普登 (UNM) 2011 Q2 法說會逐字稿

Good day, and welcome to the Unum Group second-quarter 2011 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Senior Vice President of Investor Relations, Mr. Tom White.

Good morning, everyone, and welcome to the second-quarter 2011 analyst and investor call for Unum Group. Our remarks this morning 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, 2010, and in our subsequently filed Form 10-Q. Our SEC filings can be found in the Investor section of our website at www.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. The presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on our website also in the Investors section.

Participating in this morning's conference call are Tom Watjen, President and CEO and Rick McKenney, Executive Vice President and CFO, and also our Business Segment Presidents Kevin McCarthy for Unum US, Randy Horn for Colonial Life, and Jack McGarry for Unum UK. And now I'll turn the call over to Tom Watjen.

Thank you, Tom, and good morning. The second quarter was another good quarter for Unum. Before I turn things back over to Rick and Tom to cover more extensive remarks, let me touch on a few highlights I would ask you to take away from the quarter.

First, driven by slightly higher operating earnings in our core operating segments and a lower share count as a result of our share repurchase program, we reported a 9% growth in our operating earnings per share for the quarter, which I think is a very good result in this environment.

Second, we continue to see modest growth in most of our target markets, which is expected, the majority of that coming from our US businesses. Unum US posted 9% growth in new sales this quarter, including 19% growth in Group LTD sales and 12% growth in our Group Life and AD&D sales. While Unum US voluntary benefit sales declined 14% this quarter, we're up against a very tough comparison from the same quarter last year.

At Colonial, new sales grew approximately 2% this past quarter, following a slight decline in the first quarter. The primary driver was stronger sales in the public sector, which had been lagging a bit this year.

Not surprisingly, sales in Unum UK declined by 34% in local currency this quarter, due to our pricing impactions in that market. We did, however, see an increase in sales to existing customers, which is certainly a very good sign to our continued grip in that marketplace. And as usual, Kevin, Randy, and Jack are here to answer any questions you may have about their operations, but also the market conditions in each of their markets in the Q&A session.

Third, despite the low interest rate environment and global economic concerns, our investment portfolio remains in excellent shape, with strong credit quality, minimal realized investment losses, and generally stable portfolio yields that serve to protect our reserve position. While we would certainly like to see interest rates rise, we are well positioned if this trend continues.

Fourth, as a result of our strong financial results and investment performance, we continue to maintain a very solid capital position. Our weighted average risk-based capital ratio is 394% at quarter end, and our holding Company's cash and marketable securities position is over $925 million, providing the Company, as you can imagine, enormous financial flexibility.

And finally, we continued our stock buyback activity with a total of $146 million of stock repurchased this quarter. Over the past 5 quarters, we have repurchased $726 million of stock and reduced our share count by 9%, while, as I said earlier, also maintaining a very solid balance sheet.

In summary, over the past several years, we have built our business plan around a focus on discipline in all that we do, trading growth for maintaining solid margin. This has not surprisingly led to more consistent financial results that we produced over the last several years, as well as a strong financial position we enjoy today.

We are certainly looking for opportunities for accelerated growth in ROE expansion, but we will continue to do so in a disciplined manner. And now I'll turn things back over to Tom White for his remarks.

Net income for the second quarter, as you see, was $229.8 million, or $0.75 per diluted common share. This compares to net income of $209.7 million, or $0.63 per diluted common share last year.

Included in the results for the second quarter 2011 are net realized after-tax investment losses of $2.2 million, or less than $0.01 per diluted common share, compared to net realized after-tax investment losses of $18.9 million, or $0.06 per diluted common share in the second quarter of 2010.

Net realized after-tax investment losses for the second quarter 2011 included an after-tax loss of $3.1 million, resulting from changes in the fair value of an embedded derivative in a modified co-insurance contract, compared to an after-tax loss of $15.3 million in the second quarter of 2010. Excluding these items, after-tax operating income was $232 million for the quarter, or $0.75 per diluted common share, compared to $228.6 million or $0.69 per diluted common share in the year-ago quarter.

Turning to the operating segments, Unum US operating income increased 1% to $218.1 million in the second quarter. Within Unum US, the group disability line reported another solid quarter from a risk perspective, as Rick will describe, though operating income declined 6.7% to $78.5 million as net investment income declined due primarily to a decrease in the level of assets supporting this line of business. And also premium income declined by 2.6%.

Within the Group Life and AD&D line, operating income increased 3.3% to $53.2 million in the second quarter, benefiting from slightly higher revenue and a stable benefit ratio.

In the Supplemental and Voluntary line, our second-quarter income increased 7.5% to $86.4 million. The year-over-year improvement was driven primarily by strong results in the Voluntary Benefits Business line, as well as solid growth in the recently issued Individual Disability Line, the effects which were more offset by slight decline in income in the Long-Term Care business.

Moving to Unum UK, operating income in this segment decreased 3.4% to $54.7 million in the second quarter. Operating income declined 5.6% in local currency.

While premium income in local currency was up 5.2% in the second quarter, the benefit ratio was higher at 69.8%, compared to 66%, reflecting the impact of higher inflation on claim reserves associated with policies containing an inflation-linked benefit increase feature and a lower level of claim resolutions in Group to LTD, partially offset by favorable claim incidence, also in Group LTD.

Concluding our core operations, Colonial Life experienced a 1.8% increase in operating income, compared to the year-ago quarter as premium income growth of 5.3% and unusually strong net investment income were partly offset by a higher benefit ratio.

The Individual Disability close block operating income was $10.4 million in the second quarter of 2011, compared to $12.4 million in the year-ago quarter. This was driven primarily by lower premium income, which declined 7.6% due to the expected run off of the closed block. Net investment income declined 3.7% due to a lower level of bond call premiums and a decrease in the level of assets.

The interest adjusted loss ratio was slightly lower at 84.3% this quarter, compared to 85.4% in the year-ago quarter, reflecting more favorable claim recovery trends this quarter.

And finally, the Corporate and Other segment reported an operating loss of $16.8 million, compared to a loss of $17.6 million in the year-ago quarter. The improvement was driven by lower operating expenses, including a decline in litigation expense, partially offset by higher debt interest expense. Interest expense increased to $32.3 million this quarter, compared to $30.8 million in the second quarter of 2010.

In addition, net investment income in the Corporate and Other segment was lower, driven primarily by lower short-term interest rates in our Investment and low income housing tax credit partnerships. Our increased level of investment in tax credit partnerships over the past year contributed to the lower income tax rate for the second quarter compared to a year ago.

So with that brief overview on our operating results, I'll turn the call over to Rick McKenney for further analysis of this quarter's results.

Thank you, Tom. The key theme for this quarter is going to be the consistency of our results. I'll highlight this through the key profitability drivers for our business lines, provide a snapshot of our investment portfolio, and give you an update on our capital strategy. I'll start with our risk experience for our primary lines of business, beginning with Unum US.

Once again this quarter, risk experience was generally stable. Our Group Disability performance remains strong, with the benefit ratio and a narrow band with the second quarter at 84.4%, compared to 84.6% in the year-ago quarter, 83.9% in the first quarter, and 84.4% in the full year 2010.

Group Long-Term Disability new claim incidents continues to show some volatility and was slightly higher in the second quarter compared to the first quarter, but was slight lower than what we experienced in the second half of 2010. As with previous quarters, our claim recovery experience remains solid. We have not changed our expectations, although we are carefully monitoring it. And we expect the benefit ratio to remain within the range of results of experience over the past several quarters.

For the Group Life and AD&D line, results also remain generally stable with the benefit ratio at 70.3% for the second quarter, flat with the year-ago quarter and consistent with a 70% benefit ratio of the first quarter.

Looking to the Supplemental and Voluntary lines, Voluntary Benefits earnings remained quite strong again in the second quarter, with favorable risk experience continuing in the Life line of business. The loss ratio in the recently issued Individual Disability line was lower relative to last year's second quarter and generally stable with the first-quarter results.

And finally, Long-Term Care loss ratios were up year-over-year and slightly higher compared to the first quarter, driven by the continued buildup of active Life reserves and a slight uptick in new claim incidents.

We continue to make good progress on the individual, Long-Term Care rate increases that we began to file in the fourth quarter of last year. We have completed our filings in 47 states in the District of Columbia. So far we've received rate increases approvals in 30 states. As well, we have achieved 84% of the requested rate increase in those states that have reached the decision, and we continue to work with the remaining states. The additional premium from this rate increase will emerge over 2012 and 2013.

In the UK, we continue to see greater stability in our risk results. While the benefit ratio is higher this quarter relative to a year ago, it is generally stable with the levels over the previous 2 quarters at just under 70%. The impact of higher inflation in the UK has caused much of the increase in the benefit ratio on a year-over-year basis, and in isolating on claims experience for Group Long-Term disability, we have seen favorable claim incidence trends, but some deterioration in claim resolution experience.

Jack and his team are implementing many of the claims management processes that have served us well in the US, and we believe that these practices will benefit our performance in the UK over the long term.

And finally, on Colonial Life, the benefit ratio for the second quarter remained within our expected range of 50% to 52%. At 51.2%, the benefit ratio was higher than a year ago, but generally consistent with the experience of the past 2 quarters. The Accident, Sickness and Disability line of business, which produced adverse claim trends in the fourth quarter of 2010, has stabilized over the first half of the year.

Turning to the top line, new sales in Unum US continue to show some good momentum, increasing 8.6% for the second quarter and 9.3% for the first half of the year.

Group LTD sales grew at 19% this quarter, with better sales results coming from the core market, where pricing appears to be firming somewhat, as well as the healthy mix between core market and large case business. Group Life and AD&D also had solid results with sales up 11.8%, driven by good growth trends in this core market.

Our sales in voluntary benefits declined 13.5% this quarter, but I'll note that last year's second quarter was especially strong, with heavier-than-normal large case activity pushing last year's growth rate over 50%. Premium income in the Voluntary Benefits grew by 8% this quarter as we continue to see solid growth in this line.

We remain pleased with the underlying sales trends in our Voluntary Benefits business and the pipeline of activity we are seeing. Overall, however, economic uncertainties in the US continue to dampen our top line growth trends, and we continue to see essentially no benefit to our premium line from the natural lift to our business from a growing employment base.

At Unum UK, our emphasis remains on firming rates in the Group Risk market. As a result, new sales remain challenging. But we're pleased the persistency is holding up well relative to our expectations. Additionally, we're seeing good up-sell trends as existing customers add to their coverage. Premium income was encouraging this quarter at GBP107.8 million, an increase from both a year ago and prior quarters.

Jack and his team continue to make good progress in implementing several important operational initiatives for a business that is already producing a 20% plus ROE.

Finally, sales in Colonial Life regained some positive momentum after a soft first quarter. Second-quarter sales increased by 2.1%, primarily driven by higher sales activity in the public sector. Our commercial market sales were down slightly this quarter on a difficult comparison with a 13% increase last year and our withdrawal from the market of a limited benefit medical product. Recruiting trends at Colonial Life remain positive with new rep contract growth of 5% this quarter, and up 6 % year-to-date.

Moving on to the investment portfolio, we continue to be very pleased with the results we're producing. The credit profile of our investment portfolio remains in excellent shape, with the net unrealized gain position in our fixed maturities securities portfolio at $3.9 billion at the quarter end, and our portfolio watch list declining even further this quarter.

Miscellaneous net investment income, which results primarily from bond call premiums, was a slight net positive to our results this quarter, compared to the year ago quarter and was slightly higher than our historical quarterly run rate. The Colonial Life and Unum UK segments were beneficiaries of this source of net investment income this quarter relative to a year-ago quarter, while miscellaneous net investment income in Unum US in the closed log was slightly lower than we saw a year ago.

Putting money to work at good rates is extremely challenging right now, but it continues to only have marginal impact on the Company. As we laid out at our last Investor Day, we benefit from a low level of new cash flow to invest relative to the size of our existing portfolios, and the hedges we have in place in our long duration LTC portfolio.

Our portfolio yields continue to hold up well, with our aggregate portfolio yield of 6.68%, down a basis point from the first quarter. Yields on the investment portfolios backing our various product lines also showed similar stability. The yield net of our discount rate for Unum US Group LTD business is in very good shape at 96 basis points as of June 30. Given these strong, ongoing financial results, book value per share continues to grow, increasing 10.4% from June 30, 2010, to $29.94 at June 30, 2011.

Moving on to the balance sheet and our capital position, statutory earnings remain strong in the second quarter at $171 million. This level of statutory earnings continues to drive strong growth in our capital position. The weighted average risk-based capital ratio for our traditional US Life Insurance Companies was approximately 394% at quarter end, towards the upper end of our target range of 375% to 400%.

Holding Company cash and marketable securities totaled $927 million. We remain active repurchasing our shares with the second quarter totaling $146 million, and for the first half of the year was $370 million. Our leverage ratio remained at just under 21% for the second quarter.

An item to note, which is in our earnings release and our soon-to-be-filed 10-Q, is that we're providing our current estimate to the future adoption of the accounting standards update, which clarifies which costs qualify as deferred acquisition cost. As you're aware, beginning in 2012, only the incremental direct costs associated with successful acquisition of new or renewal insurance contracts can be capitalized.

We currently estimate that our retrospective adoption will result in a cumulative effect adjustment for the opening balance sheet of between $400 million and $600 million in the year of adoption. This is for US GAAP accounting only, and therefore, is a non-cash and does not impact our statutory capital, our RBC, or our Holding Company liquidity.

We also currently estimate that the adoption of this update will result in a immaterial decrease in net income in 2012 and in the years proceeding to which the retrospective adoption will be applied. It also doesn't impact any of our plans in the coming years.

Finally, as we look forward to the second half of 2011 and given a very solid first half of the year, we're confirming our previous outlook for 2011, which calls for operating earnings per share growth of 6% to 12%. Now I'll turn the call back to Tom for his closing comments.

Thanks, Rick. I'm generally pleased with our results this quarter. The economy and today's employment trends continue to make top line growth a challenge, but our ongoing focus on consistent, profitable growth has positioned us very well. Our strong capital position and financial flexibility are valuable assets, and I believe will continue to provide us with opportunities to profitably grow our business and continue to follow the capital management strategy of dividend increases and share buybacks that has served our shareholders well.

This completes our formal comments. And, Operator, let's move to the question-and-answer session.

(Operator Instructions). We'll take our first question from Jimmy Bhullar from JPMorgan.

Good morning.

Good morning, Jimmy.

First, if you could discuss market conditions in the disability market, in terms of pricing, claims incidents, recoveries. Obviously your margins have been stable for the last several quarters, but other companies have seen deterioration.

And then on the UK business, your ROE was high to begin with. You're raising prices. I think the thought was that competitors would follow and your margins would go even higher, and that doesn't seem to have happened. So I was just wondering if you could discuss if your sales remain weak, would you lower prices, or are you seeing evidence that competitors might follow suit down the road?

Thanks, Jimmy. Let me ask Kevin to talk to the US market and the pricing themes, and then Jack obviously can touch on an update on what is happening in the UK. Kevin.

Thanks, Tom. Good morning, Jimmy.

Hi.

First on the competitive side, I think I characterized the marketplace as fairly stable. There seems to be some firming up of pricing, particularly in the small and mid market. On the other hand, incumbent carriers continue to defend vigorously their inforce business. And I would say that from a competitive environment standpoint, those factors plus the movement -- the steady movement of brokers towards more voluntary benefits, all of that speaks well for our strategy.

On the risk side of disability, as you know, our loss ratio is operating, as Rick said, a pretty normal range. We take a look at incidents on a regular basis. We see some volatility, but in no particular segment or cohort. Mostly, we experienced a normal level of noise, I guess I would call it, in the middle part of the year, this year in the same way we did in 2009 and 2010. We're continuing to monitor the economy. We constantly adjust our pricing to fit what is going on in the economy. We adjust our target markets. We stay pretty disciplined around our core market focus. We continue to develop our renewal program the same way that we've done in the past. In general, we feel like we're on top of the risk situation on disability. We think market conditions bode well for growth for us.

Okay.

Jack, do you want to pick up on Jimmy's question around the UK and some of the competitive dynamics there?

Sure, Jimmy. I would say relative to the competitive dynamics in the UK, it's early yet. We are trying to harden rates in the market. I think there is a consensus across the market, both among brokers, as well as competitors, that rates need to harden in the market. The big sales months in the UK are January and April, and so there has really only been four or five months of us hardening rates for the competition to react. We didn't really expect them to react early in the year. We're hoping that as they see their sales come due, they'll begin to react later in the year.

There are some signs as well in the UK of softening earnings outlooks. I know L&G reported recently and had some negative results in their group risk line. So we're sticking the course. We're encouraged by our persistency. We're encouraged by GIP sales being stronger than group life sales. We're encouraged by our expanded coverage in our existing cases, which were very strong sales growth. So I think we're going to stay the course, and clearly see if things get better in the second half of the year. And there are some signs, but I wouldn't say we've seen concrete evidence of the market hardening as yet.

Okay. And then maybe if I could ask another one from Rick, just on your buyback plan, you obviously still have a plan outstanding. The stock is pretty cheap. What is the rationale for not doing an accelerated program, given where the stock is trading?

I think when you look over the course of the quarter, stock has gotten cheaper lately. Our quarter ended on June 30. If you look back at the second quarter, we bought back almost $150 million of stock. We're really on pace to the authorization we talked about. And as I said last quarter consistently, when the prices are high, we'll buy less, and as they get lower, we'll buy more. So I think we're probably in one of those points in time where the price is lower.

We'll have to see where it goes from here. We haven't changed our view in toward share repurchase. I think as we mentioned our capital highlight and Tom mentioned, we have an awful lot of flexibility, and that is currently a lever that we'll pull.

Okay. Thanks.

Thank, Jimmy.

And we'll take our next question from Chris Giovanni with Goldman Sachs.

Thanks. Good morning.

Good morning.

Rick, could you maybe provide an update in terms of the preliminary DAC charge? I guess in terms of the amount related to the expenses that are no longer DACable versus maybe the amount related to unsuccessful sales, and then any further commentary would be appreciated.

Sure, I think when you look at that, one, I'd note it's still early in the process. We put the range out there. We thought we had a good estimate around where we were, so we wanted to take that out to our investors. But I would say that we're not finished. When you look at the overall impact, we probably lay out that about two-thirds of it is going to be costs that are not deferrable anymore, and about one-third is successful sales impact.

When you think about those two categories, think about the not deferrable anymore, does not have direct line of sight to the sale. You can think about rent at a sales office, where before we would have said that was directly attributable to sales. Now without that direct line of sight, we won't be deferring those costs anymore. If you think about the unsuccessful sales, think about underwriting and things like that, where we think they were built on the acquisition, and they won't be anymore.

So, that gives you a sense of the types of things As I said, we are willing to process. I wouldn't extrapolate or generalize too much because it is a very detailed roll-up that you need to go through to understand where you are. I hope that gives you a little bit of insight, and obviously we'll bring more to you, line of business and that type of view as we get closer to investor day and outlooks for 2012.

Okay. That's helpful. And then maybe for Kevin, regarding the long-term care book business, can you give us an update in terms of where you are with the filing of rate increases? And then when we think about the interest adjusted benefit ratio, where you think that settles in as we see an increase in active life reserves with hopefully an offset from higher premiums?

Yes, thanks, Chris. Good morning. As Rick said in his earlier remarks, we're well on pace to achieve, so far, what looks to be about 84% of our desired price increases. We'll continue to push that through. We've gotten some optimistic signs, even from some states that we thought might be more difficult. We're feeling pretty optimistic that we're going to achieve our price increase goal. And as Rick said, that will flow through in 2012 and 2013 into top line and bottom line.

In terms of interest adjusted loss ratio, we're making all of these moves right now in terms of building up active life reserves and placing rate increases in order to get that loss ratio stabilized, probably somewhere in the mid 80s.

Okay. Thank you very much.

Thanks, Chris.

We'll take our next question from Colin Devine with Citi.

Good morning, gentlemen.

Good morning, Colin.

I've got three. First, with respect to the pace of buybacks, they're a little slower this quarter than the first. Tom, I think you have been quoted in the media talking a little bit more about M&A lately. Is there anything we should be reading into that is the first question?

Second with respect to the change in DAC, Rick, I assume most of the adjustment's coming on the supplemental and voluntary line, and perhaps if you could just give us some idea, because it does represent, I guess, about 25% roughly of your outstanding DAC that you're going to adjust downward or about $2.00 a share.

And then for Kevin, looking at persistency trends this quarter, should we start to infer perhaps somewhat slower momentum heading into next year? And I guess, tied to that, there was fairly flat premium growth this year?

Thanks, Colin. Let me start, and as I said, we'll move to Rick and Kevin for his two pieces. You're right, we have been talking about M&A, but I must say, we really haven't changed direction in terms of the fact -- the primary focus is running our operation. Secondarily it's putting our capital back in the hands of our shareholders through dividend actions and share buybacks. And, oh by the way, if we can find M&A transactions that fit onto our strategic plan and financial foundation, we'll do it. And we certainly are looking at some things.

But I wouldn't want you or anyone to think that we're holding back on capital in anticipation of M&A. Our view, I think frankly, has always been, if we saw the right thing that fit strategically and financially, we'll find the capital to support it. So let's not hold back too much capital in anticipation of something that actually may never happen. Because as you know, we're incredibly disciplined about the things we look at. We are trying to be active. Just as a general matter, there is not a lot out there. But, again, I don't think that we're warehousing for that because, as I said, I have a strong belief, that if the right thing comes along strategically and financially, we'll find the capital to support that.

I think Rick, you were talking about the pace of buybacks, and I think nothing has really changed on that score.

Okay.

Do you want to pick up, Rick, the DAC question.

Yes. So to give you some general -- it's across the board quite frankly, in terms of where it is. I think the percentages talked about of the write-off would represent probably the write-off you would see on a pro rata basis across the board. Like I said, we will have to get more details out there. There may be a little bit higher percentages in some of our group lines, but those carry lower DAC balances, and all of that is in the back of the statistical supplement.

Will this drive any change to how you're going to operate Colonial with the career force?

No, it won't. And when you look at it in terms of where we are and the variable cost base that we have in Colonial Life today, I think we'll continue to operate it very much the same way. Try to make that -- I don't actually see us changing operating practices around the horn at all as a result of this.

Okay. Good.

Kevin do you want to pick up the persistency question.

Sure. Good morning, Colin.

Good morning.

I think persistency is pretty stable. It was virtually stable in every single line of business. There was a little bit of down kick in group life, I think primarily driven by a couple of expected large case terminations. Otherwise, very stable. I think that's a reflection, to some extent, of our customer relationship metrics, which are all extremely sound on the satisfaction side. I think it's also a reflection of a little bit of market inertia. Out to bids seem to be at a lower level over the last year or so than they had been in prior years. Probably as a reflection of a little bit of more stable pricing in the marketplace. So there is less opportunity to go to bid and get a better deal maybe. I expect persistency to hold up and stay about where it is.

And then I think on the flat premium side of the question, I think that is more of a reflection of lack of employment growth and lack of wage inflation, and that is really all about the economy. Also as you remember last year and the year before, we were lagging on what we call NBOC, sales to existing customers, primarily driven, I think, by customers tightening up a little bit and sitting tight on their benefits. We did see some uptick two out of the last three-quarters now in terms of NBOC sales, and that would have a positive impact on 2012, 2013 premium if that continued.

Okay. Extending that a little bit, you're now heading into the renewal season. I assume the pencil is sharpened up. Perhaps, a final one on what premium increase do you think we're going to see this year, rate increase?

I think we'll probably be in the low, single digits going forward. I think some of it will be a reflection of the natural aging of the block. A little bit of a reflection of our normal triage process where we identify what we need to get the those rate increases. The increase this year has been about 2%, and although the ask increase on cases that terminated was at 8%.

I would expect to see us in that same range. And we'll also monitor some of the activity that is going on with the Social Security administration around their approval rates and that thing. And to the extent we think that Social Security offsets could be under pressure, then we'd be moving rates up there as well. It's in the low single digits.

Thank you.

Thanks, Collin.

And we'll take our next question from Steven Schwartz with Raymond James & Associates.

Good morning, everybody. I did want to ask about Social Security, so I think you just handled that. I think what you're telling me or telling us is that if Social Security comes under pressure, that would affect you negatively, and that you would have to take actions?

Good morning, Steven. Yes, basically if Social Security changed its approval practices and we starting seeing fewer approvals then we'd have to price for that. I think we're well prepared for that. We have a very robust and well-structured renewal program that's been very successful for us over the last five years. We would just start to build that into pricing over time.

I was thinking there's that, but I was thinking more along the lines of whatever Congress comes into commission, vis-a-vis cuts and potential cuts to Social Security.

In terms of cuts to Social Security benefit design?

Right. Exactly right.

It's very hard to prognosticate about that. There is so much politics involved in that particular question, it's hard to know what is real and what is not real. I would be very surprised if Social Security disability benefits, in terms of benefit design, are cut. I think what is more likely is they might tighten up their claim management practices a little bit given the economic pressures that they're under, and that's really what I'm referring to.

Just as a background point worth noting too, that a very small percentage of those who actually have disability benefits actually have private disability insurance. So it's a very, very small piece of the puzzle actually.

Absolutely right.

I think it's more likely Social Security will be looking at a large majority of the claims they'd be looking at wouldn't necessarily be people that are covered by us.

Okay. And then if I could, I think, Rick, you said that the overall effective interest rate or the yield on the overall portfolio was 6.68%. Was that correct?

Correct.

And could you give us a sense of what you're investing that new money at.

Much lower than that.

Yes. Thank you.

No. And I tried to reflect on remarks. It's tight today. We would have seen this environment last year if you go back to August of last year where rates came down for different reasons. Credit spreads are a little bit wider then. They are actually quite tight right now. The good news is, and you have to take it back to our Company, we're not putting a lot of cash to work. So we are able to wait, sit on our hands until the deal comes along that hits the targets we're looking at. But it is a very tough environment for our investment team right now.

Okay. So no number for us?

In terms of where new money is, you have to go across the curve. But you can do as well as I. Take the 10-year treasury and add 200 basis points on top of it. Last year we would have had the opportunity to go into some different asset classes, which would give us some different yield. Tom mentioned that in his comments around tax advantage investments. We had gold American bonds, some things that fit very nicely in our portfolio. Some of those don't exist this year or we have been priced out of the market on that front, so it is quite difficult.

Thank you.

Just a reminder though too, maybe Tom or Rick, the amount of cash we have to put out that is unhedged actually over the next couple quarters is pretty limited.

Yes. If you look at -- I'd take you back to the -- it's Tom White. The information from investor day back in November, we've got about $2.5 billion of new money to invest on a $40 billion to $43 billion investment portfolio. And as you break that out by line of business, there is a little bit more proportionally in long-term care. And there we've got about 30% of that money hedged. So as Rick said, it's a challenging environment. This past quarter, new money yield was a little less than 6%. We benefit from the hedge unwinds that occurred, and they'll continue to occur over the next couple of years.

Okay. Thanks, guys.

Thank you.

We'll take our next question from Mark Hughes with SunTrust.

Thank you very much. The Colonial sales force, how was recruiting activity in the quarter? How do you see that going forward?

Randy, do you want to touch on that?

Sure, Tom. Good morning, Mark. Yes, the recruiting was up a little above 5% for the quarter. And that was on top of a very strong second quarter last year. And we still feel like we have a very strong recruiting system. We have all the right alignment, Mark, that we need within our field leadership structure. And it's a key area of focus for us. We still have a positive outlook in terms of ongoing growth in new rep recruiting.

Got you. And how about on a voluntary side? You had obviously a tough comp this quarter. Have you seen the dynamic there change at all or is it still good increasing demand?

Well, maybe Mark we're talking on both side. Randy, maybe while you've got the mike, why don't you speak just what you're seeing in the voluntary sales in Colonial, and Kevin if you could, because I think we talked about the tough comp was more the issue with Unum US.

Yes, Mark, on our side of it, we're still seeing good opportunity out there in the market. I think Rick and Tom mentioned earlier the success we had specifically in the public sector part of the market in the second quarter. Very strong new account sales there. And although there certainly are continuing economic head winds, we're all very aware of that, I think the general trend toward more employee responsibility for their benefits serves us well, and is going to continue to create opportunities for us.

Kevin, do you want to speak because you had the tougher comparison.

Good morning, Mark. In terms of voluntary trends, we're very bullish on voluntary. I think the tough comparison is driven by we had two very large takeover cases last year just in voluntary plans that moved from another company to us, and that was worth about $8 million to $10 million. So voluntary sales would have been up in this quarter, other than that comparison. We see more brokers every day getting into the voluntary business. Our voluntary core market sales are growing. Our voluntary case sales have been steadily growing. And in our small occasions, the marketplace are simply in the platform voluntary sales associated with group grew 23%. So, I think all in all, we're looking pretty good. The pipeline is feeling pretty well as good.

Thank you.

Thanks, Mark.

And we'll take our next question from Bob Glasspiegel with Langen McAlenney.

Good morning, everyone.

Good morning, Bob.

Rick, you said that the accounting change doesn't change any of your components of your plan. But by my math calculation, it does boost ROE by 60 basis points. So since this is a non-economic, non-cash event, is it fair to say that you would increase your ROE by 60 BPs for your plan, and how the board is assessing performance, et cetera?

Yes, that's accurate. It will have that impact on our ROE. When I talked about our plans, it was more operational plans that I was referring to. And we're going to fund the business the same way. But you will see impact. You will see the ROE go up roughly half a point. You will see book value per share come down, somewhere in the middle of that range would probably be in the $1.50 half range. But net-net, I was talking about our operational plans. We're going to run the Company the same way.

But you're paid more on book value growth -- you're paid more on ROE than book value growth, or am I wrong on that assumption as far as the plan?

Yes, we are. But that will be a 2012 item we'll talk about on a recasted basis with our Board when we get to setting planned targets.

Okay. And on the macro basis, and we talked a little bit about this, but what I hear from you is a 260, 10-year and risk of a double dip and sloppier economic growth doesn't really move the needle as far as any of your strategy from here. You just assume this is short-term rather than something structural that needs to result in a significant business plan adjustment?

Bob, I'll start with that and maybe ask others to pitch in. I don't think anything we're seeing now is changing our strategic direction or our focus in the marketplace. It's not changing how we've organized ourselves operationally to think about supporting the marketplace. And so, it hasn't changed, as Rick says, really the material aspects of our financial outlook.

Obviously, we could use a better economic environment, as measured by employment growth. We could use a better environment in terms of interest rate. But I think we've proven, even over the last couple of years during the financial crisis and the economic head winds we've had to face that our plan hangs in there quite well actually, even in those tougher times. We're continuing to reinvent ourselves. We're continuing to do things to make our products and services even more competitive. So don't get me wrong, we're certainly not complacent. But it's not as if this environment is causing us to do a dramatic change in direction.

And the 260, 10-year doesn't say we have to increase our rate increases. Because you went through this a year ago. And you think this is a short-term blip and rates will go higher?

I think as Rick said, we monitor these things carefully. We have a very close connection between market interest rates, our pricing assumption, how we think about discount rates on new claims. So all of those pieces of the decision process are very tightly tethered. And I think, as we have always said in the past, we don't move quickly to short-term movement.

I think that is the key. Our pricing -- one of our hallmarks in the market is stability of pricing we have taken out there. So we may move there on a gradual basis and reflect a longer-term view of where things have been and where they're going. And I think that we'll continue to run the business that way.

Okay. It seems like long-term care is probably the most sensitive to sustain long-term low interest rate environment.

Yes. I wouldn't use the word sensitive, but certainly it's something you have to watch the most in terms of where it goes over time. And Tom mentioned our hedges we have in place. That's where I'm watching the 30-year, not the 10-year, which has come down equally as quickly. And then you look at the credit spreads in the long end. So we've been fortunate to get some long assets behind at that at some pretty good rates over the course of last year. When you throw the hedges on top of that, we've been fine. Right now, it's tough to put 30-year money out there at a reasonable rate.

Thanks for the thoughtful answers.

Thanks, Bob.

And we'll take our next question from John Nadel with Sterne Agee.

Good morning, everybody. I have a couple for you, a couple data points. In the UK business, I know the inflation linked Group Life business is having an impact on this benefit ratio. Is it possible for you guys to give us an adjusted benefit ratio that removes that impact so we can get a sense for the trend underlying?

Yes. When we look at that actually, it's something we're looking at how we would take that in the future given it's the volatility of the interest -- I should say the inflation moves in the UK are so great. So it's certainly something we're thinking about and we'll work on breaking that out. I think it's been more of a general trending item we've talked about this quarter with inflation moving.

Okay.

That is something we're considering, and we'll certainly have more discussion on that.

Okay. During the quarter, did you take any dividends up from the operating subs to the holding Company?

We did. We took about $140 million out of the operating subs in the US. We also have dividends flowing from the UK as well.

Okay. How much was that from the UK?

The UK was in pounds somewhere between GBP35 million and GBP40 million.

Okay. And --.

I would highlight those are very consistent dividend levels. That's what we're looking at is consistent streams of dividends up from operating companies to holding companies to putting it back to work.

Got it. And then if I could follow up on the DAC accounting change. As we look forward, and if I assume you guys make no changes to your sales oriented expenses, about how much of the cost that you now defer will no longer be deferred?

Will no longer be deferred, it would be about that same ratio (multiple speakers).

Okay. So it's about 25% to 35%?

Yes.

So at the end of the day, the result here on forward earnings is really no meaningful impact, just to confirm?

That's correct.

Okay. And then finally, Kevin, it wouldn't be a quarterly call if I didn't try to get a sense a little bit more detail on pricing shifts in the market. Maybe to be a bit more specific, this may be difficult, but if I held all the variables constant for you, wages, employee numbers, benefit plans, attachment points, et cetera, can you characterize for us in the small, mid and large case market how much pricing in group disability and group life is up today versus maybe a year or two ago?

Thanks, John. I appreciate that. I'll get you later.

Okay.

The market prices for LTD are fairly flat when you look in total. Usually when we talk about soft price in the marketplace, it has more to do with the number of competitors that pricing low as opposed to overall pricing levels. Overall pricing levels have been fairly flat. We've been moving rates up, as you know, over the last five years, but now we're in the low single digit rate adjustment every year, which is mostly driven by the aging of the block.

I think the industry, the question going forward is that the industry margins have been shrinking steadily over the last four years. I think you can take a look at the [Gen Re] JHA data. And our margins, of course have been increasing during that same period of time. And I think that our discipline has worked out really, really well for us on that side of the page. And I think maybe that's what we're starting to see in the marketplace is some competitors starting to firm it up, recognizing the deteriorations in margins. I think if you look at the STD business, it's the same story. Margins have been deteriorating. If you look in the Gen Re studies, STD as an entire industry was slightly south of breakeven last year. The ASL business was even further south of breakeven. So I think you might see some hardening on the STD side as well.

Group life I think is very, very stable in the small and mid markets. That hasn't moved very much. Mortality has been very stable. I think in the large case marketplace, it's a different story. We don't sell, for the most part, large pendulum group life, and the reason we don't is that tends to be a significant commodity play, price shopping play, price negotiation play. And that marketplace, I think, is extremely volatile.

That's great. Thank you very much.

All right.

Thanks, John.

And we'll take our next question from Tom Gallagher with Credit Suisse.

Good morning.

Good morning, Tom.

First I had a question for Rick. Just following up on Steven Schwartz's question about difference between new money and portfolio yield, so the numbers would be let's say new money's 4.5% to 5%, portfolio yield 6.68%, but that 6.68% is duration weighted book yield. If I look at your nominal portfolio yield, which is how we all model earnings, that number is a lot lower. It's actually 5.4%. So using the numbers that matter from an earnings standpoint for Unum, the difference wouldn't appear to be that great.

So I guess my question to you is which ratio, which statistic matters more to you? Like how is 6.68% relevant to you because your comments indicated that there was a very big gap between the two. But from an absolute earnings standpoint, the gap doesn't appear as wide. Anyway, can you comment in terms of how you would view that?

That's why I caution, it's really across the curve. There's not really any good aggregate measure to look at. What I think about is more, given the duration weight, which talks much more about the longer assets we have as opposed to necessarily the reported yield that we have today at the 6.68%, I'd look at the 30-year, and then I would use the credit spreads off of that. So you have a very fair point that when you look at that duration weighted, it's a lot higher. And actually rates even with the low level that they're at today, you would have to take the 390 or more roughly 4% around the 30-year, and then take credit spread off of that, which will get you much closer to the portfolio rate.

You really have to disaggregate it portfolio by portfolio. That's actually how I think about it. It's no aggregate levels. We manage this portfolio by portfolio. And we have done very well, even in a fairly low interest rate environment over the last year, to hit our bogeys along the way. I would say it's tough, but we're not letting up on our investment team to find the jewels out there as we continue to go through this to hit our targets.

I think Rick, it's safe to say too, actually believe it or not, our results were pretty close to plan actually, as it related to some of the investment activity we intended. So that is the other element here, which is what we expected.

I'm giving you more sense that it's hard out there, which I don't think is a surprise to you, as opposed to how we've been able to operate and work our way through the low interest rate environment today and really how we expect our team to operate through this low interest rate environment going forward.

And just a follow-up, so as I think about the potential head wind of rate, to me the difference that we're seeing today would only be 100 basis points just using nominal yield. It wouldn't be 200 basis points. Because if you are using 200 basis points, and somehow that is the real economic difference, I think it's a bigger head wind. I guess the follow-up is as you think about your business, is there some offset that I'm not thinking about from a liability standpoint that economically, the disparity or difference is really more 200 basis points? Or is it just a nominal 100 basis points spread is the more accurate way to think about the forward earnings impact?

No. It would probably be much more in the 100 range from the spot perspective. It's going to be dependent on the deal. You have to disaggregate it. When I'm talking about 10-year money, I'm thinking more about our group long-term disability line. When I'm thinking about our long-term care, I'm thinking about our 30-year money. So we're lower than the portfolio rates there today. But over the last year in a very tough -- last year was also a tough investment environment, we have actually been able to hit our bogeys along the way.

So as I look forward, it's going to be tough. But, I wouldn't see our portfolio creeping down, or moving down very quickly. I think we've highlighted that the portfolio yield in aggregate over the last year has barely moved, and rates have not been very high. It's something we worry about and we work on, but there is no near-term pressure that I'm feeling as a result.

Okay. And then just a question on long-term care. The -- that interest adjusted benefit ratio is creeping up. Can you comment on how much margin do you have left there? I know you haven't separately disclosed or broken out what the GAAP margins are there, but I think in prior quarters, when that benefit ratio was lower, you had mentioned there was a little bit of room, not a lot. So as that creeps up, are we in jeopardy of having that turn to a negative margin for the block?

I don't think we ever said it was a little bit of margin, if you go back to what we've said. There is margin in the block. I take you back to the dynamics (inaudible), which is exactly what Kevin said. Yes, the adjust loss ratios are going up. That's an expectation of that block, given the very high persistency we've got. And we're taking pricing actions to combat that. The pricing actions will take a little bit longer to come in, so we're not surprised that the interest adjusted loss ratios is still going up until those pricing actions take effect. But to be clear, it's a tough business, and the long-tailed nature of it, we're taking the actions necessary to manage the block.

Okay. And then the last question, just on the disability underwriting results and how those have held in so well, so if I understand it correctly, over the last several quarters, you've had very good claim recovery results that have offset slight tick up in incidence. On the claim recovery side, is there any -- can you give us a little bit more in terms of what is going on underneath the covers there? Is there any diminishing return benefit that is going to go away, or is that a sustainable trend where you think you can continue to see good claim recoveries, even if the employment picture remains where it is today?

Good morning, Tom. It's Kevin. I'm very confident in the consistency of performance in our claims management operation. I think they're very much on top of managing their inventory. They're very much on top of quality control and quality assurance reviews. I think they paid close attention to what is going on with Social Security. I think they are very careful about managing the claims practices right to the contract. I think we've improved steadily over the last five years in terms of relationship management with claimants and with claimant's employers, and between our doctors and claimant's doctors. And I don't see any reason that we won't be able to sustain that claim recovery performance.

Got it. Thank you.

Thank you, Tom. I think, operator, we'll have time for -- we're a little sensitive to time -- one more question.

We'll take our last question from Eric Berg with RBC Capital Markets.

Thanks very much. Good morning. Glad to sneak in under the wire here. Just a few quick ones. First, I want to follow-up on Tom Gallagher's question, which I though was a very interesting one, an excellent question. If the duration-weighted book yield is in fact capturing the true economics of your portfolio, what is going on considering the length of time that those bonds are outstanding, as opposed to a nominal yield, which I gather would just treat all bonds identically and is not an economic view of your yield. Why isn't the book yield the right -- pardon me, why isn't the duration weighted book yield the right number to be looking at when comparing the yield on the portfolio to new money? That is my first question.

To answer your question, the reason we focus on that duration weight is because we think that is the right answer, when you look at. So that's where I think you're absolutely right, Eric. Looking at the duration weight, it is important. When we look at our liabilities and our assets, that is really what we're matching up to. So I think you're right on the money there.

Thanks for clarifying. I had a misunderstanding. Second question of three relates is really for Kevin. In thinking about pricing, you are the latest disability executive. Yesterday someone at Met was talking about pricing firming. My question is -- and he was talking about large case. You today were talking about small and mid size. My question is why is it firming? Especially in the context of a weak economy, I would think it would be difficult for suppliers of any product, a service or a good, to push through price increases and to get firming prices. Why are we seeing a firming of pricing, and how is this happening in the context of a weak economy?

Well, I think, Eric, we're talking about orders of magnitude here. I think pricing had been, as I said, in disability, in particular, very flat. Some volatility by market segment particularly in the mid and large. I think over the last couple of years, especially the last 12 months, a number of companies have had deterioration of results. Our competitors have had deterioration of results. I think several companies have pointed out that they intend to increase prices. I can think of at least three that have mentioned that, if not more.

And I think that is what is firming up the pricing. And I think that it's not an order of magnitude that is having a big impact on an employer. You think about disability, we are talking about a premium per life that is in the $250 to $300 per year, per person range. I think firming up a price is I think maybe shoring up everyone's persistency and helping to shore up, eventually, industry profitability.

Last question also for you, Kevin, relates to the voluntary business. While I certainly understand the long-term case for growth in the voluntary area, the reasons for it are apparent. I can't help wondering in a difficult economic environment, while employers may be more willing, more interested than ever in having their employees pay because voluntary coverage, as I understand it, typically involves some contribution, if not a significant or total contribution by the employee, what about what the employees are thinking?

In other words, I would think that in a difficult employment environment, employees offered benefits might say not now. Maybe when I feel more comfortable. How does all of that work?

I think regardless of what is going on in the defined benefit to defined contribution shift from employer to employee, the fact remains that employees still need financial protection. And the financial protection that we provide in our product lines, particularly our voluntary product lines, are extremely affordable and cover significant risks, whether it's a critical illness risk, a short-term disability risk, an accident risk or a life risk. I think in every one of those cases, employees and their families need that level of protection. And it's a very affordable level of protection for a very high level of potential risk. And I think that is what is driving it.

And if you look back at the last couple years of deterioration in our economy, we have not seen persistency involuntary move at all. And we haven't really seen participation rates move down either. I think in going forward over time, as more and more brokers are involved in voluntary, as we get out there and increase public awareness around the protection and safety net that you get from our products, I think if anything you'll see participation rates go up.

Thank you.

Good. Thank you, Eric. Operator, I think -- I want to thank everybody for joining us this morning. I think at this point, operator, this will conclude our second quarter 2011 earnings call.

That concludes today's conference call. We appreciate your participation.