quarter of 2020. We are pleased with these results, which showed improved underlying benefits experience particularly in our group life line. The reported benefit ratio in Unum UK, which showed an increase to 82.5% in the second quarter from 75.3% in the first quarter was impacted by the increase in inflation in the U.K. in the second quarter compared to the first quarter. Higher inflation triggers higher inflation-related benefits to certain of our policyholders as well as higher net investment income from the inflation index linked yields in our investment portfolio. The rapid increase in inflation in the U.K. from the first to second quarter did distort somewhat the timing of these two factors and produced a net negative impact of slightly less than GBP three million to adjusted operating income this quarter.

This short-term impact to income is expected to balance out over the course of the year. Overall, we are very pleased with the results in our International business with benefit ratios adjusted for inflation for Unum UK improving both on a sequential and year-over-year basis. Premium growth for our International businesses was also favorable this quarter compared to a year ago. Looking at the growth on a year-over-year basis and in local currency to neutralize the benefit we saw from the higher exchange rate, Unum UK generated growth of 3% with strong persistency and the ongoing successful placement of significant rate increases on our in-force block. And Unum Poland generated growth of 12.4%, a continuation of the low double-digit growth this business has been producing. With this growth, our Unum International in-force premium is now at its highest level.

Next, we are very pleased with the results generated by Colonial Life, with adjusted operating income of $95.8 million in the second quarter compared to $73.3 million in the first quarter. This record quarterly income level was primarily driven by improved benefits experience and higher net investment income. The benefit ratio improved to 51.7% in the second quarter from 55.4% in the first quarter as experience in the life insurance block improved with the overall decline in COVID-related mortality. Experience in both the accident, sickness and disability lines and the cancer and critical illness line also improved relative to the first quarter. Additionally, net investment income increased on a sequential basis, which was primarily driven by higher income from bond calls. Looking out to the third quarter, we anticipate adjusted operating income to settle back to the low to mid-$80 million range as some of this favorable experience moderates. We're very excited with the rebound in sales activity we experienced in Colonial Life this quarter, increasing 53.7% on a year-over-year basis.

While this strong recovery comes off of a COVID depressed result in the year ago quarter, this quarter marks a return to year-over-year growth as face-to-face sales reemerge, and we drive further utilization of our digital sales and enrollment capabilities. As expected, premium income declined 4.3% on a year-over-year basis and will likely continue with negative comparisons for the next couple of quarters until sales volumes have sufficiently recovered. Persistency for Colonial Life continues to show an encouraging trend at 78.3% for the first half of 2021, almost one point higher than a year ago. Then in the Closed Block segment, adjusted operating income was $111.2 million in the second quarter compared to $97 million in the first quarter, both very strong quarters relative to our historical levels of income for this segment.

Results this quarter benefited from strong levels of net investment income due to higher levels of miscellaneous investment income, which I'll cover in more detail in just a moment, as well as favorable underlying benefits results in both long-term care and the Closed Disability Blocks. Looking within the Closed Block, the LTC block produced a slightly lower interest adjusted loss ratio of 74.6% in the second quarter compared to 77.7% in the first quarter, both results quite favorable to our long-term expected range of 85% to 90%. Over the past four quarters, the benefit ratio for LTC was 70% excluding the impact of the fourth quarter 2020 reserve assumption update. We continue to see higher mortality experience in the claim a block in the second quarter and estimate that counts were approximately 5% higher than expected. LTC claims incidence was slightly higher in the second quarter, though we have seen higher recoveries on many of these claims, which mitigates the financial impact.

Looking forward to the second half of the year, we anticipate that the interest adjusted loss ratio for LTC will likely remain slightly favorable to our long-term assumption range as mortality and incidence trends continue to normalize from the impacts of COVID. For the Closed Disability Block, the interest adjusted loss ratio was 69.6% in the second quarter and 68.9% in the first quarter. The underlying experience on the retained block, which largely reflects the active life reserve cohort and certain other smaller claims blocks we retained, performed favorably to our expectations primarily due to lower submitted claims. So overall, it was a very strong performance this quarter for the Closed Block segment driven by both higher miscellaneous income and favorable underlying benefit experience. We estimate the quarterly operating income for this segment will over time run within the range of $45 million to $55 million, assuming more normal trends for investment income and claim results.

So wrapping up my commentary on the quarter's financial results. The adjusted operating loss in the Corporate segment was $48.5 million in the second quarter compared to $38.9 million in the first quarter. This excludes the special items we listed in our earnings release. We anticipate the quarterly losses in the Corporate segment will moderate in the second half of the year to the low to mid-$40 million range. I'd now like to turn to our investment portfolio, where we are seeing very favorable overall credit trends. First, there were no downgrades of investment-grade securities to high yield this quarter. In fact, we had net upgrades in ratings overall for the portfolio, which generated a small capital benefit to us this quarter. In addition, our internal watch list of potential credit concerns is now lower today than it was coming into the pandemic in early 2020.

As you have read in our earnings release and heard through my comments this quarter, we had a very high level of miscellaneous investment income this quarter, which you know is generated from two sources. First, we saw a high level of miscellaneous investment income from bond calls again this quarter as many companies look to refinance higher coupon debt and take advantage of today's lower interest rates and tight spreads. We had approximately $10 million higher investment income from bond calls this quarter relative to our historical quarterly averages. Over the past several quarters, this has been extremely volatile and difficult to predict from quarter-to-quarter. While these bond calls enhance current period investment income, it is a challenge to replace the lost deals in today's low interest rate environment. Second, as I mentioned previously, we continue to see strong performance in the valuation mark on our alternative investment assets, which totaled $51.9 million in the second quarter following a positive mark of $35.9 million reported in the first quarter.

Both quarters are well above the expected quarterly positive marks on the portfolio of $12 million to $14 million. This quarter's very strong returns, primarily reflected returns for the period ending March 30, 2021, due to the lags in reporting typical on many of these investments. The higher returns this quarter were generated from all three of our main sectors, credit, real estate and private equity, and reflect the strong financial markets and strong economic growth. It is hard to predict quarterly returns for miscellaneous investment income, but the third quarter so far, we are seeing a continuation of favorable trends in bond call premiums. Moving now to our capital position. The financial position of the company continues to be in great shape, providing a significant financial flexibility.

The risk-based capital ratio for our traditional U.S. insurance companies improved to approximately 375%, and holding company cash was $1.7 billion as of the end of the second quarter, which are both well above our targeted levels. During the second quarter, we successfully completed a debt offering issuing $600 million of a 30-year senior note with a coupon of 5 1/8. This was the lowest coupon on a 30-year debt issue in our history. The proceeds from the issue were used to redeem the $500 million of 4.5% issue that would have matured in 2025. And you'll see the debt extinguishment costs associated with the redemption included in our net income this quarter. Importantly, this transaction enabled us to extend the duration of our debt stack and reduce the overall coupon on our outstanding debt.

With the issuance and the redemption completed in the second quarter, our leverage ratio currently is 26.2%, providing additional financial flexibility. An important industry development recently was the finalization of the C1 factor changes, which have been under consideration by the NAIC for the past several years. At our outlook meeting this past December, we indicated that our capital plan for 2021 -- in our capital plan for 2021, we assumed a negative impact of approximately $225 million from the adoption of the factor changes. As you are likely aware, the NAIC concluded by adopting a recommendation from Moody's analytics, which are not as impactful to our capital plan as we previously had assumed.

We now estimate the impact to our capital position to be less than $70 million rather than the $225 million we had previously projected, a very good outcome for us, which provides upside to our capital expectations for year-end 2021. I'll close my comments with an update to our outlook for 2021. Previously, we expected a modest decline of 5% to 6% for full year 2021 after-tax adjusted operating income per share relative to the 2020 level of $4.93 per diluted common share. Given the strong second quarter results and our updated view on COVID trends, we are revising our outlook upward and now look for 2021 after-tax adjusted operating earnings per share to decline by a range of approximately 1% to 3% relative to 2020. Our underlying performance is expected to remain quite healthy, but COVID and the Delta variant will continue to be an important driver of results.

So now I'll turn the call back to Rick for his closing comments and look forward to your questions.

Richard Paul McKenney -- President and Chief Executive Officer

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

So let me ask the operator to be open up the session.

Questions and Answers:

Operator

[Operator Instructions] Our first question today will come from Ryan Krueger with KBW. Please go ahead.

Ryan Krueger -- KBW -- Analyst

Hi, Good morning. Could you expand a little bit on your comments about potentially prefunding the main premium deficiency reserve and give us any sense of the potential time frame you might look to prefund it over?

Richard Paul McKenney -- President and Chief Executive Officer

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

You start out with a little bit choppier environment that we see today, so you have the option to hold on to it. We've talked about share repurchase, and that option exists to us today. And then as you mentioned, is looking at the PDR, the premium deficiency reserve, that we have with the state of Maine. And so we look at that as something as an obligation to us over a seven year period of time. It is something we have to look at. And we think prefunding a portion of that might make some sense in today's market. When you think about the prefunding, think about it as well as this is an area which those funds will ultimately need to go to. And it's also addressing one of the bigger concerns that people have about the company today, and that's the overhang of our LTC obligation and liabilities there. So that's the thought process. I really can't give you any sizing today or timing to that, but certainly, that's a thought process that we are in the middle of today.

Ryan Krueger -- KBW -- Analyst

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

Richard Paul McKenney -- President and Chief Executive Officer

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

Operator

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

Tom Gallagher -- Evercore -- Analyst

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

Richard Paul McKenney -- President and Chief Executive Officer

Yes. No, I think when you think about it, Tom, and what we're trying to accomplish, we have to look at buybacks as one form of it. And anything we would have contemplated there would have been quite modest. I don't think we've said there will be anything more than that. And so now we're just given the facts as we see them today as we've gone through this summer and a period of time looking at what's going on in the world around us. I mean all those are influences. No one thing would cause us to change tone around that, but those are all things we put into the mill. So we just want to be very clear that those options are out there. They are available to us, but we're going to have to make those decisions through the third quarter, through the fourth quarter based on what we're seeing in the environment around us.

Tom Gallagher -- Evercore -- Analyst

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

Richard Paul McKenney -- President and Chief Executive Officer

Yes. So I think all of those that you mentioned are all factors. We want to make sure all of our constituents are thought about through this process. The fact that the Delta variant is starting, I mean, it really hasn't come through in terms of what we've seen in our books of business, the risk that we have out there. I wouldn't want to overplay that, that, that has changed anything in the course of what we're looking at. But when you look at the risk of that out there through the next couple of quarters when you look at interest rates, which have come down pretty precipitously over the course of the summer, those are all factors that play in. But I wouldn't highlight any one factor greater than the other.

Tom Gallagher -- Evercore -- Analyst

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

Steven Andrew Zabel -- Executive Vice President and Chief Financial Officer

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

Operator

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

Jimmy Bhullar -- JPMorgan -- Analyst

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

Steven Andrew Zabel -- Executive Vice President and Chief Financial Officer

Jimmy, it's Steve here. I'll take that one. So I'll take us really back to what we've seen over the last five quarters. As you know, second quarter of last year, we really saw, I'd say, three things in our benefits experience. Number one, extremely high claimant mortality specifically in nursing home. We were about 30% higher than our expectations. The second thing that we saw was lower-than-expected claims incidents as people were potentially reluctant to claim really in any site as whether it's at home or in a facility. And then we also saw really a slowdown of transitions between sites and so slowdown of people moving from home care to facilities or vice versa. People pretty much just stayed where they were. What we've seen in those three over time, claimant mortality continued to be pretty elevated through the last several quarters, about 15% elevated. We've seen that come down to about 5% elevated in the second quarter.

We would think that, that would continue to moderate. When you think about vaccination trends, pretty targeted toward the older population, which clearly is where our block will be concentrated. So we would see that continuing to moderate the latter part of the year. From an incidence perspective, we have seen incidents continue to kind of trend up more to our expectations. I would say that's where we are in the second quarter, maybe a little bit higher incidence, a little bit higher recoveries of those new claimants, but financially, I'd say we're back pretty much to our expectations. And then the last would be transitions. And we have seen that open up a little bit, but I'd still say that it's probably a little bit light versus what we might have historically seen pre-pandemic as far as people moving between different sites. So I'd say we're getting back to normal. We'll have to see what this next wave of Delta variant does within the block and how that affects those different dynamics. But we do think that we'll be trending back to kind of that 85% to 90% range, probably at this point by the latter part of the year into next year.

Jimmy Bhullar -- JPMorgan -- Analyst

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

Richard Paul McKenney -- President and Chief Executive Officer

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

Timothy Gerald Arnold -- Executive Vice President of Voluntary Benefits and President of Colonial Life

Yes, thanks, Jimmy. Appreciate the question. So we are seeing really strong activity levels in all geographies. We're seeing strong results across industry segments and across product categories. We have tremendous agent retention. We currently have 19% more agents than we have at the same time in 2019. We're seeing great engagement among our agents and tremendous productivity. We're finding that technology period with a really strong agency distribution force is the key to being successful in this environment where we can roll and provide benefits education under virtually any scenario. And we are seeing a substantial increase in virtual enrollments. But what we're also seeing is even in states where there are high levels of the Delta variant, we're not seeing a return to the kind of shutdowns that we saw in 2020. And so we believe that we'll be able to continue with face-to-face enrollments and also augment those with the incredible digital tools that we've built over the last few years. [Technical Issues]

Operator

And our next question will come from H. Lee with Dowling & Partners. Please go ahead.

Humphre Lee -- Dowling and Partners -- Analyst

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

Steven Andrew Zabel -- Executive Vice President and Chief Financial Officer

Yes, Humphrey, I'll take that. This is Steve. I'm not completely following your math, but I'll just kind of restate what our assumptions are and how we're thinking about the last half of the year. In the second quarter of 2021, we did have about 800 -- estimated 800 COVID-related deaths, and that was on a nationwide count of 52,000. I would say that it's kind of hard to do a rule of thumb calculation anymore just because we are seeing a different population in our experience as COVID starts to impact the kind of younger, more working-aged individuals. So we had that 1% kind of rule of thumb. That's drifted up quite a bit. It's probably around 1.5% at this point.

We do anticipate in the third quarter and really in the fourth quarter a nationwide level of about 40,000 COVID-related deaths. And so if you kind of run the math through what we think the distribution of that is going to be, we do think earnings will probably be around $15 million for both third and fourth quarter. Now as far as just broader kind of historical levels of earnings and that sort of thing, we do see fluctuations quarter-to-quarter just in the average size and the count of claims, that was pretty consistent between first quarter and second quarter, but that can fluctuate quite a bit period to period. I think what we just need to see is kind of get through this uncertainty of pandemic and then kind of rebaseline what the earnings power of the group life business is. But we continue to feel really good just about the premium levels there and how that's resonating with the market. So probably more to come as we get into looking into next year.

Humphre Lee -- Dowling and Partners -- Analyst

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

Michael Q Simonds -- Executive Vice President and Chief Operating Officer

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

Operator

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

Tracy Benguigui -- Barclays -- Analyst

Good morning. Could you confirm my understanding, any PDR prefunding, would that be voluntary? And means does not require you to accelerate the seven year time line if you hold excess capital?

Richard Paul McKenney -- President and Chief Executive Officer

Yes, the way we look at that, Tracy, is it would be voluntary. This is just something we're looking at. Like we said, it's obligation over the next seven years going back a year. And so we would be -- it would be voluntary in what form we put that in and timing, that is up to us. We're still maintaining moving along the path of the original PDR.

Tracy Benguigui -- Barclays -- Analyst

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

Richard Paul McKenney -- President and Chief Executive Officer

Yes. So no, that's not what we're saying. I think what we're saying is as we put more funds to our long-term care business, ultimately in a transaction that would get realized. So it's not the technical nature of it in terms of how a transaction is done and how it moves around. We're just saying that the more funding we have behind our long-term care block, ultimately, what a buyer, when they look at it, there'll be a smaller gap now in that period of time. So it's nothing technical, just saying there's more capital that's now within the LTC business, which would then be realized upon sale. [Technical Issues]

Operator

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

Erik Bass -- Autonomous Research -- Analyst

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

Richard Paul McKenney -- President and Chief Executive Officer

Yes, maybe I'll step back in that a little bit, Erik. I mean when you think about the prospects that we've talked about of an LTC transaction, I think that from our perspective, going back to last year-end, certainly, we feel like we have the capabilities to do so. Our IDI transaction is a good indicator of that. We now see it a little bit differently that we can actually perhaps customize some of the risk that a counterparty is willing to take on. I'd tell you what has changed and which is just part of the dynamics of the market is just where interest rates are, we've talked about that as being a headwind to any type of transaction and widening the gap. And those certainly have come down here now over the last quarter. So that's probably the only thing that has changed. That's the math of a deal, but I don't think any other dynamics have really changed to how we've talked about it recently.

Erik Bass -- Autonomous Research -- Analyst

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

Michael Q Simonds -- Executive Vice President and Chief Operating Officer

Erik, it's Mike. I can take that. It might be a good opportunity to talk a little bit about a couple of our different geographies because we are encouraged on a broad basis about the recovery, and you see that quarter-over-quarter, as both Rick and Steve highlighted in their remarks. In the group insurance market, to your specific question, we are encouraged about activity levels and what's coming through in the pipeline. The competitive realities are not terribly dissimilar from what we've seen in prior periods. I do think, while no one carrier really stands out as being overly aggressive, I think there are a number of players out there that are probably looking to make up for some lost ground.

After a challenging 2020, we're going to stick to our pricing and underwriting guidelines but are, again, pretty encouraged about the ability to differentiate on things like our investments in leave and our HR Connect capability. That's put us in a, I think, pretty good stead. We'll play opportunistically in that large case market, where I'd say the competition is probably the toughest. If you go down market, and it's literally almost linear down into the small case market, things are really opening up, and we are encouraged. Core overall was up in the quarter. And if you go down into the small end of core, we're seeing nice double-digit increases there, which bodes well for us. going forward. I think, Tim, maybe comment a little bit on the competitive market and what you're seeing.

Timothy Gerald Arnold -- Executive Vice President of Voluntary Benefits and President of Colonial Life

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

Richard Paul McKenney -- President and Chief Executive Officer

Yes, Mark, maybe you can hit quickly what you're seeing in the international market?

Mark P Till -- Executive Vice President and Chief Executive Officer

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

Operator

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

Josh Shanker -- Bank of America -- Analyst

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

Steven Andrew Zabel -- Executive Vice President and Chief Financial Officer

Yes, this is Steve. I'll take that one. And there's a lot in there, so let me try to break it down a little bit as far as kind of nontrendable items. And I'll just start with the benefits experience. As I mentioned, from an incidence perspective, we're pretty much back to what our expectations would be. Claimant mortality is still running a little high, so you can kind of think about from where we were from a loss ratio perspective in the second quarter. Over the next few quarters into next year, that will trend back into that 85% to 90% range. Then the other thing that I guess I'd focus on is just net investment income and specifically our miscellaneous net investment income.

Overall, we had about $52 million of alternative asset income during the period. The majority of that is going to be in the Closed Block. Our expectation would be more in the 12% to 14%, so that variance you can pretty much consider a little bit unique and probably won't recur. Now with that said, this tends to be pretty volatile as far as the marks on this portfolio. So over time, our expectation is kind of that 12% to 14%, but it can be a little bit higher, a little bit lower. And then the other would be bond calls. And I would say, overall, we were probably for the organization maybe $10 million over our expectation overall. And maybe half or a little bit less than half of that would have been in the Closed Block.

So you kind of boil that all up, and we're looking to the back half of the year to probably be kind of in that $50 million all-in Closed Block earnings for the third and the fourth quarter. But as you know, things can be very volatile in this business line both from a claims experience perspective as well as from this net investment income. Now your question about just taking into consideration our claims experience and all add in their mortality experience into how we think about reserve adequacy and kind of our assumption review. We're really viewing all of what's happened over the last year as an anomaly by and large, unless we do see more permanent changes in behavior and in those types of things. But we're kind of treating this all as an anomaly, feel good about the liability assumptions that we have in our reserve, and we'll go through our normal process at year-end. But we're not seeing anything right now that would have us change our perspective there.

Josh Shanker -- Bank of America -- Analyst

And then on the individual disability portion, the lower claims submission, by phrasing it that way, like is that unusual? Is that over-related? Is that a change in the nature of the book? Again, just trying to figure out what's trendable in that.

Steven Andrew Zabel -- Executive Vice President and Chief Financial Officer

Yes. Yes. So for that Closed Block IDI, really two things happened when we did our transaction with Global Atlantic. One was we ceded the majority of our claims blocks to them, but we do still retain some smaller pieces of that block. So we will continue to have some claim. It's basically claim termination risk, whether it's mortality or recovery. We still do have a bit of that risk. That's been pretty consistent with our expectations. We also retained the entirety of the active life reserve block. And so if you think about the risk there, it's really incidence on the active lives and then how that claim performs over time. And we have actually seen some pretty favorable experience around incidence over the last couple of quarters. Again, that can be somewhat volatile, so I would just think about $5 million a quarter for the Closed Block Disability business over the latter half of the year. Again, we're kind of new to that block and what we have left. And clearly, because it's a smaller block, it will probably be more volatile than what we saw when we retain the entire block. But I think just for modeling purposes, that $5 million a quarter is a pretty good number.

Josh Shanker -- Bank of America -- Analyst

And then just to put a bow on it, just trying to understand in first quarter, what day did the change in [Indecipherable] base in the Global Atlantic transaction? When [Technical Issues] did the transfer occur, on which day?

Steven Andrew Zabel -- Executive Vice President and Chief Financial Officer

Yes. Well, there were two phases of it. So I'll take you back to fourth quarter of last year. we closed -- for GAAP purposes, the effective date was basically halfway through December is when we closed the deal. And so the way to think about that is we pretty much have the full block in our fourth quarter financial results. And then that would have been reflected on Phase one reflected in our first quarter, second quarter results. For Phase 2, that would have been effective really at the end of the first quarter. And so we really closed Phase two in the latter part of the quarter. So second quarter was the first quarter we would have reflected Phase 2. And the way to think about it is that second quarter is pretty much the block we're going to have going forward, just to kind of summarize all that. [Technical Issues]

Operator

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

Mark Hughes -- Truist -- Analyst

Yes, Thank you Good morning. Sorry if I missed this earlier. Do you have any comments on the recoveries in the Unum US group disability line? Any change in behavior at the social security administration around approving disability claims that might be noteworthy?

Michael Q Simonds -- Executive Vice President and Chief Operating Officer

Sure, Mark. It's Mike. I appreciate the question. To the first part of it, recoveries continue to be solid and favorable relative to our expectation. We've built a good deal of expertise into the folks that work with claimants, the claim and book staff, and that's proved to be a really helpful asset for our clients and for us through the period and really rock-solid. The second part of your question, you mentioned SSDI, and it only can move around a little bit. We have seen a little bit of a slowdown. It seems as though the working from home may have created a bit of a backlog. I wouldn't put too much of an emphasis on it at this point because it does move around. Also, we're aware of some pretty significant increases in approved staffing for the staff at SSDI. So we stay close to that inventory. We've got a couple of partners that we use externally that help us keep that inventory moving through. It was a little bit of a pressure point in the quarter, but probably too early to call on trends. [Technical Issues]

Operator

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

Tracy Benguigui -- Barclays -- Analyst

Thank you for taking another question. I just want to make sure I'm thinking about your outlook update correctly, just recognizing that you've had a pretty strong second quarter. Is this more rightsized here? [Speech Overlap]

Richard Paul McKenney -- President and Chief Executive Officer

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

Tracy Benguigui -- Barclays -- Analyst

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

Steven Andrew Zabel -- Executive Vice President and Chief Financial Officer

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

So that's probably the most significant change to our outlook. So we gave a little bit of the second quarter performance back there. And then the other thing is just looking at STD volumes, lead volumes due to the Delta variant. We do think that the group disability loss ratio is going to stay elevated kind of where it is right now probably for the remainder of the year. And therefore, that does dampen our earnings expectation that we would have had in our original guidance just a bit. And that also kind of backs off a little bit of the overperformance in the second quarter. And so those are kind of the headlines on how we're thinking about it. Thank you.

Richard Paul McKenney -- President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Thomas A. H. White -- Senior Vice President Investor Relations

Steven Andrew Zabel -- Executive Vice President and Chief Financial Officer

Richard Paul McKenney -- President and Chief Executive Officer

Timothy Gerald Arnold -- Executive Vice President of Voluntary Benefits and President of Colonial Life

Michael Q Simonds -- Executive Vice President and Chief Operating Officer

Mark P Till -- Executive Vice President and Chief Executive Officer

Ryan Krueger -- KBW -- Analyst

Tom Gallagher -- Evercore -- Analyst

Jimmy Bhullar -- JPMorgan -- Analyst

Humphre Lee -- Dowling and Partners -- Analyst

Tracy Benguigui -- Barclays -- Analyst

Erik Bass -- Autonomous Research -- Analyst

Josh Shanker -- Bank of America -- Analyst

Mark Hughes -- Truist -- Analyst

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