普登 (UNM) 2012 Q2 法說會逐字稿

Good day, and welcome to the Unum Group second-quarter 2012 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 the Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead, sir.

Great, thank you, operator. Good morning, everyone, and welcome to the second-quarter 2012 conference call for Unum. 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 the results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the SEC. They are also located in the section 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, 2011. As well as our subsequently filed Form 10-Q. Our SEC filings can be found in the Investor Section of our website at www.unum.com.

I will remind you that statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on our website, also in the Investor Section. Participating in this morning's conference call are Tom Watjen, our President and CEO; and Rick McKenney, Executive Vice President and CFO; and also the Presidents of our three business segments, Kevin McCarthy for Unum US; Randy Horn for Colonial Life; and Jack McGarry for Unum UK. So now I will turn the call over to Tom Watjen.

Thank you, Tom, and good morning. As you saw from our announcement last evening, operating earnings per share grew by 3.9% this quarter. And despite the headwinds, I am pleased with the performance of most of our businesses. Let me highlight a few points. First, Unum US and Colonial continue to generate solid results, striking a good balance between growing the businesses while maintaining strong, predictable profitability. At Unum US, premium grew 4% as continued to see strong sales growth, especially in our core markets and voluntary benefit lines. And persistency was solid across most of our product lines.

When combined with a stable benefit ratio, this business continues to generate a consistent ROE of between 13% and 14%. At Colonial, premium grew at about 5% this quarter. And while sales were relatively flat year-over-year, the margins in this business continue to hold up quite well. And the result is that this business continues to generate a consistent return on equity of between 16% and 17%. You will see that the earnings for this business are down slightly year-over-year, and this is due to extraordinary high investment income last year, and not a weakening of the underlying business.

Next, well as I said, I am generally pleased with our operating performance. The one exception was our Unum UK business. While it remained solidly profitable and generated a return on equity of around 12% this quarter, the level of profitability and the volatility of our results in this business are below our expectations. While this is our smallest business, it is a business and marketplace we like a great deal. I am confident that we can, over time, improve the performance of this business through pricing actions, rebalancing our mix of business, and more consistent operating performance. And Rick will touch on that further in his remarks.

You will see, too, that the results for the quarter in our Closed Block segment improved somewhat over our first-quarter results. That was the case for both our individual disability business, as well as our long-term care business which, as you may recall, was added to our Closed Block segment in the fourth quarter of last year. New claim incidents in long-term care returned to more normal levels this quarter from the spike we saw in the first quarter. We said at the time that it would take a few quarters for the long-term care block to settle down. That seems to have been the case. That block will continue to be a challenge, though, and Tom and Rick will both touch on this further in their remarks.

Now turning to our investment results. This past quarter was another strong quarter, despite what obviously remains a very challenging investment environment. Today's extremely low rates will continue to pressure our investment income results, but we are working to mitigate this impact by implementing rate increases on new sales and renewals. While interest rate pressure will likely persist for some time, our credit quality remains strong and we are not going to deviate from the disciplined investment strategy which has served us so well through these difficult financial and economic times. We will sacrifice yield if need be to maintain a solid high-quality investment portfolio.

Lastly, our capital position remains in very good shape, with our risk-based capital level at 404%, above our target range of 375% to 400% for the year. And holding company cash was at $564 million. We continued to buy back stock, repurchasing around $125 million this quarter, which brings our total repurchases over the past year to $550 million. You saw that our Board approved a new share repurchase authorization, and Rick will touch on that in his comments. I might add that in addition to repurchasing stock, dividend actions remain a part of our play-book as evidenced by the 24% dividend increase we announced in May, the fourth consecutive year in which we have increased our dividend.

In summary, I continue to feel good about our position. Our overall operating trends are solid. Our business unit returns are well above industry averages. Our investment portfolio remains in excellent shape. And our capital position exceeds our long-term targets, providing us with significant financial flexibility. And looking ahead, we expect cash flow to remain healthy, allowing us to continue to return capital to our shareholders through share repurchases and dividend increases, something I continue to believe has great value in these unsettling times.

Given the weakness we have seen primarily in our UK business, we are adjusting the outlook we provided last year at our Investor Day meeting. We now believe that it will be slightly below the target range of 6% to 12% growth in operating earnings per share. And Rick will touch on that more in just a moment. Now I will turn things back over to Tom for an overview of our operating results. Tom?

Great, thank you, Tom. As you can see from our press release yesterday, we reported net income of $216.4 million for the second quarter of 2012, or $0.76 per diluted common share, compared to net income in the year-ago quarter of $227.6 million, or $0.74 per diluted common share. Included in that for the second quarter of 2012 are after-tax nonoperating retirement related losses of $7.5 million, and a net-realized investment loss of $1.4 million. Included in last year's second quarter are nonoperating retirement related losses of $5.2 million and a realized investment loss of $2.2 million. So excluding these items, after-tax operating income was $225.3 million this quarter, or $0.79 per diluted common share, compared to $235 million, or $0.76 per diluted common share, in the year-ago quarter.

Turning to business segment, operating income for the Unum US segment increased 3.5% to $212.7 million in the second quarter, with premium income increasing by 4.2%, and both the expense ratio and benefit ratio showing improvement relative to the year-ago quarter. Operating income in the Unum US group disability line was $70.4 million in the second quarter, compared to $78.7 million last year. While premium income increased 1.7% over last year due to favorable sales and persistency trends, total revenue did decline fractionally by 0.2%, as net investment income declined 7.5%, due to a lower level of miscellaneous investment income, lower assets allocated to this line, and a slight drop in the investment yield. The benefit ratio was 84.7% in the second quarter, up slightly from the year-ago 84.4%, but down slightly from the first quarter of 84.9%.

In the group life and AD&D line, operating income increased 10.2% to $57.3 million in the second quarter, benefiting from an increase of 7.2% in premium income and higher net investment income due to a higher level of miscellaneous net investment income. This offset an increase in the benefit ratio to 71.9%, from 70.3% in the year-ago quarter. In the supplemental and voluntary line, second-quarter income increased 13.5% to $85 million. The year-over-year improvement was primarily driven by solid growth in premium income, which increased 5.7%, as well as favorable risk experience.

Moving to Unum UK, operating income in this segment declined to GBP19.1 million from GBP34 million in the year-ago quarter. The benefit ratio increased to 85.4% in the second quarter from 69.8% in the year-ago quarter, while premium income and local currency increased 1.5%. Results in both the group disability and group life business lines were below year-ago levels. Concluding our core operations, Colonial Life reported a decline in operating income of 6% this quarter to $67.6 million. Premium income increased by 5.3%, which is generally consistent with the rate of premium growth we have seen at Colonial Life over the last several quarters. In addition, the benefit ratio of 52.5% is in line with our expectations for this business segment.

The results of the Closed Block segment showed a decline in operating income to $25.7 million from $30.4 million in the year-ago quarter, but a strong improvement from the first quarter operating income of $15.4 million. Premium income declined by 1.4% due to the ongoing wind-down of the individual disability block.

For the Corporate segment, we reported an operating loss of $25.9 million in the second quarter, compared to a loss of $17 million in the second quarter last year. Net investment income is lower due to lower asset levels, a lower proportion of assets invested at long-term interest rates, and a decrease in investment income attributable to tax credit partnerships. The interest in debt expense was stable at $32.2 million in the second quarter, compared to $32.3 million in the year-ago quarter. And finally, the tax rate in the second quarter is lower this quarter, due primarily to the release of an $11 million tax liability related to unrecognized tax benefits. So now I will turn the call over to Rick McKenney for further analysis. Rick?

Great, thank you, Tom. This morning, I will cover the margin trends we experienced in our business segments this quarter, a view on our growth trends. We will also provide an update on our investment results, capital position, and outlook for the second half of the year. First, on operating results in the second quarter, I will start with Unum US. It was another very good quarter for the Unum US segment, with operating earnings growth of 3.5% and generally solid risk experience. Sales growth and persistency continue their positive trends as well.

Starting on risk results for group disability, the benefit ratio was in line with the average of the past two years at 84.7% in the second quarter. This quarter compares to the first quarter ratio of 84.9%, and 84.4% in the year-ago quarter. Submitted new claim incidence trends for long-term disability were slightly higher, but with an average-smaller claim size and higher claim recoveries, the financial impact was neutralized. These favorable trends in LTD continued to be offset by somewhat weaker results in our short-term disability claim experience. We again saw higher paid-incidence rates and higher average weekly indemnities. We believe the actions we are taking with pricing will firm up these results in STD over time. Importantly, we have not seen these trends in short-term disability claims trending through to our long-term disability results.

On the investment side, the interest reserve margin for this line declined 91 basis points this -- to 91 basis points this quarter from 97 basis points in the previous quarter. And we expect this margin to continue to gradually decline over the next several quarters, given today's extremely low new-money yields. Given the environment, also likely that we will work in reductions to our new claim discount rate, like we did in the third quarter of last year. We will balance this against a very healthy margin that we have built up over the past several years on our in-force block and our ability to adjust pricing as business renews. Overall, we remain very pleased with our Unum US group disability results and the strong, consistent profitability that this business line continues to generate.

The group life and AD&D line was a very strong earnings contributor this quarter at $57.3 million, up 10%. Premium income increased by 7% and net investment income benefited somewhat from higher miscellaneous net investment income this quarter, which together produced revenue growth of almost 8%. The benefit ratio was 72% in the second quarter, consistent with the first quarter but up from the year-ago level of 70%, due to higher average claim size, which was somewhat offset by lower submitted claim incidents. The supplemental and voluntary line produced within Unum US produced its highest quarterly earnings this quarter, with earnings of $85 million, an increase of 13.5% from last year's second quarter.

Premium growth this quarter was 5.7%, driven by almost 9% growth in the voluntary benefits line. Risk experience was also very good, with a benefit ratio of 49%. In the individual disability recently-issued line, we saw stable risk experience with lower paid claim incidence rates and higher claim recoveries. In the voluntary benefits line, we experienced lower claims and a lower average claim size for the voluntary disability line. The supplemental and voluntary line remains an attractive growth opportunity for our Company, as well as a significant source of earnings.

Turning to the UK, results were weaker than we expected, with operating earnings declining to GBP19 million, with unfavorable risk experience in both the group disability and group life lines. For group disability, the unfavorable risk experience was driven by a combination of higher average claim size and a lower average size of claim recoveries. New claim incidents trend were generally flat. But we did experience a lower level of declines. Group life experience was driven by both higher volumes and average size of claims. Clearly, these results are well-below what we believe this business segment can generate and what it has historically generated.

Again in this quarter, we saw different types of volatility, which added to the challenge. But there are underlying pricing challenges we have seen in recent years that we need to address. We have talked about our pricing on the group disability side in the last year, and we continue to take price-to-returns profitability to the levels we have seen. The group life business has been more challenged in recent quarters.

It can inherently be more volatile given the size of the policies we write, but to restore the baseline profitability we have come to expect, it comes back to raising prices. Overall, our outlook for the UK remains positive, but we do have work to do over the next several quarters and years to restore ROEs back to the 20% level from our current level of 12%. In the near-term, we expect quarterly earnings targeting a range of GBP20 million to GBP25 million, but we may continue to see volatility outside those bounds as we work to improve performance and contain this volatility.

Moving to Colonial Life, this segment produced another solid quarter. Results were lower than last year, which benefited from usually high miscellaneous-net investment income, but in line with our expectations. The loss ratio was slightly elevated in this year's second quarter, but also in a range of expectations. This is a very solid result that produced a 16.5% ROE for this quarter.

Concluding my comments on margins, we are pleased to see the results in the Closed Block long-term care line of business improved from the results of the first quarter. New LTC claims returned to a more normal level this quarter after the spike we saw in the first quarter, and the interest-adjusted benefit ratio declined to 87.8% in the quarter, from 91.2% in the first quarter. The contribution from our long-term care line remains below what we feel this line can generate over the longer-term, but this quarter's performance was a strong improvement from the first quarter and indicative of what we expect from the Closed Block in total over the near-term.

Moving on to our sales trends, we remain very pleased with the trends we are seeing across our business line. Unum US continued the strong trend we have seen for the past few quarters, with total sales for the second quarter increasing 9%. For the group disability and group life and AD&D combined, sales were also up 9%, with sales in the under 2,000 life core market increasing 11% and comprising about 75% of the sales mix. Voluntary benefit sales were also good, increasing 8% for the quarter. Persistency was also very high for Unum US, at 91.7% for group long-term disability and 91.6% for group life for the first half of the year. Given these strong trends, we produced 4% premium growth for the Unum US segment again in the second quarter, with minimal help from the external environment or natural growth in the marketplace.

In the UK, we continue to see somewhat better pricing trends in the market. And with that, we are seeing better sales results, particularly in the group disability line. Group disability sales increased by 10% in local currency, with positive trends in both the core and large case markets. You will note that group life sales were flat this quarter as we firm up pricing in this line as part of our strategy to improve the profitability in this segment.

And finally, premium increased 5.3% in Colonial Life this quarter, consistent with the growth trends we have seen in recent quarters. New sales in total were essentially flat, and we are slightly more encouraged that the core commercial market sales increased by 2%. The sales trends this quarter were consistent with the trends we have seen in recent quarters. Sales to existing counts remain generally strong, while sales to new accounts are more of a challenge.

Moving on to the balance sheet and the investment portfolio, we continue to be pleased with the excellent credit quality of our portfolio. The net unrealized gain position for our fixed maturity securities stands at $6.4 billion at the quarter end. And our watch list of potential problem credits remains very low. Net realized after-tax investment gains and losses on our portfolio was essentially break-even on the quarter.

Currently in the investing world, the challenge continues to be the low interest rate environment. There is no question it is difficult to put money to work in attractive yields. We continue to be selective in our asset purchases. And as a result, the overall portfolio yield continues to hold up relatively well. The portfolio yield now stands at 6.59%, compared to 6.67% at year end. Similar to the first quarter, we continue to maintain higher than normal cash balances for our product portfolios as we search for the best possible investments. We think that is the right decision, but it does create a drag on our net investment income relative to our expectations coming into the year.

We would like to catch up and be fully invested in the second half of the year, but we will remain selective and be opportunistic as possible. As such, net investment income for the balances of 2012 is likely to run below our initial outlook coming into the year. With regards to the balance sheet, our capital position continues to be very healthy. Statutory net income was $158 million for our traditional US life insurance companies this quarter. Our run rate remains very solid and continues to support our capital model that generates about $500 million of free cash flow per year.

The weighted-average risk-based capital ratio for our traditional US life insurance companies is approximately 404%, above our 2012 target range of 375% to 400%. Holding company cash and marketable securities totaled $564 million at quarter end, in line with the first quarter level of $575 million. During the second quarter, we repurchased $125 million of our stock. For the first half of the year, we have completed $300 million of our $500 million plan. We also announced yesterday that our Board has authorized a $750 million share repurchase program. Our previous repurchase authorization was due to expire on August 2, today. And this new authorization will cover our expected repurchases for the balance of 2012, and give us flexibility as we develop our capital management plans for 2013.

In closing with a comment on our outlook, as we included in our earnings release and Tom mentioned earlier, we now believe that growth and operating earnings per share for 2012 will be below the range of 6% to 12% we originally discussed at our Investor Meeting last November. The primary driver of the lower outlook is the under performance of the Unum UK segment that is emerging in 2012 and likely will continue for the balance of the year. Our outlook for Unum US and Colonial Life has not changed. Now I will turn the call back to Tom for his closing comments. Tom?

Thanks, Rick. In closing before we take you questions, as I said earlier I am generally pleased with our results this past quarter. We have continued to generate strong profitability and growth at Unum US and Colonial Life, and have maintained a solid investment portfolio and capital position. And continue to generate good cash flow that we can continue to return to our shareholders through dividends and additional share repurchases. There is no question that we have work to do to improve our Unum UK performance, but I am confident that our team has a solid plan in place that will lead to gradual improvement in the performance of this business. Operator, this completes our prepared remarks. Let's move to the question and answer session.

Thank you. (Operator Instructions)

Jimmy Bhullar, JP Morgan.

Hi, good morning. I had a couple of questions. First on the UK business, you have been expecting a recovery in the business, but the margins have actually progressively declined. So what gives you the comfort that results have bottomed? And if you would just talk about how long it would take you to reprice the book and if you are seeing competitors repricing as well as you are doing it. And then secondly, on long-term care, just talk about your comfort with long-term care reserves. Part of the reason you took the charge was low interest rates. Rates have declined further since the last time you took the charge. So just your overall comfort level with long-term care reserves.

Good, thanks, Jimmy, and good morning. Let me start with the answer to the first one, and then ask Jack to certainly pick up. But I think it is important, as you are alluding to, to put the UK business in context, because there have been some questions raised in the past. And I think that there is no doubt we have a lot of confidence in that business and that market over the long term. And again, even in a quarter when, frankly, it didn't meet our expectations, we still generated 12% ROE in that particular business. So, as I will come to in a second, we certainly have some work to do, and Jack will talk further about that. But I think this past quarter has caused a few of us just to step back and look at the performance of that business over a little longer term.

For example, the last six quarters. And if you look over the last six quarters, what you see actually in our BTOE, and you probably know this, is unfortunately a fair amount of volatility in our performance, where it ranges from a high BTOE of about $34 million all the way down to a low of $19 million that we saw this quarter. And frankly, that level of volatility in BTOE is very inconsistent with what we see in other parts of our business. And so again, that is why I said we have stepped back a little bit just to look at that business. Again, each quarter, each issue is explainable, as Rick mentioned his comments. Sometimes it's around incidents, sometimes it's around recovery, sometimes it's around one product versus another. But again, that level of BTOE volatility, in my opinion, isn't consistent with what we want to do around the rest of the Company. So again, we have actually taken a hard look at a few actions that we can take in that market, which Jack can expand in just a second. Some of those actions relate around pricing increases. Some of those actions relate around rebalancing our business in terms of the product selection, the segmentation of the market, the capital allocation we have within those products. And so then we have some room to improve in terms of just having more consistency in our operating performance. And so, yes, we think we've got a good game plan to address those performance issues.

Again, it is not just about this quarter, but it is about looking at the trend that we have seen here. Which, again, on one hand produces a 12% ROE at a low point, on the other hand it has got more volatility than we like to see over the long term. I would also put this business in context, as well. Again, very important strategically to us. We see great growth opportunities. But if you look at even just this past quarter, the BTOE in the UK is about half of what we produced in Colonial and it is actually less than any one of the three operating lines within Unum US. Just again, to give a sense of context. So with that, Jack, maybe just talk a little bit more about just some of things that we are doing and why we have confidence in our ability to turn the ship and create a little less volatility in that business.

Great, thanks. And we are confident in the business. We are already implementing significant price increases in the business. The UK business renews generally has a two-year rate guarantee. So it takes two years to go through the block of business. We started renewals in the group life block in the first quarter and ramped them up in the second quarter. We will continue to ramp them up through the remainder of the year. We are targeting double-digit rate increases in the block. Through the first half of the year we have achieved a 9.5% rate increase, and that has improved quarter-over-quarter. The market is taking very similar actions to us. They have seen the same increase in underlying mortality that we have. Double-digit, 10% rate increases in the life market are common. We are being successful at implementing them. So we are very positive about that. The competition is reacting similarly. They reacted similarly, by the way, on the way down as prices went down, and have made a commitment, I believe, to restore prices. You know, we are also looking at other things to control volatility, looking at our business mix, the relationship between income protection and group life, the size cases that we write, the retention limits on cases that we keep. So we are going to continue to implement actions to improve both the overall results with rate, the volatility that we see and try to lessen that, and the effectiveness of our operations to implement actions to correct it.

Thanks, Jack. Maybe, Rick, if I could turn to you on the long-term care?

Yes. And first, I think it is important to talk about the context of the interest rate environment and the broader business, as you heard from Jack. And I mentioned in my comments, we do have the ability to reprice much of our business to reflect the very challenging interest rate environment that we are seeing. We are taking fairly aggressive action across all of our product lines to reflect the environment that we see ourselves in today. More specifically to your LTC question around reserves, I will take you back to year-end in terms of the process that we went through. At year-end, when we looked at the business and we would have talked about at the time, we saw the adjustments that we were making reflect in the interest rate environment. And the go-forward of that, it would take us about three to five years. In terms of that, I would tell you in the current environment -- although the first half we did a pretty good job on that front as we sit here today. And the real challenge is, it probably takes you to the shorter end of that range. But I think we are still out there in that type of time horizon, how interest rates impact specifically our GAAP reserves in long-term care.

Okay, thank you.

Suneet Kamath, UBS.

Thanks and good morning. Question for Rick, if I could, on the discount rate. I just want to understand how you are thinking about that, because I think you said in the one hand you have a pretty healthy margin. I guess it ticked down a little bit this quarter, but it is still above your target. But then you also suggest in your comments, given the challenge in terms of new money rates, you might be looking at a discount rate reduction at some point later this year. So I was just hoping, if you could maybe frame that up a little bit in terms of order of magnitude, and then update us on any guidance in terms of what a 25-basis point change in the discount rate would do to annualized earnings or EPS. Thanks.

Sure. Let me include a little color on the commentary I gave. I think we are working with a couple of different items here. One is the challenging investment environment we have. We want to, in the market, reflect that challenging environment in our pricing on a pretty [rapid] basis. We are balancing that with over -- you know, over different times we actually let that margin build up quite a bit. So we are balancing those two items. But as we did last year, and I would point you back to third quarter of last year, we were early in that process to actually reduce our discount rate. We did it by 25 basis points. And those are the kind of things that we are looking at as we get in towards the end of this year. Because we have seen with the all-in invested rate has come down pretty precipitously, not just treasury yields but all invested yields, at the kind of credit quality that we like to invest in. So, we are looking at that with no prediction as to exactly what the time frame would be. But I would just point you back to third quarter in terms of the type of actions we would take and the type of size, and looking into the future on that. And by way of reference, 25 basis points, as it was last year, is about a $3 million impact to the overall Company.

Got it. And then, I think you told us your portfolio yield was, I think I wrote down 6.59%. Can you just tell us where you are investing new money, at what rate today? And then, I don't know if you mentioned which actual asset classes you are investing in. If you could do that as well, that would be terrific. Thanks.

Sure. And when you look at that portfolio yield, that does reflect a fair bit of what we have been able to do over time. In the longer end of the curve, it certainly supported that. Putting money to work today is quite difficult. Especially on the short end of the curve, as you look at spreads off the 10-year treasury rate, we think single A, triple B-type investing, you are looking at right around 3%, 3.25% maybe. Where we have been putting money to work today, where we can most effectively, has been in other asset classes, such as commercial mortgage loans and private placements. So we have actually done that reasonably effectively. As you get up to the longer end of the curve, those types of investments that you make would be more opportunistic. Different deals come to the markets at different times. And so it is hard to really give a general rule of thumb there as you get out towards the 30-year end of the curve. But we are still being opportunistic on that front. But very, very challenging.

Thanks.

Actually, maybe if I add too, Kevin, it may be worth talking about the parallel pricing actions we are taking, too. Because certainly, the discount rates and the interest rate environment is certainly a piece of the equation. But also, I don't believe in sitting on our hands, either. Because there is a fair amount of activity going on to be sure that we reflect those lower rates in a business where -- there are certain parts of our business that are interest-sensitive, but there is also a lot parts of our business that are actually not interest-sensitive, either.

That's right, Tom, thanks. Well, in the case of the discount rate change, 25 basis point discount rate change affects LT rates by about 2%. We have been in the process of putting mid-single digit rate increases into the LTD marketplace during the course of this year to reflect both the interest rate environment and the sort of slight but steady volatility that we have had in incidents. As we look into 2013 and our renewal program, I would expect to be pricing to be mid- to high-single digit range increases for LTD, again to reflect those same claim trends and also the expectation that below-interest rate environment will continue and that we might need to take a change in the discount rate, so we are going to price out ahead of that. Most of our other lines don't have that kind of interest rate effect at all. You know, STD and life don't really get hurt at all by interest rates. What we are looking at in the STD line of business, though, is a deterioration in industry-wide experiences. So we are placing 10% to 15% price increases in STD, basically to reflect that deterioration in STD prevalence. So, a lot of pricing activity going on and we think on the pricing side, we are ahead of the curve in terms of low interest rates.

It's Rick again. If I could come back around on the interest rate side. So I gave you benchmarks of spot rates. I think it is important to look at what happened with actuals, too, in the second quarter. We actually put money to work at about 5.3%, including some of the hedges that we have out there, as those hedges roll off. So although spot rates are tough, I think in the first quarter, as in the second quarter, we have done a pretty good job of finding the right investments out there to back our portfolio. I don't want to leave you with the sense that everything we're putting out today is at 3%.

Steven Schwartz, Raymond James & Associates.

Hi, Suneet just asked my question. So I will just take a pass.

Ed Spehar, Bank of America.

Thank you, good morning. I just had a follow-up question on the UK group life business. I'm just wondering, I believe April is the big renewal season. And it seems like the recognition that you need to make some significant changes in group life has happened pretty recently. I understand that you are putting rate increases in, but I believe as recently as early May you had been looking for the UK business to be sort of flattish in terms of earnings this year. So I am wondering if you could help us understand how quickly you are going to be able to get the profitability back to targeted levels, given that we have kind of missed, I think, the big renewal season.

Maybe I will ask Jack to start with that. And it is not just the renewals, I think, Jack, to speak to, but there's also certain segments of the market where you can change -- I think you are doing some work to change your strategy. We don't have to get into too much detail there. But it is not just rate, I think, in group life, that's entering into the picture. And maybe Rick, if you could follow up just a little bit with just some of outlook commentary.

Yes, we are looking to change the business mix. There are segments of the market that we have pulled away from in selling new business. On the renewal piece, we were responding to this trend before it actually emerged, so we were already doing rate increases. They were a little bit lighter in the first quarter, but during the second quarter, which would include that renewal cycle, we put double-digit rate increases into the market. As I said, we are right at the edge of double-digit. Now we expect that by year-end, we will be well into double digits. We expect to continue that through the 2013 renewal season. And we will be optimistic from there going forward as the marketplace and competitors allow. So I think we got a good jump on it. We didn't wait until May or June before we started to do renewals. A part of that is because the marketplace actually saw the blip in claims experience last year that we saw in the first half of this year. So the marketplace had already begun to respond with rate increases last year and we followed suit on that. So I think we are in a better spot than you might otherwise think. In addition, even though April is the big month, it is not like January in the US. Things are much flatter in the UK. There's probably 40% of your renewals are still outstanding at mid-year going forward. So we are optimistic that we caught the curve.

I think just, Rick, in terms of outlook, I don't think we are making -- we are assuming it takes some time to get back to the levels. But maybe anything else you want to add to that.

Yes, so I would just take it back to my comments that, you know, we expect the second half of the year will be starting to run right between GBP20 million and GBP25 million. Which is down, as you know, relative to what we would have thought coming into the year. That reflects really more of the volatility coming out of the book and just the natural fluctuations we have seen. Pricing will take some time. And so that's where -- even the actions Jack has taken thus far, you know, this is going to be a process that works out really over the next couple of years, although we are on top of it right now.

So should we assume to get back to the 20 ROE, we are looking at two years out?

I think that is probably a fair assumption. We will come back and talk about it next quarter. But I think that from what we see right now, that's probably a fair assumption.

Thank you.

John Nadel, Sterne Agee

Hi, good morning. Most of my more technical questions have been asked. Just wondering if you could give us an update on your view of the M&A landscape? I mean, it sounds like most of the activity, at least that we are all pretty well aware of that's out there, is sort of outside of your core, but I am just wondering what the outlook looks like, what the opportunity set looks like within your mix.

Rick, I will start and maybe ask you to supplement a little bit, too. But I think, John, we really don't see a lot on our core. I want to come back to your word -- core -- because we very much are staying to the focus of the things we do well and not getting too distracted by obviously some of the other things, which as you point out, there's an awful lot of activity in some of those other areas. Those are not places where obviously we want to play, and feel it has the characteristics of the things we can add value in. Again, we are staying very close to the marketplace. I think if there are things to happen that are close to our space in the marketplace, we are aware of them. But it's a quiet period of time right now because we don't see a lot of things that fit within our sweet spot in terms of where we are as a strategy. But I do think, Rick, again, we are very much viewed, I think both from the US as well as maybe even other markets around the world, as a potential buyer for properties, which is a good thing. But that patience is very important.

I would just add to that, you know, when we look at the processes that are out there, we are very much involved with anything that is going on. We are certainly introduced to most situations that are out there. It is true that much of it does not meet our core. I think the business lines we are in are very much favored by the markets today. So I don't think we will see that much in the near term. It's something we will keep an active eye on. And the second is, as we look at M&As relative to purchasing our stock, it is a very, very high hurdle to actually go out and do there, relative to where our stock is trading relative to book today. I think that is still our primary choice, although we would love to see a good acquisition that fits.

Certainly. And then just a quick one on Colonial. I think your commentary has been, and it has been pretty consistent now for it seems a couple of quarters, that sales to existing accounts has held in there pretty well. Maybe we could even characterize it as reasonably strong. But new client creation has been extremely difficult. Would you characterize that pressure on new client creation as still primarily economically driven, or do you see that as more competitively driven? Because it appears, you know, at least from my vantage point, that Aflac is doing a little bit better on the US side, and maybe I'm wrong. I am just wondering if Aflac and Allstate and a few others are becoming a bit more competitive in that respect.

Randy, let me ask you to touch on that. But maybe just to set the framework a little bit, we didn't go into it in depth in our remarks, John, but glad you raised it. Because certainly Colonial, as Rick said in his comments, has been a steady contributor to the results of the Company. But as you know, we think about the market really in three segments. Our core commercial, which is a small business, was actually up about 2% or 3% for the quarter. Our large commercial actually was up pretty nicely for the quarter. The decrease was really more in the public sector. As always, there is a segmentation process that applies to how Colonial comes to market. I think some of the work that has been done has certainly improved our positioning. For example, in the core commercial marketplace, we continue to see good results there. But with that, Randy, maybe you could add a little more color to the market and what we are seeing. Because I think sometimes the headline result doesn't necessarily translate into what is happening in the marketplace.

Sure, Tom, and good morning, John, from --

Thanks, Randy, good morning.

From an economic standpoint, there certainly are still some headwinds out there for everyone. There's no question about that. I mean, one of the key things we look at is consumer confidence, and levels of discretionary income, and that type of thing. But we are working through that just fine. So that is not a huge and not a new issue for us, by any means. There is rising levels of competitive intensity out in the marketplace, with a lot of different carriers getting into the voluntary space. But as Tom said, overall, we feel comfortable with the activity levels and the success we are having in our core commercial markets. The real pressure this quarter was on new public sector sales, and we just had a couple of real tough comparisons with the second quarter of last year, where we had a couple of larger cases on the public sector side. So really, John, no fundamental concerns. We feel like we are getting the right products and services out into the marketplace. We have good steady growth in our agent account and new offices that we are opening, new sales offices, et cetera. Feel pretty good about the fundamentals and the market overall, and where we can take things. So again, economy is still not our friend, but we can overcome that and feel like we have good prospects going forward.

Thanks very much for that, Randy.

Christopher Giovanni, Goldman Sachs.

Thanks so much, good morning. First question, just on capital management. I guess I was a little surprised by the buyback activity in the quarter. I guess, one, just given maybe where the shares were trading and then, two, just given the smaller window you guys have in 4Q. So should we be thinking that you guys kind of get through the rest of your $500 million authorization in 3Q?

Rick, do you want to pick that up?

Yes, certainly. Hi, Chris. Actually, when you think about our buyback activity, we have done $300 million year-to-date. Our second quarter actually looked quite active. When you think about the rest of the year, another $200 million to do. I wouldn't tell you exactly when we will do it. But we certainly see value in our shares today and where they are trading. So we will be active. But right now we are sticking to our $500 million for the year. So that is our expectation. We still look back to our capital generation model and say -- and still quite an uncertain environment -- that we want to spend the excess that we are generating. We also keep some pretty healthy capital levels behind that. So I think that is how we will lay out how it plays out between third and fourth quarter. We will have to see how it goes.

Okay. And the tax rate was lower due to the tax accrual. As we look to the back half of this year, is there any other one-time tax items that kind of are on the horizon?

Yes, there is always a lot going on, on the tax line. There is still some of that. I think that as you look out to the year, it probably will lead you to an overall tax rate for the full year of right around 30%, which would say, it is a little bit lower in the third and fourth quarter than our expectations. We think there may be a couple of small one-time items that come through which bring that tax rate down maybe in the 29% to 30%-type range.

Okay, that's helpful. And then just quickly for Jack, on the UK book. I guess the group life, I wanted to see if it is at all possible to split out, you know, the legacy kind of your older Unum clients in the UK versus the book of business that grew a bit more substantially when Aegon made the exit of the business a few years back.

Yes. You know, one of the things in the UK is the entire block tended to be priced on a consistent basis. And so as rates in the marketplace fell and we followed that trend, we were renewing old cases as well as younger cases. So if you look at the cases, rating is pretty similar across the block, similar opportunities for rate increases across the block. So it is not like in the US where you might get more aggressive on new sales and have a higher rate on your existing cases.

Okay, thanks so much.

Ryan Krueger, Dowling & Partners.

I had a follow-up on the discount rates. First, I just wasn't sure if I correctly heard the earnings impact from a 25-basis point change, because I think your investor presentation last year said $14 million annually, is that correct?

That was correct annually. I gave you the quarterly number of $3 million.

Oh, okay, great. And then, you also made some discount rate changes last year on the newer individual disability block, and I think you also made some changes in the UK. Should we be expecting some adjustments there as well?

Yes, I'm not sure what you are referring to on the disability block. In the UK, hard to predict. We are reflecting the interest rate environment there as well, but we don't see the same kind of pressure we see in the US for -- similar pressures on new money investing but in terms of adjustments at discount rate, it is not of the same magnitude in the UK.

Alright, and then just lastly, when I look at the reserve [to real fords] in your supplement, the group disability recoveries have been pretty favorable now for a few years and then this quarter was even better, and I think probably the best you've had. Can you just talk a little bit about what factors there are driving this and if you can continue around these levels?

Yes. I mean, the recoveries as you said, we have now been performing our recoveries for quite a number of quarters now. But even there, you get some degree of volatility. You know, in some quarters you are running at 110% actual-to-expected recoveries. Some quarters 113, some quarters, 108. I think for the most part, you know, we are right on the money pretty consistently in terms of number of recoveries that we expect to occur, but you always get some volatility around the average size of the claim. And that is probably what you are seeing in terms of the bounce around this quarter. I think we had a little more favorable performance on the recovery side, both in terms of size of recovery and number of recoveries. And I do expect it to continue.

Okay, Just what has changed versus a few years ago? When I just look at this disclosure, it seems like there is a significant improvement relative to what it was a few years ago. Is it that you are making more conservative up-front assumptions on recoveries, or is it that recovery rates have actually improved?

No, I don't think there has been much of a process change or anything like that. I think we've got a very seasoned and well-oiled organization. And that organization that consistently performs. You know, I think one could speculate that the economy, the consistent pressure on the economy probably maybe encourages people to return to work maybe a little more aggressively, perhaps. But that is pure speculation. But I don't think we've made any internal process changes.

Okay, thanks.

Sean Dargan, Macquarie.

Good morning, thank you. All my questions have been answered.

Mark Finkelstein, Evercore Partners.

Good morning. A lot of tired folks on the call this morning.

(laughter) Yes, we can see that, yes.

In any case, I guess just to Ryan's question, I had similar thoughts. Why shouldn't claim recovery patterns start to taper off over time? I mean, they have been very strong for a fairly prolonged period of time. And just, things revert to the mean and you know, you price for some of the improvement over time. Why shouldn't it start to taper off?

Kevin?

Yes. I could turn it around and say why should it taper off? I guess, recoveries are about sort of consistent, disciplined management of your claims management processes, consistent and disciplined interaction with the claimant, with the claimant's employer, with the claimant's physician, and so it is a process. And, you know, I just don't see any reason that we should expect it to move.

Kevin, I think you touched on it, but we have made a very consistent, steady investment in that part of our business. Maybe that is stating the obvious. But that is at the heart of what has led to this more consistent performance once the claim comes into our hands.

Yes, and I mean, you are exactly right, though. And I do think, you know, Mark, you talked about reversion to the mean, I mean, we have been performing at these recovery levels for, I don't know, 20 quarters, 16 quarters, whatever it is. It is a long time that we have been performing at this level. And I think, you know, back five or six years ago when we started to put a lot of these processes in place, we ramped up our organization, put a lot of inventory control, [scanner] control, all the processes in place to make sure that we could have consistent performance and we have delivered on it. And I don't see any reason it's going to move.

Okay. Rick, you made an interesting comment in your opening remarks. And it related to the long-term care business. I'm not going to get the words exactly right, but you kind of alluded to longer-term improvement in LTC, near-term this is kind of a sustainable level of earnings that we should be looking for. And I guess when I look at that business, loss ratios have been trending higher obviously, despite rate increases. Interest rates are obviously lower. You know, who knows what happens to those three or four years out. But I guess, what gives you the confidence in making the statement about margin improvement in a business that, you know, has really only gone one direction for you and pretty much everybody else?

[It's a fair play.] I think, Mark, when you look at -- this is Rick. When you look at the LTC business, that statement really stems from the fact that we are very active in terms of raising rates in that business. We have been talking for that now for a couple of years. But those premiums are just starting to flow. So as you go back to when we started to raise rates, the process of actually getting premiums to start to flow takes some time. We will be starting to see that now. All of the pressures you talk about are still challenging. And when I talk about improvement, it is slight improvement over time. It's not material improvement. But that will come from the repricing environment.

And Mark, if I could add to Rick's comments, too. I think I would just underscore the importance of having chosen to get out of that business completely, put it into a closed block, and the focus that brings around an organization. So I think to your point, Rick -- and Kevin, his organization is very involved in this, as well -- once you make that decision and put it into a closed block, it doesn't just sit there. There is an awful lot of focus on many things, including rate increases. I can assure you, Mark, that we recognize there is a substantial portion of our capital supporting that part of the business. And there's things -- there's not many new levers, but there are levers that we can use to, as Rick said, slightly improve the performance there.

Okay, and just one final question on the UK. I mean, if you look at this business historically, obviously very high returns, you know, 20-plus%. You benefited from acquisitions that you made a while ago that, you know, you put them on your own claims platform, they performed well. Obviously, the last few years or last couple of years have been much more disappointing. I guess my question is, how do we think about the true returns of this business, you know, longer term? I mean, is this really a 13%, 14% return business, similar to kind of what you would expect in the US, or is there reason to think that it should structurally be higher in the UK over the long-term?

Maybe I'll speak and maybe ask Rick to speak to it, too. I don't think, Mark, that we ever -- and then we have been saying this probably for the last year or two, is that we ever -- those rates have returned that were in the upper 20s and sometimes even into the 30s, were not sustainable for any number of reasons. I think obviously, so we have been trying to bring people's expectations about the returns in this business. I for one, I think we believe as a management team this is still a business that can produce well above industry sorts of ROEs. It certainly is not going to get to those kinds of levels we saw before. But through the efforts of Jack and his team, too, the hope is that what we are also doing is reducing the volatility of the BTOE contribution. As I mentioned in my comments, just looking at the last six quarters, there is low of 19 and a high of 34, and bounced all around in between there. So part of this is also just getting to the right-above industry-average kind of ROE. But it is also dealing with the business model that has more predictability in terms of its ability to produce more consistent BTOE performance, as well. Rick, I don't know if you can add anything to that.

I would just add that when we look at that business, we see things we can improve. And I think that is the key thing. We have gotten to a 12% ROE. We see action items we can take to improve the business. We see the ability to take price in the marketplace and make risk selection that differs from what we have today. And so, I think that gives us confidence we can be higher than here today. And Jack, maybe you can follow up on that.

Yes, you know my view to the market is different in the UK. There's only four major players in the business. That business tends to be a very small part of what they do overall. And there is a ton of market expansion opportunity in the UK. So the dynamics of the business in the UK aren't the same today as they are in the US, where you have 25 carriers, you have deep penetration, and there is a lot of fighting back and forth between carriers. So as long as those dynamics are still in place, you should still be able to get above-industry returns on it.

Okay, alright, thank you.

It looks like from the queue we have exhausted our questions. So let me just thank you all for taking the time to join us. I think as a couple of you mentioned, there was an awful lot of reporting companies here in a relatively short period of time. So we appreciate people taking the time. Obviously, we are all available if there are any follow-on questions. And operator, this will complete our second-quarter 2012 earnings call.

That concludes today's conference. Thank you for your participation.