普登 (UNM) 2013 Q1 法說會逐字稿

Good day, and welcome to the Unum Group first-quarter earnings results conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to the Senior Vice President, Investor Relations, Mr. Tom White. Please go ahead, sir.

Great. Thank you, DeVonna. Good morning, everyone, and welcome to the first-quarter 2013 earnings 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 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, 2012. Our SEC filings can be found on the Investor section of our website at Unum.com.

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

So now I would like to turn the call over to Tom Watjen. Tom?

Thank you, Tom, and good morning, everybody.

Our first-quarter results were a good start to 2013, with year-over-year operating earnings per share growth of 9.6%, and book value per share, excluding AOCI, increasing 11.9%. But let me touch on a few of my observations for the quarter.

First, our operating performance again remains quite strong. We continue to generate solid underwriting results across most of our businesses, resulting in a stable to lower benefit ratio for each of our major business segments. As a result, we again delivered strong profit margins across most of our business segments, and an operating return on equity of 11.7% for the Company, and 14.1% for our ongoing Operating businesses.

Second, as it relates to revenue growth, it remains a difficult environment. And you saw that in our Company-wide sales, which were down 5.2% for the quarter. Not to make excuses, but when you look more carefully at the results, you'll see that the decline is driven by two things, a significant year-over-year decline in UK group life sales, and pressure on our small case US-based business. The UK group life sales results should be no surprise, as we have taken significant pricing actions in this product area.

And in the US, the general environment remains challenging, which has been compounded by the fact that many brokers and agents and employers are focused on the implementation of healthcare reform, thus delaying the implementation of new workplace benefit programs. This headwind may be with us for much of 2013, but is no cause for us to change our disciplined growth strategy. We continue to feel that we are very well-positioned in our markets.

The third thing I would point out is we have continued to deliver very solid investment results, and our asset quality remains excellent. We have not changed our investment strategies and stretch per yield, but instead have continued to take the actions necessary to manage through this low interest rate environment. Including raising prices in those product areas most impacted by today's lower rates. In addition, our balance sheet remains in very good shape, and our book value per share, as I said earlier, excluding AOCI, grew to by almost 12% to $30.24.

At the same time, we have maintained a solid capital position, which when combined with our strong first-quarter statutory results, continues to provide us with a great deal of financial flexibility. Our risk-based capital ratio of 396% continues to be at the upper end of our expected range for 2013, and our Holding Company cash position of over $650 million is also well within our guidance.

We repurchased another $95 million of our stock as part of our plan to repurchase $500 million for the year. And have now repurchased approximately $2.3 billion in stocks since we initiated this program in 2008. Later this month, our Board will consider an increase to our common stock dividends, which they have increased in each of the past four years.

But lastly let me also touch on a couple of other areas that have in the past not performed as well as we hoped, both of which I am happy to say, continued to show steady improvement this quarter. I'm of course referring to our Unum UK Group Life business and our Closed Block. Our Unum UK Group Life business results have stabilized and we continue to make progress executing our plan of repricing and repositioning of this block of business.

While more time is needed for these results to be fully realized, I am pleased with what we are seeing thus far. And within our Closed Block segment, our long-term care interest-adjusted loss ratio improved in the first quarter, compared to both the year ago period, as well as the previous quarter. This line continues to present longer-term challenges, but we are pleased with the improved risk performance we have seen in this line in the most recent set of quarters.

So in summary, the first quarter represents a good start to the year. While we continue to have a cautious view of the business environment for 2013, which may slow the growth of the Business, we continue to believe that the disciplined approach we have followed in the past will allow us to continue to generate solid margins and returns in our businesses. That, along with our commitment to returning excess capital to our shareholders through share repurchases and dividend increases, we think will assure that we continue to create value for our shareholders.

So with that brief review of the first quarter, I'll now turn things over to Tom for a brief review of the operating results. Tom?

Great, thanks.

As you can see from our press release yesterday afternoon, we reported net income of $212.6 million for the first quarter of 2013, or $0.79 per diluted common share compared to net income in year-ago quarter of $213.9, or $0.73 per diluted common share. Included in net income for the first quarter of 2013 are after-tax non-operating retirement related losses of $9.7 million, and after-tax net realized gains of $6.7 million. Included in first-quarter 2012 were after-tax non-operating retirement related losses of $7.6 million, and after-tax net realized investment gains of $8.3 million. So excluding these items, after-tax operating income was $215.6 million for the quarter, or $0.80 per diluted common share, compared to $213.2 million, or $0.73 per diluted common share in the year-ago quarter.

Moving to an overview of our business segments. Operating income for the Unum US segment increased 1.1% to $208.1 million in the first quarter, with premium income increasing by 2.5%. A lower benefit ratio, 70.9% in the quarter compared to 72.5% in the year-ago quarter, and a lower expense ratio were off somewhat by higher amortization of deferred acquisition costs in the supplemental and voluntary business line, due to higher level of policy terminations.

Within the Unum US segment, operating income in the group disability line was $77.9 million, compared to $74.7 million last year. Premium income increased 2% over last year, due to sales growth and the impact of rate increases. The benefit ratio for this line was 84.3%, down from a year-ago 84.9%. This line includes a before-tax gain of $4 million from the purchase and retirement of the debt associated with the tailwind securitization.

In the group life in AD&D line, operating income increased 10.5% to $57.9 million in the first quarter benefiting from an increase of 3.5% in premium income, as well as favorable risk experience, which lowered the benefit ratio to 70.6% in the quarter, compared to 72% a year ago. In the supplement and voluntary line, operating income declined by 8.2% to $72.3 million, compared to $78.8 million in the year-ago quarter. The primary driver of the lower earnings was a higher level of DAC amortization, which resulted from unfavorable policy terminations, primarily in our voluntary benefits product line. Underlying risk experience, in both the individual disability recently issued and voluntary benefit lines, was favorable relative to the year-ago quarter.

Moving to Unum UK. Operating income in this segment declined to GBP20.2 million from GBP24.7 million in the year-ago quarter. The benefit ratio improved to 69.5% in the first quarter, compared to 72.4% in the year-ago quarter while premium income in local currency declined by 14.5%, primarily reflecting the group life reinsurance program. We saw favorable risk experience in the group life and supplemental and voluntary lines of business, which were partially offset by less favorable results in the group long-term disability line.

Wrapping up our core operations, Colonial Life reported an increase in operating income of 8.2%, to $75.4 million. Premium income increased by 3.6%, and the benefit ratio remained generally stable at 52.5%, compared to 52.1% in year-ago quarter. Net investment income increased by 11.5% in the quarter, and included approximately $5 million of miscellaneous net investment income, above the level we normally experience in this segment.

In the Closed Block segment, operating income totaled $27.3 million, compared to income of $15.4 million in the year-ago quarter. The interest-adjusted loss ratio for both the individual disability and long-term care blocks improved from the year-ago quarter. For the Corporate segment, we reported an operating loss of $33.7 million for the first quarter, compared to a loss of $20.6 million in the year-ago quarter. Net investment income is lower due to a lower yielding asset and a decrease in investment income, attributable to tax credit partnerships. Interest in debt expense was higher at $34.8 million, compared to $32.5 million in the year-ago quarter. Operating expenses were higher in the first quarter compared to a year-ago, due to less favorable expense accruals.

So now I'd like to turn the call over to Rick McKenney for further analysis of the quarter. Rick?

Thank you, Tom.

This morning, I'll spend a moment on the profit trends we saw in our business segments this quarter, including detail on our growth trends. Then we'll comment on our investment results and our capital position. First, on operating results in the first quarter. Unum US operating earnings increased just over 1%, with favorable risk experience across each of our major product lines. Focusing on risk results first and beginning with our group disability business, the benefit ratio continues to perform well at 84.3% for the first quarter of 2013 which compares favorably to the 84.9% in the year-ago quarter, and 84.5% in the fourth quarter of 2012.

The underlying experience this quarter was favorable, with favorable overall claim incidents, continued strong claim recoveries, and the ongoing benefit that we realized from the pricing discipline we showed on new sales and renewals. Also recall that we reduced the new claim discount rate for group long-term disability in the third quarter of 2012. This line of business continues to perform very well as we seek to balance growth, but maintaining strong profit margins.

The group life and AD&D line had a very strong first quarter, as well. The benefit ratio improved in the quarter to 70.6%, compared to 72% in the year-ago quarter which led to earnings growth of over 10%. The improved risk results were driven by a favorable average claim size, while claim incidence was slightly higher. And finally, in Unum US, the supplemental and voluntary line produced $72 million, which is lower than the run rate we have seen. We saw a higher level of policy terminations in the voluntary benefits line than we have seen historically. This causes more DAC amortization, which was partially offset by reserve releases, as these cases leave.

As for the underlying risk trends for the supplemental and voluntary line, both lines of business exhibited favorable risk experience relative to the prior-year quarter. The fundamental trends for both of these lines continues to be quite positive, providing the Company with a strong long-term growth opportunity. This comes as we leverage our traditional employee benefit relationships to increasingly provide employee-paid financial protection products. Our markets are increasingly moving in this direction, and we remain well-positioned to serve those market needs.

Moving to Unum UK, our earnings on a pound sterling basis were GBP20.2 million. This result is consistent with our expectations, and we are pleased with the underlying business trends in the first quarter. The benefit ratio for the first quarter of 69.5% showed improvement from the fourth quarter of 76.2%. The group life reinsurance program we initiated on January 1 causes a decline in premium income, but will add more stability to this line of business over the course of the year. We did see some noise in the quarter with a small amount of prior-year life claims that were not covered under the reinsurance program. But I would say, otherwise, the 2013 group life claims experience was stable this quarter.

Beyond the claims experience, we continue to make good progress on repricing and repositioning our group life block, and tactically increasing renewal rates for our group disability business. Average rate increases for group life will continue to run in the low double-digit range, and persistency remains within our expectations. First-quarter group life persistency was 83.5%, compared to 82.5% for all of 2012. It will take several more quarters to fully implement our repricing actions, but as I said, we are pleased with the progress we are making so far.

Colonial Life again produced solid results for us, with earnings of $75.4 million for the first quarter, an increase of just over 8%. The benefit ratio of 52.5% was consistent with the trend we've experienced over the past several quarters, and is within our range of expectations. We saw less favorable claim experience in both the cancer and critical illness, and accident, sickness and disability product lines, which was mostly offset by improved risk experience in our life line of business. This quarter, we did see a higher level of miscellaneous net investment income in this line that helped earnings by about $5 million.

And finally, overall results in our Closed Block improved to $27.3 million this quarter, compared to $15.4 million in the year-ago first quarter. Operating earnings in the individual disability line were generally consistent with the year-ago quarter. The interest-adjusted loss ratio improved to 81.5% this quarter, compared to 83% a year ago, reflecting lower submitted claims.

Looking at long-term care results, we saw improved results, with the interest-adjusted loss ratio at 89.5% for the quarter, compared to 91.2% in the year-ago quarter and 89.9% for the fourth quarter primarily reflecting more favorable recovery, and mortality experience.

Now I'd like to move to a discussion of our sales and growth trends, first looking at Unum US. Overall sales increased by 1.3% in the first quarter, with sales in the supplemental and voluntary lines increasing 3.6%. Our group sales declined by 1.6%, with sales in the under 2000 life market declining by 12% this quarter, as the market environment remains competitive and we think our corporate customers are distracted as they focus on the implementation of healthcare reform. Growth in the group large-case market increased by 21%, primarily driven by sales of new lines of business to our existing customer base. Our mix of group sales is within our longer-term objectives, as 62% of sales are in the core market, and 38% in the large-case market.

Premium persistency for our group lines was slightly lower than last year's first quarter, but remains within our expectations at 88.9% for both group LTD and group life. We continue to see little to no benefit to premium income from the market place. And in total, premium growth was 2% in the group disability line and 3.5% in group life and AD&D. While we would certainly like to see an acceleration of these levels, we remain diligent to protect our profit margins.

In the UK, sales results again this quarter reflect the actions we are taking to improve the profitability in this business. Sales were down 46% in total, with a sharp drop of 75% in group life sales. Clearly, this reflects our aggressive rate actions and decisions to pull back in certain market segments. Sales in group disability were flat this quarter at GBP7 million. Total premium income for the overall business declined 14.5% in the first quarter, largely reflecting the 50/50 quota share reinsurance referenced earlier that we put in place beginning this quarter in the Group Life line of business.

Finally, at Colonial Life, sales began 2013 with a 4.9% decline. Sales declined by 3.8% in our core commercial market, but did increase by 5.6% in the larger commercial sector of the market. Persistency for our three primary product lines all showed a slight improvement over the first quarter of 2012. Premium growth remains positive at 3.6% for the quarter.

Transitioning to the balance sheet and the investment portfolio. There is little change to our recent trends of strong credit quality in the midst of an on-going challenging environment for new money yields, due to the low-level of interest rates, as well as tight corporate bond spreads. On credit quality, the net realized gain position of our fixed maturity securities portfolio stands at $6.8 billion. Our credit quality remains in very good shape, with a minimal level of credits on our watch list.

New money yields, however, continue to present a challenge. And for the first quarter, we had a 6 basis points reduction since December in our overall portfolio yield, to 6.41%. We continue to manage through this environment by being selective in our asset purchases, and look for the best relative value with the cash flow we have to invest. We have been running a higher than normal cash and marketable securities balance, which created a drag on our net visit income for the first quarter, as we look for the best possible investment opportunities.

Additionally, we continue to make pricing adjustments on our new sales and renewals to reflect the lower interest rates. As we mentioned at Investor Day back in December, we estimate that the low interest rate environment will impact our operating earnings growth by 68% in 2013, by which we expect to recoup one-third as price increases work their way through our books. A good example of this is in our US LTD business. We did experience a widening in the interest reserve margin of 5 basis points, from 87 basis points at year-end to 92 basis points at the end of the first quarter. Given the low level of cash to invest in this portfolio this quarter, the portfolio yield remains stable, while the aggregate discount rate declined as a result of the reductions we made to the new claim discount rate in the third quarters of 2011 and 2012.

Moving on to an update on capital, we continue to be in a very strong position. The most important driver of capital management is statutory net income, which totaled $175 million for our traditional US life insurance companies in the first quarter, an excellent start to the year. Given this strong performance, the weighted average risk-based capital for our US Traditional Life Insurance Company was consistent with the year-end level of 396%, at the top end of our 2013 range of 375% to 400%.

Holding Company cash and marketable securities totaled $652 million at quarter-end, and share repurchase activity in the first quarter totaled $95 million, and we continue to expect approximately $500 million of repurchases for 2013. Finally, we have no change to our 2013 outlook, and continue to anticipate growth in operating earnings per share to be within a range of 0% to 6%.

Now I'll turn the call back to Tom for his closing comments.

Thanks, Rick.

As we move to your questions, I'll close by reiterating my opening comments. We are pleased with our financial operating results for the first quarter. As a result of our strong, rich results, we again generated solid profitability in returns, and positive cash flow with the Company. While generating profitable top line growth remains challenging in today's environment, we are maintaining our disciplined growth strategy, which has served us well in the past. Importantly, too, our balance sheet and capital position remains strong, which enables us to continue to supplement our operating performance with consistently returning capital to our shareholders through share repurchases and dividend increases. This completes our prepared remarks.

And operator, let's move to the question and answer session.

Thank you. (Operator Instructions) Jeff Schuman with KBW.

Wanted to drill in a little bit on some of the market dynamics in the UK and the US. In the UK, I think you said the group life sales down 75%, but persistency sort of hung in. So that might suggest maybe that the rate increases are maybe sticking on some of the renewals, but things are pretty challenging on the sales front. With sales down 75%, very good to see your discipline. But is there any -- do we see any hope that the market is going to start following you at some point?

Kevin, you want to touch on that?

Yes. Good morning, Jeff. I think the persistency does reflect that rate increases, so far at least, are sticking to a reasonable degree. I think that the decline in sales is primarily driven by two things. One, we discontinued sales of certain products within our group life portfolio that we deemed to be just too unprofitable for us to pursue. And we significantly ramped down our large-case group life sales, where we saw significant profit deterioration during 2012. And that's primarily what is driving down the sales comparison.

Okay. So you weren't necessarily losing head to head, you just weren't competing for as much business, essentially.

Right. I think we are very competitive still, even though we are moving rates up in the core market. But I think we've, much like we did in the United States, backed away from the more volatile and more difficult profit picture of the large-case market.

But then once again, kind of get back to the key point. So you do see -- you do feel there is some hardening of the life rates across the market.

To some degree. We are certainly moving them up, and other competitors are moving them up to some degree as well, although not to the rate or the extent that we are.

Okay, that's helpful. And then in the US, I was interested -- I think the group sales being limited, I think you attributed to the uncertainty around reform. And I guess the idea maybe is that business maybe isn't churning as much. But then if that's true, I would have thought maybe that would have been a help to persistency, and I think persistency was a little bit off there. So is there actually less market churn, or what's going on there?

Persistency is off, but not by very much. And when you take into account that, that is driven by the fact that we are moving rates up in the sort of mid- to upper-single-digit range, I think we expected that. Last year's persistency also was incredibly high, maybe historically high over the last 7 or 8 years. So I think it's operating pretty much in the 88% to 89% kind of range, or 87.5% to 89% range that we expected to operate at. And I think we're feeling quite good about our ability to place rate increases.

But then in the marketplace, in terms of healthcare reform, most of the pressure I think is in the smaller end of the market. And that shows up in our sales results. Our small-case sales were down 19%, but our mid-market sales were up 6%. And our large-case sales were up 18%, primarily driven by -- the vast majority of it -- new sales to existing large-case customers. So I think the dynamics that we're talking about are reflected in other competitors' results as well. The small-case market I think is a little bit under the gun in terms of what are we going to do by January 2014 around healthcare reform? How are we going to work with exchanges? And I think that's driving activity levels down, and it's probably increasing some inertia in terms of movement of sales.

It was pretty much a 2013 phenomenon that has to get sorted out by the end of the year. Is that kind of the way to think about it?

I would think about it that way, yes.

Okay, thanks a lot, guys.

Thank you, Jeff.

Sandeep Kamat with UBS.

So I wanted to start with the benefit ratios across your segments. If I just look year over year, it looks like pretty much everything is moving in the right direction. We've had a couple of other companies report last night. And I would say that things have been much more mixed on the underwriting side at some of those names. So I'm trying to understand if what you're seeing is sustainable, or maybe did you just have a really good quarter and maybe things start to revert a little bit as we move through the year.

Kevin, why don't you start with that one?

Yes. I think it's a mix -- to answer your question, Sandeep. Good morning. I think on group disability income, there was a particularly good quarter. Everything went well -- submitted incidents are slightly down, paid incidents remain flat, actual expected incidents was better than pricing assumptions, [SKD] incidents was moving its way down. Hopefully that continues. But I think the loss ratio, we've always said would be in the 84% to 85% kind of range. And there might be little movements here and there inside of that range. But we're pretty happy with the quarter, that's for sure.

In group life, we had favorable mortality and favorable severity, and that helps us out and moves that loss ratio down a bit. But again, that loss ratio tends to be in that 70% to 72% range. And it's sort of at the lower end of the range but about where we expect it to be. And then in voluntary, the loss ratio was lower than we would normally expect. We would expect it to be closer to the 50% to 52% range. But that was primarily driven by the active life reserve releases as a result of the large-case terminations in voluntary.

Okay. And then are you expecting on the voluntary, as you peer into the second quarter, this issue around large terminations -- is that going to persist, do you think?

I think we'll get some of that throughout the year. You know, we're trying to be more disciplined in our underwriting, particularly around large accounts that have high employee turnover rates and low re-enrollment rates, and where profitability starts to decline. And we can't get it back on the volume side and we can't get it back on the repricing side either, so we're just not interested in continuing to pursue those accounts. The majority of that would be more focused on the first quarter, in terms of renewal activity, than throughout the rest of the year. But you'll see some continued effect of that throughout the year in voluntary as we work our way through that.

And I also think on the voluntary sales side, the voluntary market is going to experience some of that same healthcare reform pressure as employers and voluntary carriers try to figure out what exactly is the nature of a voluntary wrap-around sale that is going to work with an as yet undefined health insurance exchange program. So I think in both cases, you're going to see that kind of pressure.

Maybe, Kevin, I can add, too, I think if you look at both our Unum US performance as well as the Colonial performance from a persistency point of view, historically, we've always had a much higher persistency than the marketplace. And I don't think we see any changes in that as we look forward.

Right. I would suspect that the persistency will eventually revert back to the mean, close to the 79%, 80% range, as the year goes forward.

Got it. And then a question for Rick on the long-term care Closed Block. Good to see that interested adjusted loss ratio stayed below 90%. I think it's in line with what you guys built into your reserve build at the end of 2011. Are we yet seeing the benefit in terms of the price increases in the denominator of that calculation? In the past, Kevin has talked about being X% of the way through the price increases. But there's also been this commentary around -- it's going to take a while for that premium to actually emerge through the income statement. I just want to get a sense of where we are on that. Thanks.

Good, thanks, Sandeep. I think you characterized it well. We are tracking that process to our expectations, and working with our regulators to go through that process. So to date, that's working reasonably well. But you're right, that does take some time for that to come through the premium line through implementation, and the different things that have to happen there. So we haven't really felt that impact yet. In fact, some of the benefit we see is from previous price increases going back several years. So this is a longer-term trajectory that we have to work through. But in terms of the actions that we can take, we are doing reasonably well, and tracking to our expectations.

Great, thank you.

Thanks, Sandeep.

Mark Hughes with SunTrust.

In Colonial Life, what is the outlook for recruiting in the overall size of the sales force in 2013?

Randy, you want to touch on that by maybe even -- as you do, maybe talk about just some of the strategy adjustments we're making in terms of how to position the sales force.

You bet, I'll do that. Good morning, Mark. We have ratcheted down our recruiting, Mark, here in the first quarter. That was intentional. We are dropping it from roughly around 1,500 agents recruited in the first quarter a year ago, down to -- it was in the 900 to 1,000 range. We think that's a much better balance of quantity and quality. We're very focused on training these new reps effectively, and getting the best possible return out of that effort. So I really see the size of our sales force stabilizing in that probably 11,000 to 12,000 range by year-end. Don't see any dramatic decreases. But won't see it significantly increasing either. But I think we'll -- really, our strategy is around getting better return, higher levels of productivity per rep. And I think that is going to serve us well over time.

Okay. How about on the US group business? You said there's some delay related to healthcare reform. How about competition? You've obviously taken some pricing actions. Do you think you're ahead of the market now in that and that it may take some time for the market to catch up with you?

Kevin?

Yes. Good morning, Mark. I think we've been consistent over the last several years in moving prices up. The number of competitors in the recent 12 to 18 months have started to move prices up as well, in response to some of their deteriorating loss ratios. But we were certainly ahead of the game. And when you look at industry pricing statistics, we still tend to be priced somewhat higher than the majority of our competitors in the core market.

I think every carrier is faced with the same low interest rate environment and ought to be moving their rates up to some degree. And everyone has faced some deterioration in loss ratio, except for us, pretty much, and so ought to be taking that kind of action. And everyone has got the same sort of effect of an aging population, with the expectation at least of claims sort of following aging of the population. If you continue to price for that, then you can stabilize your loss ratios and continue to generate your returns. So competitively, I think, the market is a little bit harder than it was maybe two years ago. But I still think we are ahead of the market on that.

And Mark, if I could add to that, too. I think, as you know, you have to think about every carrier has had a different starting point as they think about repricing. Kevin, in Unum US, we have about a 13% ROE for the group disability line of business. So therefore, when we talk about price adjustments, they are really to reflect primarily the lower discount rate that we have in the lower interest rate environment. I'm not sure every carrier finds themselves in that same situation as they talk about repricing strategy.

Right. I think if you looked at the industry margins, they are considerably lower than the margins that we're throwing out there.

Great, thank you.

Thanks, Mark.

Jimmy Bhullar with JPMorgan.

So first a question on buybacks. I think you did $95 million this quarter. That's lower than what you've done in the last few quarters. So is there any reason for that? And how do you expect buybacks to ramp up as the year goes on? And then on the sales, you discussed this a little bit in the past few questions. But how much of the sales weakness is because of just the disruption on healthcare reform? Or is part of it that there are still competitors out there that are somewhat aggressive on pricing?

Rick, you want to take the first one?

Sure, thanks, Jimmy. When you look at our buybacks of $95 million in the first quarter, one, we're very happy with that. We think relative to our market cap, we still continue to return a significant amount of capital to our shareholders. When you look at our trend line, what we've done in various quarters, we've been in and out of the market. So I wouldn't read anything into a $95 million quarter other than that -- how we get into the market. But the bottom line is that we still look at $500 million for the year. We think that's consistent with our capital generation model. And that, in conjunction with dividends, we think is a very effective way to return capital to our shareholders.

Kevin, want to pick up on the sales question?

Good morning, Jimmy. It's hard to quantify how much of it is from healthcare reform --

Just in general terms, is that more? Or is it that you're, like in some parts of the market, you're losing share or losing cases to other companies?

Yes, activity is down about 10% year over year. So you would expect that, at a stable closing ratio, to translate in that similar kind of pressure on your sales. There certainly are some aggressive competitors out there. I don't think we're winning and losing much more than we had been in the past. But always in this marketplace, regardless of how many carriers are acting to move prices up, there are always several carriers that are acting to take advantage of that, and trying to drive their sales up. And you've just got to look at sales numbers to see that.

And then in the UK business, what was the benefit -- and what would the results have looked like if you had not had the reinsurance contract in place? And what are your intentions as to potentially renew this for next year?

Certainly. When you look at the reinsurance contract, in the first quarter I would say it was kind of a wash. So the underlying results in the quarter were actually pretty good in our group life line. So all else being equal, I think we may have lost a little bit by having that reinsurance. But I think we still are very happy that we are in that structure going throughout the year. As we mentioned, we did have a little bit of carry-over from previous year claims that came through that weren't covered. So that elevated the loss ratio a little bit. But that's a structure that we like, relative to our business and the size of our business and the volatility that we want to see. So I wouldn't speculate in terms of how we take that over time. But certainly, still happy it's in place here in the first quarter.

Okay, thank you.

Thanks, Jimmy.

Chris Giovanni with Goldman Sachs.

I just wanted to touch on the UK and see how we should be thinking about earnings once we sort of get through the pricing changes. And the reason I ask is that, the reinsurance transactions appear to be doing what you've really targeted, which is reduce some of that earnings volatility we've been seeing the past couple of years. But presumably, it's going to give up some of the upside when profitability improves? So versus the low $30 million or so you're trending versus maybe what we saw a couple years ago, which was consistently in the $50 million or so quarterly range there, where should we end up here once you get through all your pricing actions?

Rick?

It's difficult to talk about in terms of where we end up much longer term. Let me talk about this year and maybe as we get out into next year. This year, we expect the business to be flat, relative to year-ago period. So as we take through price, as we take through driving stability -- and as Kevin mentioned, there's lines that we are not continuing to write in that business -- we'll see 2013 be relatively flat. As we get past that period of time -- and I'm not sure exactly where that inflection point will be -- we'll start to see those price increases come through in the overall profitability of the business. So as we get out into 2014, we expect to see that trend line starting to increase. But I don't want to leave the expectation that we'll get back to those levels that we were at several years ago. It will be one that is slowly increasing beyond 2013 as prices take hold and growth takes hold in that marketplace.

Okay. And then your guidance, the operating earnings piece, you pointed to down 2% to 5%. And then that would be offset by 6% to 8% of accretion from buybacks. Just trying to think how we should be thinking about the guidance, given the more measured pace of buybacks in 1Q. But then less accretion in reduction of share counts based on the 30% increase in the share price here year to date. So should we be thinking about towards the lower end of that range, just given less accretion from buybacks? Or am I missing something in terms of the moving parts?

Rick?

I think those are all the right moving parts when you look at it, Chris. But I think when we take all those different pieces together, we still expect to be squarely in that range. So as we buy back over the course of the year -- and as I mentioned, a little lighter this quarter. But we expect to catch up on a reasonably quick pace. We still expect the benefits coming through on that front. And we will buy back a little bit less shares -- as our share price sits at these levels -- but nothing that will materially alter what we see over the course of 2013.

Okay. If I can just sneak one more quick one in, just in terms of the sales mix, for Kevin. Obviously you would want the mix to be better on the core piece, but obviously you pointed to a number of the competitive dynamics there. I just want to try to get our arms around how we get comfortable that the larger end of the market that you have -- how do you basically assess the business that you're putting on to make sure we don't see loss pressures down the road from maybe greater share within a more volatile segment of your group business?

As we've always talked about our large-case business, we're pretty disciplined about how we go at it. We're opportunistic where we see the chance to get the price we want, and we tend to have off quarters when we can't get the price that we want. This quarter, particularly, was driven largely by new coverages added to existing accounts. So we are already familiar with the profitability of those accounts, and we're pricing the new lines of coverage consistent with what we've already got on the books. So to the extent that they were already profitable customers, we are adding lines of business. If they weren't already profitable customers, we probably wouldn't be adding those lines of business, unless we were adding them at higher pricing than we have on the existing line. So actually, I view the quarter as quite an opportunistic and successful quarter in that regard.

Great, thanks so much.

Thanks, Chris.

Erik Bass with Citigroup.

One on the healthcare reform. I'm assuming that is also pressure for Colonial. But could you talk about what you see as a potential impact on sales, and demand for voluntary products once healthcare reform is implemented? And do you see this as a potential catalyst, or vice versa, a challenge for sales?

Actually, Randy, why don't you get started on that. Because again, you -- I think as Erik mentioned, you have a window into that with your business as well. And then maybe ask Kevin to pick up from there.

Absolutely. Good morning, Eric. Yes, certainly some choppiness, as Tom and Rick and others, Kevin, have talked about in the current time frame. But we're doing a lot of work in terms of training of our field force, we are providing guidance for employers regarding the overview of the healthcare reform requirements. We're providing recommendations on how employers need to prepare and respond, doing a lot of benefit counselor certification-type training in terms of public exchange requirements in their respective states.

So you put all that together, once we get through this implementation period, help employers get over the hurdle of just understanding the legislation and what the requirements are, we really see a very robust opportunity in terms of product solutions, benefit communication needs, that type of thing. So yes, some challenges in the short term. But a lot of opportunity, a lot of need for what we provide, and just a lot of opportunity for the VB market in the post-healthcare reform world.

Kevin, you want to add to that, too? Especially, again, I think we have some Company-wide initiatives to be sure that we actually develop a strategy, which I think is a little different than some other companies around. Make sure we can connect with some of those new emerging distribution channels within healthcare reform.

All right, thanks, Tom. Randy covered it really well. I would say that as we go through -- I think the opportunity -- the situation right now is sort of choppy because of a little bit of confusion and need for education, and the need to understand how exchanges are going to work. And that there is not going to be just one size, there are going to be many sizes and differences in exchanges, depending upon federal versus state versus private. In that context, I think there's a real opportunity to design wrap-around products that fit with those exchanges. We're going to be introducing a new group hospital indemnity product during the course of 2013, for example. I think there's a real opportunity, as Randy said, for new enrollment support and competitive communication support.

And in Unum US, and working with Colonial, we are now in the process of connecting on a plug and play basis to over 40 different platforms out there for benefit administration, and health exchange administration and enrollment management. And so I'm really optimistic about the future of voluntary, given healthcare reform.

Got you. And is it right to think about, you see the opportunity primarily in supplemental products and gap fillers that supplement what major medical would do?

Yes. I would say the greater opportunity will be there. I don't see much disruption effect the longer term on the traditional group insurance marketplace. I think that will continue to operate the way it has, although you'll see a steady shift of employer pay to employee pay products over time, much as we've already experienced. But the big growth opportunity is in voluntary.

Okay. And just one quick follow-up on voluntary as well. Are you seeing any changes in the number of people that are electing voluntary benefits that you could possibly attribute to the economy? Or I guess, just generalized, has there been any change you've seen in election rates over the past few years?

I'll answer for Unum US, and maybe Randy can supplement. Participation rates have been very steady for us during the course of 2011, 2012. And actually in the fourth quarter of 2012, we had quite high participation rates in our voluntary enrollment. So we haven't seen any deterioration in that at all.

Yes, and Eric, on our side of it, same story. We've seen very steady participation rates. In the first quarter, saw a little bit of pressure in terms of the sales premium per application. I think there was some pressure there just with the general economy. The payroll tax increase had a little bit of an impact on things. But in terms of overall participation, very stable, if even up a little bit.

Okay. Thank you very much.

Thanks, Erik.

John Nadel with Sterne, Agee.

I think we've sort of beat the sales and that sort of stuff to death at this point. I'm interested in the pace of the closed block disability premiums declining. That pace of decline has really slowed down versus what we've seen in prior years. And probably, at least I think, it's slowed down versus what you guys were expecting to see. Any explanation there? Is that something that's just an anomaly here?

Rick, you want to touch on that?

Yes, certainly, I'll give it a try here, John. In terms of closed disability block slow-down, what you're going to see in that time -- and we're also talking about pretty long time frames, so nothing you would see in any particular quarter. As people go through that process and stay on claim for longer term, you will see a little bit of slowing, but I would have to go back and look. I wouldn't expect you would see anything dramatic here over the last several years. But you will see it slow down as you look out over the course of five years to a decade. So we will have to go back and look at that, John, and get back to you at some point. There shouldn't be anything in particular that would cause any quick deterioration in the run-off. We would expect it to be pretty steady.

And Rick, if I can add to that. I think as everyone knows, the Closed Block includes the IDI business as well as the long-term care. And they each have different characteristics from a premium point of view. The IDI business was continuing to -- and is continuing to decline. At the same time, the long-term care business is actually continuing to grow. So you've got two sort of offsetting activities actually with the net block.

Okay. And maybe that's just what I'm missing, is focusing on one versus the other. The other question I have for you is just, a lot of moving parts, right? I mean, and rates and new money rates are lower now than they were, let's say, most of last year. You're getting some pricing approvals on the long-term care Closed Block business. I'm wondering if you can give us a sense for, with all the variable inputs here, how we ought to think about the risk of some sort of reserve strengthening later this year. I know your 10-K indicated that there was potential for as much as about a 7% reserve strengthening, based on a lot of different factors. As we get through three or four, roughly, months of this year, how is the combination of all those factors trending?

Certainly. John, if I were to take that and talk about where the reserves are relative -- it really hasn't changed from what we've been talking about over the course of the last year. The pressure that we're seeing in interest rates is one that will take place over a period of time. We talked just over a year ago about a three- to five-year time horizon. And I think we've consistently said we're probably on the shorter end of that, given where rates have gone, back to that initial look. But that still takes us out a couple of years from now.

With regards to other things that we're seeing, in the morbidity, we've talked about our range of loss ratios in the 85% to 90% range. And as you've seen this quarter and last quarter, we are in that range. So it's a dynamic business. But I wouldn't give you any more there that would say that there is something imminent in the course of 2013, different than anything we've been talking to you about over the course of the last year.

Perfect. Very helpful. Thank you, Rick.

Thanks, John.

Mark Finkelstein with Evercore Partners.

Sorry to do this. Back to healthcare reform, and the impact on small-case. We haven't really seen any impact, at least noticeably, on persistency. Do you have a view on whether there should be any persistency impacts?

Kevin?

I think so far, it's probably positive, generally speaking, in the sense that activity levels are down, and therefore, takeover account possibilities are down. And that's probably going to help the persistency in general. As brokers and employers focus their attention on healthcare, they are not focusing on moving their ancillary lines of coverage. So it's probably been a marginal benefit.

Down the road, it's hard to tell. I think you might see, as I said earlier, some shift down the road as healthcare reform gets put in place, from employer-paid products to employee-paid products. And that may move lines of coverage from what we call our group lines to our voluntary lines, even though we retain the customer. You may see some voluntary growth offset a little bit by some group persistency pressure in the industry in general. But right now, I would say it's probably a net positive.

Okay, interesting. And then just on the sales side, does it get worse before it gets better?

No, I don't think so. I think it probably stays as it is at the moment. It depends a little bit, of course, on competitive pricing dynamics, too. And it depends on how much emerges. There is going to be a lot of activity during the second quarter from HHS and others around health insurance exchange regulations getting sorted out. And as that happens, the pressure on brokers to communicate will increase. Hopefully, by the time we get into the third and fourth quarters, brokers will be starting to pay attention to understanding what's going to happen with their client base, and what kind of health insurance coverage they're going to put in place in what exchange. And then they'll start to take a look at what they want to do with the group coverages. So I would expect that this phenomenon might last for the second and into the third quarter, but hopefully reverse itself in the fourth quarter.

Okay. And then just on the voluntary side, if you've already addressed this. But what is the follow-on effect beyond the first quarter of the surrenders? And is there a way of framing out kind of an earnings impact normalizing for all the one-timers? Just kind of an ongoing impact.

Rick, you want to touch on that?

Yes, the ongoing impact that you would see, Mark, of that is, most of it, basically like any other premium loss, I think it was just a little bit accelerated in the quarter. And that's why you would see the one-time noise coming through as you wrote off the DAC and as you wrote off that. So you will lose the margins on those cases that are left, and we will replenish it with the new cases that we bring on. So I don't think there is anything special going on there, except for just general block migration that you'll see.

Okay and just continuation beyond this quarter on that activity?

I probably wouldn't look at that activity, relative to -- I would look at the overall premium size and the good margins that we see coming through on that. So yes, there will be a little less margin than we would have anticipated, but we'll look to replenish that with new sales at good margins as well.

Thank you.

Thanks, Mark.

Eric Berg with RBC Capital Markets.

So on the voluntary area, what is causing this attrition of business? Could we start there? Was it a pricing and a competitiveness issue, or what exactly happened that led to this large loss of premiums?

Kevin, you want to start on the strategy side of it, because I think that's really where it --

Good morning, Eric. For the most part, it comes down to being disciplined about where we want to play in the voluntary market. We had several large accounts that had high employee turnover rates and that we weren't going to get the necessary re-enrollment premium to bring the cases back to profitability. It's not very different than the process we've gone through in the group business. We are just focused on managing our in-force business effectively, and making sure we are focusing our in-force management and our sales management toward where we think we can get the best participation levels, the longest sustainable relationship with the client, and the most lines of coverage to deepen that relationship with the client. So strategically, that's what we are focused on.

And again, Kevin, I think you start with the fact this reporting segment had a 12%, 13% ROE. So we are not -- when you talk about going through some of those initiatives, they are not really designed to deal with the real fundamental issue of pricing. This is more strategic about positioning in the marketplace and with certain customers.

Right. And basically, making sure that we can maintain and even grow those margins by having the right mix of business.

Absolutely.

My second question relates to long-term care. I think you touched on this in detail, so I'm just looking for additional -- a modestly more perspective. My question is this. When you originally -- I think it was the end of 2011 -- increased the size of the exit to the individual long-term care business and a large reserve increase, you cited the fact, I believe, that your data were not statistically credible because of the small number of individuals on claims. And you referenced a Society of Actuary study that came out the prior summer that had provided a basis for the reserve charge that you took. Where do things stand now? And by that I mean, what percentage of your policy holders are on claims? And in particular, would it still be the case the data is not statistically credible? Unum's data alone is not statistically credible?

Rick?

Yes, Eric, I think the short answer to that is, it's still the same. The statistical credibility of our data is quite small. We're a small piece of the market, and even the market is still working into statistical reliability. So that has not changed at all. And that won't change for many years into the future. So we will look to the overall industry side of actuaries to give us some guidance in terms of how the world is shaping up on that front. But don't expect that will take base for us in the near term or even in the medium to long term.

Thank you.

Thanks, Eric. I think out of respect for the fact we know there's another call coming up beyond this, we'll limit to one more question, please.

Yaron Kinar with Deutsche Bank.

To follow up on Chris's question earlier about the growth in large-case business. If I understand correctly, the growth is also in -- even in the core business, it's in the larger-case businesses. So should we expect some additional volatility going forward through that in underwriting results?

Good morning, Yaron. No, I don't think so. The large-case business, the national client group business, as I said, the vast majority of that was sales of new lines of coverage and expansion of benefit coverage to existing clients. I wouldn't expect any volatility impact from that. The growth we're seeing in the mid-market, which I will characterize as sort of the 100 to 2,000 life or so marketplace, that's strategic for us. We want to focus our sales organization where we can get the best productivity return for the sales effort, given the margins that we have in our business. And we tend to try to focus our efforts more in that sort over 100 life marketplace. And I wouldn't expect that to have any negative effect on the risk side of the equation.

Okay. And maybe one more. Listening to your call today and your answers, especially around healthcare reform. Sounds like if everything else holds, the status quo holds, employment levels, interest rate levels, and so on, but healthcare reform goes through, and there's this release of pent-up demand. Sounds like there should be potential for both revenue growth and earnings growth next year from that alone. Is that a fair way of thinking of it?

Kevin, why don't think about it from a sales point of view, and just the market acceptance point of view?

Yes, as I said earlier, I do think that when healthcare reform gets sorted out, the relationships that we are building with exchanges and benefit administrators, the products that we're designing to wrap around healthcare reform, ought to generate an upward trend, I think, in the growth curve for our voluntary lines of business. And I think that's -- the marketplace is confused right now. And in the state of confusion, it's sort of disrupted and there is a lot of scrambling around, and there is a lot of inertia. Once healthcare reform gets put in place, I think there will be brokers that will move more aggressively into voluntary. Companies like ours that are well-positioned on the enrollment communications and product portfolio side, will be well-positioned for growth.

I think you may have heard me talk about this before, but there remains a significant need for the things we sell, actually. And that very basic need for that protection hasn't changed with healthcare reform. What we're seeing is both with Unum US and with Colonial, is it's obviously distracting brokers, agents and those involved in making the buying decisions. But that very basic need still exists. And I think it's becoming more clear to the market, to public policymakers and others to that effect. And that's why I think if you sense some optimism beyond some of the disruption we're going through, it's because the basic need is still very much there.

Great, thank you very much.

Well, thank you all. We know it's certainly -- as I said before, there's been a number of companies that have recently reported, which creates challenges for all of you. So we thank all of you for taking the time to join us this morning. And this will complete our first-quarter 2013 earnings conference call.

That does conclude today's conference. Thank you for your participation.