Prepared remarks
Thank you for standing by. My name is Kate, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Unum Group Q2 2026 Earnings Conference Call. I would now like to turn the call over to Matt Royal, Investor Relations. Please go ahead.
Thank you, and good morning. Welcome to Unum Group's Second Quarter 2026 Earnings Call. Please note, today's call may include forward-looking statements, and actual results may differ materially, and we are not obligated to update any of these statements. Please refer to our earnings release and our periodic filings with the SEC for a brief description of factors that could cause actual results to differ from expected results. Yesterday afternoon, we released our second quarter earnings results and financial supplement. Those materials are available on the Investors section of our website. Also, please note, as usual, references made today to corporate sales and premium, including Unum International, are presented on a constant currency basis for improved comparability period to period. Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; and CFO, Steve Zabel. Following the remarks from Rick and Steve, additional members of management will participate in Q&A, including Chris Pyne, who leads our Group Benefits Business; Mark Till, who oversees Unum International; and Steve Jones, who we welcome for his first earnings call as President of Colonial Life. Now let me turn the call over to Rick.
Thank you, Matt. Good morning, everyone, and thank you for joining us. It's good to be back with you just a few weeks after the call to announce our latest transaction in our Closed Block. As we discussed then, the agreement to reinsure an additional $3.8 billion of long-term care reserves represents another meaningful step in our deliberate approach to reducing risk and actively managing the Closed Block. We will provide more detail on that later in the call, but today, our focus is on the second quarter results, first half performance and trending, and outlook of our core employee benefits franchise. It is consistently a franchise that generates attractive returns, delivers free cash flow and creates long-term value for our shareholders. With that as context, let me turn to the second quarter. We delivered a solid second quarter, one that demonstrates the breadth of our diversified employee benefits offerings.
A key tenet of that is continuing to be a consistent partner for employers and their employees as their employee benefits needs continue to evolve. The quarter reflected continued attractive returns, generally stable persistency and favorable performance across several of our core businesses. Starting with the top line, we saw continued underlying premium growth of roughly 5%. Across the board, we saw good persistency, which has been true throughout this year as our customer centricity and connectivity has paid off. Getting to new customers has also been successful. Sales growth has been solid, which was highlighted by U.S. sales in our Unum brands, growing 7.4% in the quarter, bringing year-to-date sales growth to 14%. Across the broader enterprise, our business continues to perform well against this backdrop of solid demand for workplace benefits. Employers continue to look to partners who can help them manage increasingly complex workforce needs and Unum is well positioned given the breadth of our product portfolio, our service capabilities and the investments we have made in digital connectivity and leave management.
Our model is built around disciplined pricing, strong customer relationships and capabilities that support employers and employees at moments that matter. Our investments in connectivity and leave capabilities continue to scale. Roughly half of our Unum U.S. in-force block, excluding our IDI business, is now tied to HR Connect, Total Leave or Broker Connect and premium and fees tied to these capabilities have grown nearly 70% since year-end 2023. We are also seeing clear evidence that employer-facing capabilities are resonating in the market with HR Connect representing more than 20% of second quarter new sales. Similarly, sales which are included in our Total Leave offering more than doubled year-over-year in both group and voluntary benefits. Colonial Life had another very strong quarter with 6% sales growth leading to solid premium growth and attractive returns of nearly 20%. It has been a multiyear journey of building momentum and the business has benefited from disciplined execution.
As a result, in addition to sales growth, we have seen solid persistency and favorable benefits experience, maintaining its important position in the worksite market. Colonial remains a critical part of our ability to reach employers at different sizes with solutions that help protect employees and their families. Looking internationally, premium growth remained positive in both the U.K. and Poland, both north of 5%, yet sales were relatively flat in the U.K. Overall, our growth engine is performing well in a dynamic and competitive environment. From an earnings perspective, this quarter showed variation of performance within our lines of business. We had solid performance across most of our lines, which included a continuation of strong group life performance. At the same time, there were two specific areas of elevated benefit experience that we are actively managing — most notably, paid family and medical leave within the U.S. group disability segment and group income protection in the U.K. Importantly, we understand what is needed to address these areas, and we already have actions underway to do so.
Equally important is that these lines continue to perform very well in aggregate. Total U.S. group disability is generating ROEs in excess of 20% and the international segment as a whole is in the teens. To drill down a little, within U.S. group disability, results were pressured by elevated experience in short-term disability, primarily from the newer paid family and medical leave states. Although we're not happy with some of the results of these markets in the early days, we know that PFML is important in a developing market that is closely connected to our broader leave capabilities. We have made the decision to participate early even as the claim data is developing. It's a natural extension of the investments we have made in helping employers manage absence, disability and mandated leaves. As the experience in the PFML market matures, we will respond, and we have the pricing know-how to incorporate this business into an overall high-return group disability franchise.
The U.K. story is a little bit different. Our U.K. Group business had results that were below our expectations this quarter. While the recent claims experience has been elevated, we have a long history of managing through changing experience cycles. We clearly continue to have strong market positions, maintain deep expertise in the market and are taking targeted pricing and underwriting actions to support attractive returns over time. These two areas are the current focus areas but aren't overshadowing an overall franchise that had very strong performance. As a good portfolio does, we also had business lines that outperformed like our Life business and Colonial Life. That diversification is a meaningful advantage, helping balance performance across the portfolio as market conditions evolve. While the majority of our team has been actively growing our business, we also continue to make meaningful progress in actively managing and reducing the Closed Block.
The recently announced reinsurance transaction represents another important step in addressing our long-term care exposure and materially improving the profile of that business that remains. Following closing later this year, the retained block will be predominantly group long-term care, with a much smaller individual long-term care component. The ongoing business will be characterized by a simpler benefit structure, a footprint that is distributed in a group format and continued natural runoff as employers reassess the role of long-term care coverage within their benefit programs. As a result, the remaining block will look materially different than it was just 18 months ago. Our objective remains to actively manage the risk and volatility of the Closed Block while keeping our focus on growing and strengthening the core franchise. Turning to capital. As we look at our position today and looking through to the closing of the long-term care transaction in a couple of months, we are in a very robust capital position.
Our deployment plans remain unchanged. During the quarter, we returned approximately $275 million through dividends and share repurchases and approximately $750 million year-to-date on our way to $1.3 billion of deployment this year. Our cash-generating franchise creates significant financial flexibility and allows us to be consistent with our deployment philosophy. That is investing in growth, having the ability to act on enhancing M&A opportunities and returning capital to shareholders through dividends and share repurchase. Additionally, over the last several years, our strong core operations have also enabled us to manage and remove LTC risk from the company. Overall, the second quarter reinforces the quality and durability of our diversified business model. We delivered strong results across most of our business lines. This starts with solid growth metrics and customer demand on the top line while maintaining attractive returns through to the bottom line.
We do have areas we can improve, and our teams know how to address them. Ultimately, we are clear-eyed about the opportunity in front of us to grow the company, to protect more individuals and families at times of need. We do so in a disciplined way that is good for our customers and good for our shareholders. And with that, I'll turn the call over to Steve to walk through the results in more detail. Steve?
Great. Thank you, Rick, and good morning, everyone. Second quarter after-tax adjusted operating income per share was $2.16, up 4.9% from prior year, while year-to-date after-tax adjusted operating EPS growth was 7.5%. As Rick noted, we continue to produce attractive returns with consolidated adjusted operating ROE of 15.9% in the quarter and 16% year-to-date, both within our outlook range. Top line trends remain positive, supported by strong sales and persistency in our core businesses. Second quarter core earned premium grew 3.6%, with a 3.7% increase year-to-date. Adjusting for the runoff of the stop loss business and the transactions executed last year, year-to-date core premium growth would have been just over 5%. Looking ahead, we are positioned to achieve our full year expectation of 4% to 7% as the impacts of last year's transactions will not dampen the growth rate in the second half of 2026.
Total U.S. group persistency remained strong at 91.5%, up nearly 2 percentage points from the prior year. So then turning to our quarterly operating results, the Unum U.S. segment produced adjusted operating income of $329.6 million in the second quarter of 2026 compared to $318.2 million in the second quarter of 2025. Results reflected favorable earnings in Group Life and AD&D and supplemental and voluntary, partially offset by pressure in group disability. Group disability reported a second quarter benefit ratio of 65.8% compared to our 62% to 64% expectation. This result included a couple of points of pressure from elevated short-term disability experience, primarily driven by higher claims activity in the newer paid family and medical leave markets. While traditional STD experience was also elevated, PFML remained the primary driver of the quarter's pressure with LTD recoveries remaining consistent with our expectation.
We continue to view PFML as a developing market that is closely connected to our broader leave capabilities. Importantly, our PFML pricing structure generally does not include multiyear rate guarantees, allowing us to incorporate emerging experience in new pricing for both new business and renewals. We have begun implementing double-digit rate adjustments for new business and at renewal for existing clients. And we expect those actions to build into results over time. As a result, until new rates are fully embedded in the block, we expect to see continued elevation of the benefit ratio more in line with the experience in the past two quarters driven by PFML. Importantly, underlying trends in LTD remain stable, driving confidence in our longer-term view of the benefit ratio over time. Results for Unum U.S. Group Life and AD&D were favorable. Adjusted operating income was $93.2 million for the second quarter of 2026 compared to $70.2 million in the prior year quarter.
The benefit ratio was 66% compared to 69.7% in the second quarter of 2025, driven by continued lower incidence. This quarter's strong performance reflects the favorable mortality trends we've experienced recently consistent with the pattern observed over the last several quarters, which we do expect to continue. Taken together, total group benefits generated a benefit ratio of 65.9% compared to 65.2% in the second quarter of 2025, as favorable group life mortality balanced increased PFML pressure in group disability. This translates to combined ROE exceeding 25%, a very strong result. Adjusted operating earnings for the Unum U.S. supplemental and voluntary lines were $133.3 million in the second quarter, an increase from $123.2 million in the second quarter of 2025. Benefit ratio was 47.4%, favorable to our 48% to 50% outlook range as the segment benefited from strong multi-life individual disability claims experience.
Turning to premium and sales. Unum U.S. premium grew 3.3% with support from strong sales and persistency. Excluding the impact from the runoff of the stop loss business and our IDI transaction last year, Unum U.S. premium grew just over 5% year-over-year. Unum U.S. quarterly sales were $281.8 million compared to $262.4 million in the second quarter of 2025, representing growth of 7.4%. Year-to-date Unum U.S. sales were up 14.3%, reflecting continued momentum across several product lines. Moving to Unum International. Adjusted operating income for the second quarter was $24.3 million compared to $41.6 million in the second quarter of 2025 and below our outlook. The segment's benefit ratio was 78.4% compared to 72.4% in the prior year quarter, driven primarily by unfavorable experience in the U.K. Adjusted operating income for Unum U.K. business was GBP 15.3 million in the second quarter compared to GBP 29.4 million in the second quarter of 2025.
The U.K. benefit ratio was 82.2% compared to 75% a year ago. Premium growth remained strong with U.K. premium growing 5.2% and Poland premium up 8.8%. The earnings pressure remains concentrated in the U.K. group income protection business, where elevated average claim values continued during the quarter. Looking ahead, we expect pressure to continue in the U.K. segment, but at a lower level in the second half of the year from current elevated levels, supported by the pricing and underwriting actions we are taking. Given the impact of U.K. results on our international tax profile, we currently expect our effective tax rate to be approximately 22% for the remainder of 2026. So then moving to Colonial Life. The segment produced a record earnings quarter. Adjusted operating income for this segment was $131.4 million compared to $117.4 million in the second quarter of 2025. Benefit ratio of 46.7% was favorable compared to 48.3% in the year-ago period and was better than our expected range of 48% to 50%.
Premium income was $477.4 million compared to $462.1 million in the second quarter of 2025, which was driven by prior period sales. Sales in the second quarter were $134.1 million, which was up 6% from the prior year. Colonial Life produced strong returns, including adjusted operating ROE of 19.4%. We are continuing to see strong adoption of Agent Assist, our proprietary agent productivity platform and digital workspace. Over 70% of our more than 12,000 agents utilize Agent Assist to help build client relationships and enhance sales. Colonial Life's results demonstrated disciplined operating execution, resulting in overall strong sales, persistency, benefits experience and returns. I'll now provide an update on the Closed Block. As Rick mentioned, the most significant development since our first quarter call was the announcement of our agreement to reinsure an additional $3.8 billion of long-term care statutory reserves out of Fairwind.
As we described on the call earlier this month, the transaction represents approximately 26% of our total LTC block and 52% of our individual long-term care business, removing 100% of the remaining individual long-term care reserves held in Fairwind. The process to close is continuing as expected with completion expected in the fourth quarter. Following the transaction, Fairwind retains approximately $7.1 billion of group long-term care statutory reserves, supported by total protections of approximately $1.9 billion. The transaction materially improves the risk profile of what we retain. Across key Fairwind assumptions, sensitivities decreased by 28% to 42%. The retained block is now predominantly group long-term care which carries a different risk profile and generally more basic benefits than individual long-term care. It is also important to note that following closing, the upfront cost of the transaction will be amortized and reported within the Closed Block GAAP results, consistent with prior transactions.
In addition, the transaction is expected to generate increasing amounts of noncontemporaneous reinsurance impacts, which represents the ongoing recognition of earnings associated with reinsurance transactions completed in prior periods rather than current period operating performance. The earnings impact from both the amortization of upfront transaction costs and noncontemporaneous reinsurance impacts are expected to be approximately $30 million to $40 million per quarter. Combined with our prior Closed Block reinsurance transactions, the total impact from these items is expected to be approximately $90 million to $100 million per quarter initially and will gradually decline over time. Excluding these items, we expect Closed Block GAAP earnings to continue tracking to our expectations with some quarter-to-quarter volatility as we execute actions within the block. More importantly, the underlying exposure is well protected from a capital perspective, supported by substantial reserve margins and protection within Fairwind and Provident Life.
Outside of long-term care, we also expect impacts post-closing on the ongoing business, which includes loss of net investment income on transferred holding company cash and the addition of temporary debt service as a result of our temporary financing for future tax benefits, which are associated with the transaction. Turning back to quarterly performance. Closed Block earnings remained volatile, largely reflecting the impact of employers choosing to terminate coverage leading to group LTC case terminations. In the second quarter, approximately 3% of group long-term care cases closed, reducing our long-term exposure in the Closed Block by more than 20,000 lives. Since the end of 2025, around 10% of group long-term care cases have closed, reducing long-term exposure in the Closed Block by over 50,000 lives. Outside of these impacts, underlying experience trends remained broadly in line with expectations.
The net premium ratio increased 20 basis points sequentially to 97.8%, with most of the increase driven by group LTC case terminations. Other key indicators we monitor for the health of the block remain solid. Following the close of the Fortitude Re transaction, we expect Fairwind protection to be approximately $1.9 billion. We also continue to make progress on our premium rate increase program with the current program achievement rate at approximately 15%. Lastly, the alternative investment portfolio that primarily supports LTC generated an annualized yield of 6.1% in the quarter, below our long-term expectation of 8% to 10%. I'll end by covering our robust capital position. Holding company liquidity stood at $1.5 billion, and traditional RBC at 480%, both above our long-term targets and consistent with our expectations. We remain on track to end the year within our full year outlook of 400% to 425% RBC and $1.5 billion to $2 billion of holding company liquidity.
Our robust capital position is supported by statutory after-tax operating income of $331 million in the second quarter, positioning us for our full year expectation of $1.2 billion to $1.4 billion of total statutory earnings when adjusting for the expected impact of our most recent reinsurance transaction. As we prepare for the anticipated closing of the Fortitude Re transaction, we have begun positioning capital to support the transaction in the third quarter. Holding company liquidity will decline in the third quarter as we use holdco cash to fund this temporary positioning. Accordingly, we expect to retain statutory earnings at Unum America rather than upstream in dividends, which may temporarily elevate our RBC ratio at the end of the third quarter. Our year-end capital expectations do remain unchanged, and we continue to expect to finish the year within our stated ranges for both RBC and holding company liquidity.
This cash generation model paired with our strong capital position enables our durable approach to deploying capital to our shareholders while maintaining flexibility to support growth, manage risk and execute strategic transactions. During the second quarter, we repurchased approximately $200 million of stock. Paired with our common stock dividend, capital returned to shareholders was approximately $275 million in the quarter. This brings our year-to-date deployment to approximately $750 million, and we remain committed to our plans deploying approximately $1.3 billion back to shareholders by the end of the year, an amount that represents the entirety of our expected free cash flow generation during the year. So overall, the second quarter demonstrates the strength of our diversified business model. We delivered strong results in Colonial Life, group life and AD&D and supplemental and voluntary, maintained expense discipline and attractive returns and continue to make meaningful progress in actively managing the Closed Block.
At the same time, PFML and U.K. long-term disability experience remain areas of focus as we move through the remainder of the year. While results reflected offsetting performance dynamics across the business, in aggregate, they delivered an outcome in line with our expectations. As a result, despite the expectation for pressure in those two lines in the second half of 2026, we are reaffirming our full year outlook for after-tax adjusted operating income per share of $8.60 to $8.90. I will now turn it back to Rick for his closing comments before we move to your questions.
Great. Thank you, Steve. As you heard today, the second quarter demonstrates the strength and resilience of our diversified business model. Overall, we remain confident in the quality of our franchise, the durability of our capital generation and our ability to create long-term value for our customers, employees and shareholders. And with that, when we are ready to take your questions, I'll turn it over to Kate, our operator.
Questions and answers
Your first question comes from the line of Suneet Kamath with Jefferies.
Just wanted to start with paid family medical. I think you sized the impact at like 2 points on the benefit ratio. As we think about the price actions that you're talking about, are there any limitations on how quickly you can raise pricing? Or how would you expect that price increase to sort of feather in over the next few quarters?
Yes. Great. This is Steve, and I'll kind of cover off the math on just the benefit ratio and then kick it over to Chris to talk to us about the pricing environment and what that looks like putting price into the market. So yes, the loss ratio was higher than expected. In the comments we did talk about experience generating about 2% of the elevation in the loss ratio. Most of that was PFML. I would size that up as about 60% to 70% of that was driven by PFML. I would note, importantly, if we shift a little bit to our long-term disability, we were right on top of our expectations for recovery. Overall, that experience was within the range of our expectations in the quarter, and it really performed well. But we are going to see some pressure in PFML. And so we've already taken steps in the market. And really how we've sized it out, it's going to take double-digit pricing actions for PFML. And maybe I'll get to Chris just to talk about the receptivity and what the market looks like.
Yes. Thanks, Steve. And Suneet, maybe just a little bit more about the environment. First off, PFML is really core to what our customers depend on us for. It's a big part of the leave management, short-term disability and overall benefits package that we can really help them with. A lot of these new states put burden on the HR teams to make sure they're compliant and also giving the employees what they need to operate their businesses. So of course, we're in the middle of it. As Steve said, we've been out with rate increases and what's kind of important to remember about PFML and short-term disability is high-frequency type of products. So we get a lot of good data at the customer level, and we're able to share that early and often. And we've been doing that. Yes, we do have rate guarantees for generally a year. So as things come up for renewal, we're able to go and again, communicate with clients early about what claims experience looks like, what the needed increase will be.
January 1, 2027 is a big moment for us to put a lot of action into market. So we're on top of that. And then the other element of the environment that has changed over time is we've had some really nice profit in the disability lines, and we've kind of resettled those rates on a go-forward basis for customers. So it's a little bit more of a balanced view than before where LTD was in a really good spot, and we were maybe a little slower to raise rates on PFML or STD given that dynamic. That's shifted a bit.
Got it. Okay. And then maybe on group life, it looks like the loss ratio there has been below 70% for, I don't know, 10, 11 quarters now. So maybe unpack what you're seeing there? And I guess, how quickly will that strong performance sort of build back into pricing?
Yes, this is Steve. I'll kind of hit on just the performance we're seeing. We've been extremely happy with the performance, and it's really all been driven by lower incidence than what we would have anticipated. I know coming into the year, we set an outlook for the loss ratio that was in that 68% to 72% range. We clearly performed better than that for the year. As we look forward, we're thinking that the second quarter is probably more indicative of what we'll see for the back half of the year. We had a 66% benefit ratio in the second quarter. And we think that's definitely sustainable. So definitely happy with the margins. We really don't think we're going to have to give that away with price. Just think about the bundled experience and the bundled price of all of our products and services — probably not as much price sensitivity there, and we think we're in the range and should be able to maintain those margins through the end of the year.
Your next question comes from the line of Wes Carmichael with Wells Fargo.
Just a question on long-term disability. How would you describe, I guess, pace adequacy there? And I think there were some concessions last year on price maybe. But would you expect from here, I guess I'm just trying to understand, when we think about excluding PFML and STD, what's the direction of travel of the benefit ratio in LTD — like is there more price concession to come?
Yes. Thanks, Wes, it's Chris. So over the past couple of years, it has been a very good story for long-term disability, and we're thrilled about that. We are very good about locking customers through how the performance of their particular case or broader blocks of business have gone and then we try and set the right pricing level for the future. That has included being able to reset rates in some cases, a little bit lower, depending on the experience and performance of either a case-level or block-level book of business. We feel really good about where it is now. We also feel good that our disability business, long-term disability in particular, is tied to a much bigger strategic package. Whether we're solving the needs for that customer, inclusive of financial protection in the long-term disability side and/or tying in technical investments with platforms, it really comes together in a robust way. So LTD is a really meaningful part. We have tremendous knowledge and strength in that business. We're super confident that the performance is highly sustainable, really pleased with how we've kind of looked at rates over the past few years and feel great going forward.
Got it. And just shifting gears, but on the group long-term care termination, I think there's an additional 3% this quarter. Now that you've seen a couple of quarters, just hoping you could share updated thoughts on how meaningful additional terminations could be from here?
Yes. Let me step back for that, Wes, and just talk about the long-term care actions that we've taken. You can even go back a couple of years and talk about many years on the pricing side. So we've continued to increase prices. And these all come together, I think, in what you're seeing in the first quarter and then even in the business as we've gone through risk transfer, so we've taken out some of our individual long-term care, particularly all of that that we had in the Fairwind entity. So we see more on the group long-term care side. The big move last year was actually we told employers that had a group long-term care policy that we were not going to allow new employees. So that, in combination with what we've seen with rate increases, leads us to a spot where an employer has to evaluate: do they want to have different people in their organization with different benefit packages? And so we've seen some terminations. Steve, maybe you can unpack that a little bit, but that's what we started seeing. This is a pretty new phenomenon that we've seen because of the actions that we announced last fall.
Yes. No, that's great. And yes, you're right. We had about 3% of cases, about 20,000 lives terminated in the second quarter. And those are just ongoing discussions. That takes us to about 10% of the cases and 50,000 insured lives from the beginning of 2026. It's really hard to predict going forward what that might look like. What I would say is we do have kind of renewal effective dates throughout the year. And so there will continue to be employers making decisions about their next enrollment and renewal period. And so there definitely is the probability that we'll see continued terminations of cases, but it's something that we're not able to predict, and so we'll just have to monitor that as we go forward. But we're always in ongoing discussions on just as Rick said, just weighing what a company's full benefit package looks like. And like any decision maker, they're always going to be thinking about where they want to spend their money for the benefit package for their employees.
Your next question comes from the line of Alex Scott with Barclays.
I first wanted to ask about Fairwind and just been thinking about the amount of protection you have there. And I think relative to reserves, it's seemingly quite high. But I know there's RBC requirements. And I know the reserve also potentially builds over time for group LTC. So I just wanted to get a feel from you all what's driving such a big buffer there? And how will that trend over time?
Yes. It's Steve, and I can take that. I'll go back to some of the comments that I made when we announced the deal and kind of talk about the post-deal profile of what Fairwind would look like. If I compare that to before the transaction, we had a nice combination in Fairwind of excess capital over a 350% target and margin within the reserve. And that kind of made up the $2 billion-plus protections that we have there. And think about that as the excess capital is something that's a little bit more fungible that we can use across the organization. The reserve margin just kind of is what it is. We have locked in reserve calculations there, and we have our view of the best estimate. If you go to post-transaction, pretty much all those protections are in the margin of the reserves. So that makes you feel really good that we're well reserved for that group LTC business. But it does make it less fungible.
And so our intent, obviously, would be to keep that business in Fairwind, be able to manage the business with those reserve margins. Over time, those reserve margins will play out if our expected experience plays out and will be released just into the capital of Fairwind and then decide what to do with it over time. But that will be more over the lifetime of the block. But I just step back, and we feel really good about the margins that we have there. We feel really good about the sensitivities. I mentioned that in my comments about just how we really reduced the sensitivities of that block post-transaction close. And so I just think about it as very well protected. Short term, not a lot of flexibility to do what we might want to do with those margins because it's built into the reserves themselves. But over time, we will have more flexibility to do what we want with the excess capital there.
Got it. That's helpful. Second question I had is just if you could talk about your expectations for sales as we head towards the more important end-of-year sales process. It sounds like you guys have a fair amount of repricing between paid family medical leave and maybe on the side with group life and areas of disability. So with all of that movement, do you expect to see any differences in the way that the sales process will go?
Yes. So maybe we'll talk about that on multiple lines because I think it's an important topic about how we feel about our proposition that we have that we're taking to the market more broadly. We'll start in the U.S., but I definitely don't want to miss the opportunity to hit on Colonial Life and what we have there. You mentioned, Alex, the pricing, yes, we're going to work our way through that. It's going to weave its way into it. But these sales processes are much bigger than just the more near-term things. And Chris, maybe you can highlight one, how we're doing on sales today, but also where do we see it going over the course of the year?
Yes. Thanks. It's kind of ironic when you're in the middle of something important like leave management, which has a lot of parts — just one small part of it. Your relevance to both the distributor, the broker consultant and to a customer just gets elevated. And we've been living that for several years. So you think about the strategic investments we've made in leave management, you think about the strategic investments we've made in human capital management platforms and connectivity to those platforms. What we've done to promote capabilities to customers who will benefit from them to make the sales process more efficient for our broker consultants, that puts us in a really strong spot. So when you start the year, essentially, we're up about 14% year-over-year. That is an all-in Unum U.S. number. That feels really good. And in the quarter, we're up right in the range where we'd expect — that feels strong — knowing again that we are really solving problems that not every carrier can solve.
That kind of changes the dynamic. There's a lot of trust there. We handle renewal programs like we are with and we've got a lot of experience with this in a very partnering, mature way. We leverage data to explain where things are and why they're happening. We are — as we've talked about with LTD where we have positive experience — we've made adjustments in the past that gives us the credibility to go and raise rates as appropriate in the future. So I think to Rick's point, it's a very dynamic broad, long-term effort. And I think the first half of the year results show that we're able to win business as appropriate, and we're excited about the second half of the year.
Good, and thanks. Steve Jones, in your first call, maybe talk about Colonial Life and what we see on the sales front there.
Great. Thanks, Rick, and thanks, Alex. So first of all, exciting time to step into this role as the Colonial Life business has a lot of positive momentum right now and a lot of exciting things happening. I've spent much of my first 60 days out in the field talking to our agents, talking to our broker partners around where we're doing well and where we still see opportunity to grow. What's clear to me is two things. One is the distribution system still has a lot of room for growth, a lot of upside, both in scale of agents and geographically, but also through investments in agent productivity. And then secondly, our value proposition still resonates in the market broadly and that value proposition for Colonial Life is around benefits education, enrollment support, technology support, coupled with voluntary benefits. And so we feel like that strategy is very solid. Looking forward, I see the opportunity with this business to continue leveraging technology to drive the growth and productivity of the salesforce.
We're making a lot of investments in digital enrollment experiences and AI tools aimed at lead generation and training and other things. And so there's a lot of opportunity to continue optimizing this business and growing. Relative to sales results in the quarter, we feel good about the 6% sales growth we saw and think what's especially encouraging is we saw growth coming from new clients as well as our existing book. So we had 10% growth in the quarter from new clients coming through the door. That's certainly a positive sign relative to the value proposition. We're also seeing growth across different site segments in the business. For example, our clients with more than 500 employees in the quarter grew 15%. So we feel really great about not just the overall top line growth, but the balance of those results. And then lastly, on the agency side, we continue to recruit at a high clip. It's important for Colonial Life.
We had a banner recruiting year last year, really returning to pre-pandemic levels. And we're tracking 6% ahead of that number for this year. So continue to feel good about just the growth of the agency model in general. So a lot of positive indicators there for the second half of the year.
Thanks, Steve. Mark, do you want to take us to the international business, the U.K. and Poland?
Yes. Well, let's start with the U.K. We come off a very strong momentum over the last few years. The latest data that came out said that for three of the last four years, we've been the largest writer of business including last year. And cumulatively over that four-year period, we were the biggest writer of business with our market share growing. And that's definitely driven by the strength of the proposition of the business. There's an independent survey conducted by NMG for all brokers and in the latest field study at the start of the year it shows that Unum has got the highest quality proposition in the market. So for those reasons, we've had a strong incoming period. This year has been a little bit slower for us. The market is still acting rationally. But we've chosen to make some pricing decisions on the back of our group income protection business that makes us just a little bit harder on the new business front.
I think in quarter two, sales were down about 14%. But if you look across the first half as a whole, that's closer to 4% down. So a little bit of that was timing between periods. In our Polish business, actually, we've had really strong growth in our individual business. That's growing very nicely as we continue to add LPAs — that's our life planning advisers. That's a very profitable business. And our group business, again, we've chosen to be disciplined around pricing in that business. So we've elected a slower sales trajectory there which we see much stronger earnings out of that business. Overall, we're very excited about the growth potential. We recognize the pricing environment, but we can do both. And I think as Chris said, which is really important, we bring more to these customers than just our product pricing. It's also the know-how and capability to help to manage through. PFML is a good example of that. This is new for our customers as well. And so us being there to help them through this process is a good example of where we can be helpful even after we have to take some price.
Your next question comes from the line of Tom Gallagher with Evercore ISI.
Just had a few PFML questions. So what portion of your book has multiyear rate guarantees versus the one-year that can be repriced? Can you just give us the percentage split there?
Yes. Tom, it's Chris. I don't know that I have an exact percentage, but in terms of the percentage today that's subject to multiyear guarantees, it is a very small part of the book. The short answer to the question is a small percentage. In the early days of these products, we wanted to have flexibility in pricing to be responsive to experience, because PFML and short-term disability are high-frequency products and credible quickly.
Okay. That's good to know. And just a few other quick ones on PFML. When you think about the claims you're getting, would you say — can you at least broadly quantify what do you think are clearly short-term claims for things like paternity leave versus some other claims that could turn into LTD claims? That's one question. And the other one is just related to the double-digit rate increases that you're citing, would you expect that any of that is going to lead to loss of business? Or do you think that part of the market is hard enough and peers will be looking for similar rate increases that you'll be able to retain a vast majority of the business you're putting rates through on?
Yes, Tom, good questions. Starting with the profile of these claims: essentially, these are heavily short-term only claims. This still falls into things along the lines of general surgery, accident, maternity or bonding. We do break out whether they're more family-related — where it's something that's not actually happening to the employee but that's impacting their ability to go to work — or their own medical situation. We had a very good handle on which are short-term medical and which are short-term family. They do perform in a way that largely has caps on how long the benefits will last. Every severe claim can start in the short term — for example, a cancer or cardiovascular event — but we're very comfortable with that flow-through to what normally will come to LTD and where we've got a tremendous amount of experience doing that. You can expect us to continue to manage the PFML part and the STD part appropriately.
We've got great teams focused on that every day. In terms of rate increases and potential persistency impact, one of the elements of running a group insurance block of business is that you've got to be willing to communicate well with customers and explain the expected performance going forward based on what we know or what we've seen from an experience standpoint. Yes, you always take a chance when you elevate rates and you work that through. We have a great history in terms of knowing what the impact to persistency will be. We'll balance that like we always have. And again, when you're solving bigger issues, like being an outsourced leave management partner to these customers — solving compliance, employer experience and employee experience — they are generally willing to pay a fair price based on experience. We have a lot of good history and confidence that we can get that done.
Your next question comes from the line of Ryan Krueger with KBW.
I had a question on the U.K. I know you talked about maybe a little bit better performance in the second half of the year than the recent quarter. Can you give us any quantification of what you'd expect as a kind of run-rate earnings at this point for the U.K. business and then just how to think about the pace of remediation and how long that could take?
Steve, do you want to take that?
Yes. Ryan, it's Steve. I'll just cover more to the point like what the experience we're seeing in the U.K. is, and then maybe Mark can talk about pricing dynamics in the market. Clearly, the issue we're seeing with the earnings challenges in the U.K. is related to group income protection business. It's not a broader issue with the U.K. franchise. What we've seen over the last several quarters is the claims experience has been driven mostly by higher average claim values. And I talked about this a little bit in the past when we talk about severity of these types of claims. It's really driven by things like occupation, industry income levels, and you just do the math and calculate what our expected ultimate claim is going to be for that situation. What we're seeing in the U.K. right now is a higher portion of claims coming from higher-income employees, and so that's increased the overall average benefit cost of what we've seen over there.
So it's something that we can isolate and look at and then look at those new and existing customers and take appropriate actions. A lot of that is going to take place during the year and be effective next year. So how we're thinking about the back half of this year just from an earnings perspective: we think it's going to be a little bit better for the U.K. There are some other actions that we've been able to take. But as far as larger price actions going into next year, it's going to take a little bit for that to bake in. But Mark, maybe just talk a little bit about the pricing environment and our ability to execute on our pricing strategy.
Thanks, Steve. I think the core thing to say is the U.K. market remains a competitive and rational environment. There are half a dozen large competitors, of which Unum is one. We are #3 by size gaining ground and the market operates rationally when it comes to pricing, although we do notice that with our dominant position in group income protection, it can mean we see and therefore respond to claim changes earlier than the market generally. There's some sign that our competitors are also beginning to face into some of the higher claims experience being seen in the product, and that will be helpful over time. As Steve said, it's important to say that claims experience is linked just to group income protection products. We're actually seeing positive claims trends in our other product lines. We view this group income protection challenge to be consistent with cycles we've seen before. The claims experience adjusts and pricing then needs to adjust to reflect that.
In recent years, that claims experience was lower and prices were falling. That claims pressure is now rising and pricing is following. However, given that two- to three-year rate guarantee periods are typical in the U.K. market, it means that when rates were falling we benefited, but when rates need to rise, it takes a little while to see the experience fully reflected in the pricing. What I would say is that in the meantime, we're very disciplined in our pricing actions. We adjusted new business pricing and we're phasing in our new prices. The renewals, we've taken on notable actions, some of which are visible in the H1 results and more will come through in H2. So overall, I think the real positive about the long-term trends in the U.K. is driven by our competitive position and our experience in managing these insurance cycles.
And then just one more on group disability in the U.S. You've talked about 65% as the long-term expectation for the benefit ratio. And I know you're seeing some short-term pressures on it, but you're at that 65% now. Is it still your view that 65% is the right sustainable level longer term that you can maintain?
Yes, Ryan. It's Steve. The short answer is yes, but let me give you a little bit of math to get there and how that's going to play out over the next few years. When we were coming into the year, we set our expectation in that 62% to 64% range. We had anticipated needing to put some price in the market. We knew that coming into the year, loss ratios were going to be about 1% higher this year and probably 1% higher next year just because of our pricing strategy, and then we thought we'd end up being around that 65% and be competitively able to hold those margins. So that was our going view. Obviously, what we see now is about 2 percentage points in the pressure that we didn't anticipate. We're seeing that play out, and we think that's going to play out for the remainder of the year. As we get into next year, there are a couple of dynamics: we'll be increasing prices on PFML and those will take effect mostly going into next year. For LTD, we might also be making some price adjustments. When it evens out on a multiyear view, yes, we still think 65% is the right number and we will price accordingly using that as our target. A couple of offsetting dynamics, but that is still the destination that we feel good about.
Your next question comes from the line of Tracy Benguigui with Wolfe Research.
You're now active in 13 PFML states. Given the elevated incidents you're seeing, has that changed your appetite or timeline for expanding into additional PFML states?
Yes, Tracy, it's Chris. Good question. We are active. Where private plans are appropriate, we participate, and we are also managing PFML in states even where they don't accept private plans. We're still part of helping our employer customers and brokers solve for leave management. So our appetite for being a clear leader in the leave business is still enormous. We think it's critically important. We've invested a tremendous amount. We get great receptivity from brokers and customers and consultants relative to helping with this important element of managing their workforce. Leave is one of those things that is very important to the employee population. In terms of attracting and retaining quality people, you've got to have a strong leave program. There's a compliance element relative to multistate employers that gets complicated. They need help there. They want to be able to offer robust income replacement where it's deserved, and they want to make sure somebody is managing that carefully from a time-attendance perspective.
We are central to all that and we're continuing to make investments. As new states come on, we look at those states carefully. We know more from experience, but each state is a little different. So we have to pay attention and make sure we're educating our broker-consultant community as well as our customers, and we feel like we're in a perfect position to do that.
Okay. Since you announced your individual LTC deal, I'm getting a number of questions from investors on the likelihood of doing a group LTC deal and the merits of group versus individual. I understand there's no real precedent for group LTC, so my questions are more theoretical. Are bid-ask spreads wider there since you think it's less risky? Or is the preference to do individual LTC deals rather than group more about wanting to see how your in-force management performs through early 2026 before seeing that upside to a reinsurer? Also, it's good to see the recent group LTC case terminations.
Yes. Let me back up a little bit, Tracy. I think you highlight some interesting dynamics. When you go back and look at what we've been able to do and how we've been able to do two transactions now in that area, it was about teams coming together — our asset management folks as well as biometric reinsurers. That was really positive on the individual long-term care side. There are different dynamics on the group side, and you highlighted some of them. These are still discussions that we will have with those same kind of counterparties. Think of asset managers: they'll like the fact that group policies are a little bit younger and will last longer. And the biometrics counterparties will make judgments around morbidity and longevity. You also highlighted that there are new dynamics happening in our block of business given the changes we've made — when we think about continuing to go forward, you have to take into account that we've seen 10% of this block lapse which if we had done a GLTC a couple of years ago, we wouldn't have experienced that.
So there are new dynamics happening in the block. We have taken that into account as we talk to different counterparties out there. The markets are still active and discussions are ongoing. Ultimately, you think about what our goal is: to remove this risk from our balance sheet, whether it comes organically, like we're seeing on the group long-term care side at the moment, or through reinsurance. Those are both part of our objectives. So this is something we're working on, but we have to be thoughtful about what's happening in our current book of business and what's happening in the marketplace today.
But what about the part of my question about the bid-ask spread?
Yes. It's hard to generalize. On the investment side, there's appetite for the assets supporting the block. That part is straightforward. The real question is the bid-ask with biometric reinsurers and that depends on how we parse the block. It's not a single bid-ask for the entire block; it's how each tranche looks to a particular counterparty. We would carve the block into pieces that match counterparties' appetites. So I wouldn't want to speculate too much on an aggregate bid-ask. We're happy to have completed the two deals we did, and we'll continue to evaluate what tranches make sense for different counterparties over time.
Your next question comes from the line of Joel Hurwitz with Dowling.
I have one on expenses. So Steve, the past couple of calls you've talked about expecting the expense ratio to be flat to maybe down a little, but expenses in the quarter, particularly in the U.S. and U.K., came down quite a bit. Anything unusual in the quarter? Or are there some additional expense levers that you're pulling that could support a lower expense ratio for the year?
Joel, it's Steve. I'll just take you back a few years and the journey we've been on when it comes to expense management and the drop between investing into our business and driving productivity. We have invested quite a bit in the business over time in our people as well as in our technology. That has driven our operating expense ratio up a bit historically. We did think coming into the year we were at an inflection point where we should see that plateau and start coming down over time. It should come down because a lot of the technology we've invested in will help drive productivity within the organization and help us grow expenses at a slower rate than the rate at which we're growing the company. And we're just starting to see that take effect. I would say there's no specific program or targeted area; it's just good hygiene, running a good company and really taking advantage of the investments we've made to drive productivity across the entire organization. We would expect that to continue, albeit at a moderate rate, and we are pretty happy with what we've seen so far this year as far as being able to drive that mindset within the organization.
Got it. That makes sense. And then just one on Colonial. So the second straight quarter for record earnings there, the benefit ratio again below the guidance range. Can you just unpack the experience trends that you saw this quarter? And is this lower benefit ratio sustainable?
Yes. Colonial is actually a lot of different products, and what we usually see over time is just because you've got variances in experience across those products, you usually end up in a range that's pretty consistent with expectations. Sometimes you'll see them all perform a little bit unfavorably or a little bit favorably and you'll see variations from our expected range. What we've seen this year though is just really across the board, pretty good experience. As we look forward to the remainder of the year, we do think there is a chance that that will continue. We're not saying we're going to be outside of the range we gave for benefit ratios, but we may be at the lower end of that range as the year plays out. And it is one of the things we think about when we think about the full outlook and being comfortable with that outlook for the full year.
Your next question comes from the line of Mark Hughes with Truist.
How do you think about the claims pattern in the paid family medical leave area seeing when the new states come online, there's probably a burst of activity. Then that evens out over time. As long as those don't turn into long-term claims and that to a degree corrects itself. How should we think about that pattern?
Yes, Mark, it's Chris. I do think you've hit on something that we have seen relative to what is described as pent-up demand. Each state is different. Awareness of the benefits depends on the state and the public rollout of the mandate, so that can impact the initial burst. You're right, it does tend to settle a bit, but we have seen some level of maturing activity in older states. We're paying attention to both new states as they come on and the older states and we're communicating with our customers to let them know there's an element of awareness that evolves. Ultimately that will be baked into the experience and the overall cost. The good news is in terms of flow to LTD, we see very normal patterns there — nothing abnormal. These are highly short-term paid family medical events measured in weeks away from work, and that's where we stand right now.
And then how do you protect yourself with new states coming on so you don't face another burst of higher claims?
Exactly right. We learn with each state. We have a growing database of information on the nuances of PFML. Each state has nuances, so when a new state comes on we compare and contrast to what we've learned from prior states. We'll have a more precise pricing approach going forward, but we'll also watch the emerging experience. It matures over time for us as well.
Your next question comes from the line of Pablo Singzon with JPMorgan.
So first question on group life: I was wondering what the fundamental drivers of the better experience are there. You mentioned lower incidence that's been running for some time already. Any reason or theory why you're seeing a favorable break from the long-term trend?
Yes. It's as simple as that — just lower counts. These are policies that have pretty low face amounts so we don't usually see severity or size of claims be a major driver of margin variability; it usually comes down to the number of claims we receive. If you look across the industry, we've seen lower mortality for a bit, and we're experiencing that trend in our books. So I feel great about the margins we've experienced so far this year and we'll monitor that for the back half of the year.
Okay. And then secondly, just a quick follow-up on Tom's question about STD transitioning into LTD claims. PFML does not cover LTD anyway, but I was wondering how much overlap you have between LTD plans and the insurance to cover under PFML, right? Or are those risks effectively separate with limited overlap?
Pablo, if I got your question right: we sell PFML, short-term disability and leave management as a package with LTD. They are sequential. PFML and STD are generally short duration, measured in weeks and months. LTD is more of the catastrophic cover that picks up for the small percentage of cases that are severe and will persist into years. We have a tremendous amount of experience with the flow from high-frequency, shorter-duration claims like PFML through the system and then picking up the truly severe cases for LTD.
And to add, Pablo, we typically don't sell PFML standalone; it's part of a package and managed together with STD and LTD.
Your next question comes from the line of Mark Ward with UBS.
Expanding on that last question: the package deal — how do you weigh pricing pressure in PFML against the rest of the package, given the stronger LTD returns? Does that dynamic change persistency, and how do you think about it going forward?
Mike, it's Chris. We've alluded to the dynamic that was in place. Historically, strong LTD results provided some flexibility in dealing with pricing in the shorter-duration lines. We've been resetting LTD to more normalized returns, which changes the dynamic. We now have a more balanced conversation with customers: we're pleased with LTD, but it doesn't provide extra margin to absorb PFML, so we have to be more disciplined about pricing across the package. Customers want price stability and clarity on experience, and we're having those conversations over time. PFML and STD are higher-frequency, so we stay in close contact with customers and brokers and update pricing as experience evolves.
All right. And then you guys had some strategic action costs in the quarter. Could you expand on that? Was that all just long-term care deal related or was there other stuff?
Yes, Mike. The $31 million reported as strategic actions, which we excluded from adjusted operating earnings in the quarter, was made up of two parts. About $18 million related to some real estate strategy changes that impacted the valuation of some of our home office real estate. The remainder were employee-related costs. We're constantly evaluating our operating model and how best to deliver for customers. We made some changes in that operating model and incurred some employee-related costs, so that was the remainder of the $31 million. It was a onetime set of items and reported below the line.
Thank you, Kate, and I want to thank everybody for joining us today and your continued engagement with Unum. We look forward to upcoming opportunities to connect and talk more about this and the future. That concludes our call for today. Thank you very much.
Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.