Earnings Call: Q2 2014

Jul 31, 2014

Good day, and welcome to the Unum second 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 Senior Vice President, Investor Relations, Mr. Tom White. Please go ahead, sir. Great. Thank you, Danny. Good morning, everyone, and welcome to the second quarter 2014 earnings conference call for Unum. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the sections titled "Cautionary Statement regarding forward-looking statements," and also "Risk factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2013, and our subsequently filed Form 10-Q. Our SEC filings can be found in the investors section of our website at unum.com. I remind you that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found in our statistical supplement on our website in the investor section. Participating in this morning's conference call are Tom Watjen, President and CEO, and Rick McKenney, Executive Vice President and CFO, as well as the CEOs of our business segments, Mike Simonds for Unum US, Peter O'Donnell for Unum UK, Randy Horn for Colonial Life, and Jack McGarry for the Closed Block. Now I'll turn the call over to Tom Watjen. Tom? Thank you, Tom, and good morning, everyone. I'm very pleased with our overall performance for the quarter, with operating earnings per share increasing 11% to $0.91 per share. For the first half of the year, operating earnings per share grew at 9.9%, which is at the upper end of our outlook we provided for you for 2014 of 5%-10%. Importantly too, our book value per share, excluding AOCI, continues to grow and increased 9.1% year-over-year to $33.80 a share. I think there are three key takeaways for the quarter, which Rick will address further in his comments. First, all three of our core business segments, Unum US, Colonial Life, and Unum UK, continued to produce strong results and higher year-over-year operating earnings in the second quarter. Each of these business segments is generating consistent, solid margins. As a group, generated an operating return on equity of 15% for the quarter, which is also at the upper end of the outlook we provided for 2014. I should add, too, that our overall results for the Closed Block were strong as well. Second, as I mentioned earlier, operating earnings per share grew this quarter by around 11%. What is more important to me, though, is the balance we saw in the quarter between operating performance and the impact of our share repurchase activities. This quarter, our after-tax operating earnings increased 7.5%, and our capital management or share repurchase activities added 3.5% to our quarterly earnings per share growth rate. I like this balance, and this is the kind of balance we are seeking over the longer term. Lastly, we saw very strong sales and improved premium growth throughout much of the company. I am very confident that these results have not come at the expense of profitability, but instead reflect the strength of our brand and the quality of our offering and people. At the halfway point in the year, we are generally within or above the outlook for 2014 sales and premium growth we provided last year. In summary, the second quarter was a strong one for the company. All of our businesses have shown solid year-over-year improvement. Our stronger level of operating earnings growth, along with our share repurchase activities, give us real operating leverage, and we are seeing excellent profitable top-line growth opportunities, which we are expecting to carry into the second half of the year. Now I will turn things over to Rick for a more thorough review of operating results. Rick? Thank you, Tom. Our second quarter results were quite good, as we reported operating earnings per share of $0.91, up 11% from last year. We saw good underlying growth in our after-tax operating earnings, which accounted for roughly two-thirds of our operating EPS growth. We will continue to focus on driving growth in operating earnings, and our second quarter performance continued to build off of the favorable trends we have seen emerging over the past several quarters. This growth will be additive to our underlying earnings growth per share that is generated as we steadily decrease shares outstanding. Looking first at Unum US, operating earnings increased 2.2% year over year, driven primarily by favorable experience in the Group Life and AD&D line. Group Life and AD&D produced a strong quarter, with $61.6 million in operating income, up 7.5% on favorable risk experience and premium growth of just over 3%. Our supplemental and voluntary line reported operating income of $83.6 million for the quarter, basically flat with the year ago quarter. Operating income in our group disability business increased slightly to $73.6 million from $73 million a year ago. Premium income was essentially flat this quarter, which is an improved result from the small declines we experienced over the prior two quarters, as we are seeing better sales trends and continued stable persistency. Net investment income continues to reflect the impact of the low interest rate environment. Interest reserve margins remain solid, well above our targeted levels at 91 basis points, but lower asset yields continue to pressure net investment income for this line. Importantly, our benefit ratio in Group Disability continued to improve, with the ratio declining to 81.9% this quarter from 83.9% a year ago, as the underlying experience showed stable claim incidence trends and continued favorable claim recovery performance. Looking forward, we expect a stable level of earnings from Group Disability, with some slight improvements in the benefit ratio and premium growth offset by some ongoing pressure from net investment income given the low rate environment. We expect our profit margins in this line to remain strong, among the highest in the industry. Overall, it was a solid quarter for Unum US and the segment ROE stood strong at 14%. Moving to Unum UK, operating earnings were £23.6 million for the second quarter, 8% higher than the second quarter of 2013, and generally consistent with our expectations. Our group life results are much improved and reflect the aggressive pricing and repositioning activities of the past several quarters. Group Disability results were improved this quarter, and our overall benefit ratio is 74% compared to 84% in the year ago quarter. Our margins for the U.K. have actually improved back to the mid 20% area, which generates about an 18% return on equity. Colonial Life generated another very strong quarter at $75.3 million compared to $71.1 million a year ago. We saw steady, consistent risk experience across its business lines, generating a benefit ratio of 52%, in line with the benefit ratio from last year. The underlying profitability of this business remains excellent, producing an operating ROE of 17% for the quarter. Rounding out the enterprise, the Closed Block also had an unusually strong second quarter with operating income of $37.3 million, driven in large part by very favorable results in long-term care and higher miscellaneous net investment income. The interest adjusted benefit ratio for the LTC line continued to run favorably at 80.8% for the second quarter, primarily reflecting a lower level of claim incidence rates. We generally expect the LTC interest adjusted benefit ratio to be in the range of 85%-90%, and the first half benefit ratio was 82.8%, and it has performed better relative to that expectation. The interest adjusted benefit ratio for the closed disability block showed some negative volatility this quarter at 89.4% due to higher claim incidence levels and unfavorable mortality, partially offset by favorable claim recoveries. The age of these Closed Blocks subject them to more quarterly volatility, and in this quarter, it ran favorably for long-term care, but negatively for our disability line. Moving on to our sales and growth trends across the company, we are particularly pleased this quarter with the results we're seeing. In Unum US, total sales increased by 40% in the second quarter, a sharp jump from the year ago quarter when we were seeing the worst of the disruptive impact of healthcare reform on our markets and our customers. When we look at a longer term view of sales going back to 2011, this quarter's results get us back on a trend line of growth in the mid-single digits, a more normal, sustainable level of sales growth. Within our group benefit lines, long-term disability, short-term disability, and group life, total sales increased by 50%, with 40% growth in the core market and 80% in large case market, much of which was driven by sales to existing customers. Our voluntary benefit sales also increased by about 20% in the quarter, with a good mix of sales in the core market and large case segments. These are large increases across the board, but to give you context from a profitability perspective, of the $53 million of growth that we saw, half is coming from existing customers and another quarter from sales to new core market customers, which is our most profitable business. In addition to these strong sales, persistency for our Unum US employee benefits lines remained strong at 89% for the quarter. Bringing it all together, premium growth for Unum US was up 2.3% for the quarter, and we believe we're starting to see some of the benefit from better overall employment trends. Also at Colonial Life, we saw very good sales again this quarter, an increase of 7.7% overall with positive contributions from both new accounts and existing accounts. We also saw better trends in our core commercial markets, with quarterly sales growth approaching 9% in the under 1,000 life market. Results in the large case commercial and public sector markets were also favorable this quarter, largely with growth coming from new accounts. Persistency remains slightly lower relative to the first half of 2013, but overall premium income increased by 3%, which is in line with our expectation of 2%-4% for Colonial Life. Finally, in the U.K., sales were down about 11% in the quarter to £12.6 million. Much of the decline is in the group life market, down 29%, partly due to the competitive pricing conditions and our own actions as we carefully priced this book of business. The pipeline does tell us that we should see this improve in the second half of the year. Disability sales were essentially flat with the year ago quarter at $9 million. Persistency in the U.K. is trending higher, but remains below our longer term expectations. Premium income in total increased by about 2% for the quarter. Overall, we are pleased with the growth trends in the company and equally pleased with the pricing on the business that we are selling today. We feel we have largely moved past the disruptions brought on by healthcare reform initiatives, though some evidence of that disruption still remains at the very small end of the market. Also, we are beginning to see some evidence of the improved top line growth from better employment trends. It is certainly nowhere near the pre-recession levels, but a welcome trend nonetheless. Looking at the investment portfolio, the credit quality of our portfolio remains in excellent shape. No changes there, and the watch list of potential problems continues to be very low. The decline in interest rates and the spread compression once again this quarter make for a challenging investment environment. We continue to look for the best opportunities in the investment markets and for the best relative value among the asset categories we have historically focused on. We're experiencing some near-term pressure on our investment income and product portfolio yields relative to our expectations. Similar to what we have seen over the past several quarters. Our investment team continues to perform well, and we remain disciplined in how we manage through this low-rate environment. Moving to a capital update, the weighted average risk-based capital for our traditional U.S. life insurance companies remained consistent at approximately 401%, and our holding company cash and marketable securities was $616 million at quarter end. Our statutory operating earnings of $171 million are within our range of expectations and improved over the level of the first quarter of this year. Following the first quarter issuance of $350 million of 10-year notes at a 4% coupon, in the second quarter, we retired $145 million of the debt issues scheduled to mature in November 2015, which was issued out of our U.K. holding company. As a result, there were two non-operating items that basically offset each other in the quarter, debt extinguishment costs of $10.4 million after tax, and a currency hedge gain related to that debt of $10.5 million after tax. So no impact on this quarter's net income. Also, we continually and steadily buy back our shares with the capital we are generating. Another $100 million for the quarter, which keeps us on pace with our $300 million-$600 million range for the full year. I would also note that our board of directors approved an increase in our dividend rate of 14% during the second quarter, which is the sixth year with a double-digit dividend increase. Wrapping up, I'd also affirm that our 2014 outlook for growth and operating earnings per share remains in a range of 5%-10%. In fact, most of the trends we have experienced thus far in 2014 are in line, if not at the higher end, of our 2014 outlook for sales, premium growth, and our ROE expectations. A strong first half of the year, and we like the trends we're seeing as we head into the second half. Now I'll turn it back to Tom for his closing comments. Thanks, Rick. Before we move to your questions, I'll close by just reiterating some of the things that were said before, but certainly, we have a very strong start to the first half of the year. Our focus remains on continuing to grow our business while maintaining strong margins through disciplined pricing, underwriting, and expense management. We expect to continue to generate excess capital, and we will continue to balance the deployment of that capital with the needs of the business, opportunities we see in the marketplace, and returning capital to our shareholders through our share repurchase and dividend actions. Now this completes our prepared remarks, and Danny, let's move to the question and answer session. Definitely, sir. Thank you. If you'd like to ask a question, please signal by doing so by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll take our first question from Suneet Kamath with UBS Capital Markets. Thank you. I wanted to start with the individual disability Closed Block. Rick, I think in your comments you talked about the elevated benefit ratios as maybe normal fluctuations, but have you dug into the block to see if there's anything that's jumping out there? Thanks, Suneet, for the question. Actually, as we look at the individual disability block, and I tried to reference our marks, we saw some elements which we purely attribute to volatility. Things around mortality and incidence levels that we haven't seen in some time, so it does not look like a trend. Certainly something we watch, but we would very much chalk that up to volatility in that line of business. We have dug into that, yes. Okay. Got it. I don't want to get too far ahead of ourselves, but if we look at the sales growth now over the past three quarters, it's been generally pretty strong. I'm talking about Unum US and Colonial kind of combined. As we think about 2015, I think your 2014 guidance for premiums was relatively flattish for both of those segments, maybe a little bit stronger in Colonial Life. How should we be thinking about the impact of these sales on your expectations for premium growth in 2015? Yeah. Suneet, let me ask Mike and Randy both to comment on their respective businesses, actually. Mike? Sure. Yeah. Good morning, Suneet, and yes, good strong sales in the quarter. Feel good about how the strategy is meeting the market, seeking to broaden our relationships with existing clients and grow our employee pay business. Our sales and client management folks are doing a terrific job. Turnover in both those roles is at historic lows, and so we feel really good about how we're meeting the market. That being said, in the pure second quarter, we have a little bit of an anomaly in the year-over-year growth metric, where Unum US was up 40%. That was against, as you'll recall, probably the low point in terms of market activity that we experienced in the second quarter of last year. One of the things we do is look at it, skip over 2013 and look back to 2012 where we experienced growth of about 12% or 13%. So a little bit of an anomaly. To your question about looking forward, I would expect those comparables will get a little bit more difficult when it comes to sales growth in the third and the fourth quarter. Q2 was really last year the low point. We saw it sort of flatten out in terms of sales growth and then start to improve to your point in the fourth quarter and the first quarter of this year. Certainly, with the combination of building sales momentum, probably closer in the second half of the year to the guidance that we issued last year, around 7%-10%, combined with strong persistency levels that we're experiencing, we would start to see earned premium probably to the high end of the guidance and then probably a tick or two better than that next year. Randy, you want to talk to the Colonial performance? Sure, Tom. Good morning, Suneet. We feel real good about our sales momentum at this point. We are coming in really right within our target range for the year, which we established at 4%-7%. We think that's going to lead to good premium growth performance, again, right around our targeted range of 2%-4% growth here in 2014. If we can keep this momentum going, which we feel optimistic about, Suneet, there's no reason why we shouldn't be in our targeted growth ranges moving forward and possibly even in the upper end of those ranges. Again, we are at a range of 2%-4% premium growth this year. Over the next couple of years, that was moving up more in the kind of 3%-5% range, and we feel our trend line is pointing us in that direction. Got it. Then maybe for Randy, just a quick follow-up on Colonial. Aflac U.S. has obviously been going through some issues in terms of their field force. Maybe a two-part question. One, is that having any impact on your business in terms of additional opportunities? Second, can you maybe talk about how you manage your field force? Because it doesn't seem that you're having nearly the same issues as they are. Thanks. Suneet, this is Tom, too. Especially with that last question about how we're managing that sales force, it might be good just for me to make a very brief comment just about how we're structured, actually, because I think you're right, there's different people in the markets who have different ways about going about the business. I think as everybody knows, we have really two avenues into the voluntary market. Certainly, the Unum US avenue is very important to us because voluntary allows us to have a very integrated offering of group, individual, and voluntary products in the marketplace. We actually market those through brokers and consultants. So that brand is distributed in the market in a very different way than Randy's business, for example, because Colonial has a more narrow voluntary benefit offering in the marketplace, but that's sold through agents. The agents may ultimately use a broker, but the agent controls that business. So from the group point of view, we have two very good brands, two very different ways to come to market, and it's proven to be very successful for us over the years. In fact, if you take those two businesses and look at just the results last quarter, our total VB sales were actually up 11% across the Unum US and Colonial businesses. So that's pretty strong performance. It's up 8% actually for the year. If you look at the last three years, by having this sort of two-pronged approach to the marketplace as a combined business, the growth rates range from 2% to, say, 8% over that period of time. So we've had steady growth each and every year. I just want to give that piece of context because we go to the market a little differently from some others by having two brands and two distribution systems, and they're very powerful. They give us a lot of access to different markets. They complement one another, and that's proven to be a good formula for us. So with that, Randy, you want to pick up a little bit on just the Colonial part of the story? You bet, Tom. I guess, first of all, Suneet, in terms of opportunities coming from the Aflac side of things, I, of course, can't speak to the specifics of what they're doing. But they are undergoing a lot of change in their agency distribution system. So yes, in the short term, that does create opportunities for any competitor. In terms of the management of our agency system and how we go about things, just to give you the short story, and it's really a fairly simple story, Suneet. We're maintaining a very consistent focus on our agency distribution system. This is the channel that we use to go to market, both in terms of direct sales on the smaller end of the market and then having our agents partner with brokers as they move up market. Through this approach, we really avoid any type of channel conflict, and we've been very focused on that approach for a long time. Secondly, it just gets back to sound execution of the fundamentals of our business, recruiting reps and managers, upping the quality level of that recruitment effort, developing our agents effectively, growing the number of producing agents and sales managers, and seeing very good results in that at the present time. We're seeing increased activity levels, more appointments occurring with employers, a good surge in the number of closed cases, that type of thing. Lastly, we are seeing the market environment improving, so that's helping us. As Rick said, we're seeing gradual continued improvement in the economy. Still some pressure on the real small end of it, but that's loosening up as well. I think most employers, as Rick said, are putting the Affordable Care Act implementation behind them. That's really led to more new accounts being open for us, sales and product lines that complement the changes that employers are making in their medical plans, such as our Medical Bridge product, critical illness, accident, on and so forth. So it's really led to an environment, Suneet, a very broad-based sales growth, and we're optimistic about reaching our targeted sales growth for the year based on what we're seeing. Got it. Thanks very much. Thank you, Suneet. Yep. We'll take our next question from Mark Hughes with SunTrust. Please go ahead. Good morning, Mark. Yeah, good morning. Intrigued to hear you say you're starting to see some of the benefit from better overall employment trends. What do you think that means in terms of, I think you've talked about the natural growth rate. How much has it ticked up so far, and where could it go? Mike, you want to pick up on that? Sure. We would have seen through the recession, actually a headwind there where we saw contractions in the order of 1%-2%. I'd say over the last four quarters or so, that kind of leveled out to a push up a little bit in a quarter, down a little bit in a quarter. Now I think through the first half of this year, we've actually started to see that move into positive range and think in terms of a percentage point or so. We're optimistic. Our business plans don't center on the assumption, but we're optimistic that we'll continue to see that build slowly. It plays out in natural growth to our book of business as our premiums lever on hiring trends and salary increases. That premium comes in at very low acquisition costs, which is terrific. Also at play is the attitude towards benefits. As some of the slack comes out of the labor market, we are seeing clients with a little bit of a better attitude towards improving benefits plans, perhaps adding a new benefit or two. That's showing up in our MBOC results as well. Not likely to accelerate rapidly, but a gradual improvement over the last couple of quarters. The sales overall this quarter, understanding that you had an easier comp, but still before that you had excellent growth. Was there an adjustment in pricing strategy? Obviously, your benefits ratios have been improving. Did you take that more into account when you were putting out proposals this quarter? It just seems like there was more of a step function that I'm curious as to what drove that. Mike, you want to take that? As part of this also, I think we dissected the sales from the quarter. Where those sales are coming from is a good sort of indicator of kind of that whole pricing environment, actually. Yeah, sure. Just to hit the question directly first and then speak to the mix of sales overall. No, the orientation around pricing is very consistent and actually has been for an extended period of time. We actually feel pretty good in each of our lines of business about having the market share that we do, having blocks the size that we do, yield some pretty good insights around where prices need to move up a bit, where we can afford to come down a bit. But the aggregate level has actually moved, not much at all. Looking at the quality of the business, it is one of those quarters where everything sort of broke our way across segments and products, which is good to see. But if you look at the strategy, we are very focused on building out the breadth of the relationships we have with the clients that know us and that appreciate the Unum brand. So 62% of all of our new sales came from those existing relationships. That is important. We see 2 to 3 points more favorable pricing from a line that is added to an existing relationship. We know that as we build out the relationship, it drives persistency in future periods, and that is very important to us through the renewal program. One of the key drivers certainly was large case. Just to put that into perspective, if we look at large case, we feel actually good about where that business is. It was up 80% in the quarter, but if you look at the last 12 quarters, seven times we have been up, five times we have been down, and we really do not get too caught up in what happens quarter to quarter. We look at the aggregate long-term trends. ROE in that business is actually very comparable now to our core business, and we have started to see a leveling of the earned premium, which is great and will bode well for earned premium going forward. So feel actually very good about the mix and the quality of the business that is coming in. And sorry, one more follow-up. The 62% from existing relationships, what was it in Q1? That would have been actually just a tick lower, 61% last quarter. Super. Thank you. Thanks, Mark. We will take our next question from Erik Bass with Citibank. Please go ahead. Hi. Thank you. Good morning, Erik Bass. Just following up on a couple of the last questions. I guess in the group market, we have seen several competitors that continue to face some margin pressure and appear to be either pulling back or raising prices. Has this resulted in either less competition or provided a little bit of a price umbrella for you to ramp up growth? Mike Simonds? Yeah, sure. Certainly it remains a competitive market. At any given point in time, there's going to be some carriers that are retrenching and trying to improve profitability, and others, there's going to be carriers that are trying to expand share. That being said, on balance, I would say it's a pricing environment that is slightly improved over the prior year. While I couldn't speak to any particular competitor, our best insight is that the industry, when it comes to group insurance, is currently running at a kind of mid-single-digit ROE, which would suggest there's some work to be done, and I think we're starting to see the benefit of that in a little bit of a firmer pricing environment. As we look forward, again, we're sort of cautiously optimistic that the market will firm or continue to firm up a bit. But we also recognize that as you come around the corner and you're headed towards the second half of the year, it is not easy always to maintain that pricing discipline in the face of decreased sales. And so it's somewhat of an open question as to whether industry players will stick to their guns when it comes to improving the margins of their book of business. Thanks. And you mentioned the sales to existing clients. What products are they adding? Is it a move to adding more voluntary products, I guess? And how much additional opportunity do you see to cross-sell? Is kind of keeping it in that 60% range of sales a reasonable target? Yeah. Great question. We actually think we've got a pretty long runway there. So if you think about Unum, we've built a very broad franchise, primarily around disability insurance. So we've got a large number of employer clients where we've got a line or two lines in force, and we feel like absolutely voluntary is a huge opportunity. Over a third of all our new voluntary sales are coming in on in-force group relationships. We see the individual disability, which is typically a supplemental sale for higher earners. That's a big opportunity for us. And then actually, even within traditional life insurance, we see nice opportunities for voluntary supplemental plans that sit on top of perhaps an employer-funded base. So really across the board, we see a pretty long runway and a big opportunity to drive additional growth. Great. Thank you very much. Thanks, Erik. We'll take our next question from Yaron Kinar with Deutsche Bank. Good morning, Yaron. Good morning, and thanks for taking my questions. I wanted to start off with a question on capital generation. I noticed that, I think if I backtrack and then back out of the $150 million of debt repurchase and the equity or the share repurchases and so on. I think I get to roughly $100 million of excess capital generated this quarter. I want to see if my math is correct, and if so, why it's a little bit light compared to the $550 million-$650 million annual run rate that you guided to. Rick? Certainly, Yaron. It's a good question around our capital generation, and I think this quarter we saw a good. You have to go back to our statutory earnings, which actually were back on a track that we've seen over many quarters on average, which is right around $170 million. You would note as well that that's up off of what was a lighter quarter in the first quarter. You have to take that into account first. As you look at the excess generation that we have, we continue to generate at a clip that I would expect overall. You have to take out of that, I think you're trying to do that, take out of that some of the work with debt issuance and repurchase and all the different pieces. But if you do take those different pieces out, we feel very good about our generation, where that lands, and our ability to redeploy that. You would've seen in the quarter that we actually bought back $100 million of our stock. We feel good at continuing to retire some of our shares. In conjunction, you would've seen our dividend increase that we did as well. We go through, and you could reconcile the numbers a lot of different ways, but I would say very much that our capital generation plans are on track and very consistent with what we would've talked about last year at Investor Day and how we look for the rest of the year. Okay. I guess I'm still a little confused because, again, if I take out the 145 debt, $100 million in buybacks, 37 dividends, 35 interest, I get to about $505 million remaining, and then ultimately you came in at 616. So I guess that means about $100 million of excess cash generation. Again, seems a little low relative to what you had guided to on an annual basis. Yeah. I'd add one adder in there, but not spend the time on this call to go through. We can take you offline with that, but add in the U.K. capital generation as well, which has been very consistent, over a period of time. But we're happy to take you through that offline, Yaron. Okay. Then switching gears to long-term care. Clearly you had a good quarter there. Yet one of your competitors seem to have run into some trouble there and is reviewing assumptions. Just want to hear your thoughts on kind of, as you look at your legacy book and the older vintages, what you are seeing there and how comfortable you are with results there. Jack, you want to take that question? Yeah. We had a very favorable quarter in the second quarter. We also reported a favorable quarter in the first quarter, driven by favorable submitted new claims. Both the incidence rate was favorable as well as the severity. We had good claim resolutions during the quarter. So we really did not see some of the things that perhaps some of our competitors saw in the quarter. I would note that it is a small, immature block. It is going to be volatile. We are not changing our long-term outlook of a loss ratio in the 85%-90% range. But it was a good quarter. It is good to see it. It is good to put it in the bank. And we continue to very aggressively manage and monitor the block going forward. Thank you. That is helpful. Yaron, thank you. We'll take our next question from Steven Schwartz with Raymond James. Please go ahead. Hey, good morning, everybody. Good morning, Steven. Hey. Mostly asked and answered, but I do want to go back to the sales in Group DI. I understand ACA, whatever, and maybe that has something to do with it, although I kind of find it hard to believe. But I guess my question is why 2Q? Usually things are very flat. My sense, there's not a whole lot of activity, flat between 1Q and 2Q, and all the big activity happens in 4Q. That's where you tend to see the surge in business being done. Is there anything to say about why now? Mike, you want to pick that up? Yeah. Yeah, sure. I think maybe one of the things that you're getting to, Steven, is right. Fourth quarter's going to be the biggest quarter from a sales perspective in group insurance because that's when your 1/1 decisions are sorted. Actually, you see a little less volatility, I find, in the fourth quarter because the volume is bigger. Second quarter not being the largest, sort of from a historical pattern, quarterly sort of seasonality being the biggest quarter, you are subject to more volatility. That's what I think we saw was not our biggest sales quarter. A number of things kind of broke our way, and when that happens, I think good things can happen. 7/1s are the primary, July 1st effective dates are the primary group sales that are getting submitted in the second quarter here. Again, strategically feel very good about where those sales are coming through, but because it's a smaller sales quarter, it is subject to a bit more volatility. Okay. All right. That's all I had left. Thanks. Thanks, Steven. We'll take our next question from John Nadel with Sterne Agee. Good morning. It never ceases. Good morning, everybody. A couple of real quick ones for you. The 26%, I think, effective tax rate in the quarter. Rick, what should we be thinking about as it relates to the tax rate for the remainder of the year? Actually, John, we would say calculate it right out at 30. You may be moving some of the non-operating items in and out that are messing with the calculation. Okay. So 30. It is right at 30, and that is our expectation for the year. It is tracking very much with our expectations. Okay. You mentioned miscellaneous investment income may be a little bit high in the Closed Block. Overall, was there anything notable in miscellaneous investment income relative to the run rate the last several quarters? No, I think that when you look at it, on average, it was maybe a tick or two higher than normal, but nothing that was out of a reasonable range of expectations. Okay. I guess, just an overall question on guidance. I recognize, and I think we all recognize that there's got to be some allowance for volatility in underwriting results and that sort of thing, but clearly, some real strength in the first half of the year. Even the upper end of your full year, 10% EPS growth suggests the back half of the year would be a lower earnings period relative to the first half. You affirm the guidance instead of maybe slightly raising the range. I'm just wondering if you guys had contemplated that, if you had and decided against raising the range, what was the key reasons? Certainly. I'll split that into two parts for you, John. One is how we think about it from a process perspective, our outlook. As we talked about a number of our things we've seen here, we really do refer back to what we were doing last year, and we looked at 5%-10%, and it would be very unlikely that we would change that unless we saw something taking that out of its range through the first half of the year. I don't want to discount. We're very happy with our first half results. We've had some things that went in our favor, certainly, but nothing as we look to the back half of the year that I'm overly concerned about in bringing that down. But it's just almost from a process perspective, we wouldn't necessarily adjust that unless we saw something taking us outside that range. Okay. All right. Thanks very much. Good. Thanks, John. Our next question comes from Tom Gallagher with Credit Suisse. Please go ahead. Morning, Tom. Morning, Tom. First question is on Group Disability. Your performance there continues to be quite strong, especially relative to peers, with the benefit ratio now sub 82. Can you comment at all, I'm sure you've looked across the industry to decipher broader trends, but can you comment at all about why you think your book has performed so differently? Because I think virtually everyone else in the industry has seen some level of deterioration. The one thing that comes to mind for me is you've consistently flagged better claim recoveries, and maybe that's where you're outperforming. Anyway, any help on that would be appreciated. Let me actually tee it up, Tom, but then actually ask Mike just to speak to it in more detail. Sometimes we can try to get too cute about what distinguishes us from everybody else. I think as you know, we've prided ourselves for the last six or eight years around a very disciplined approach to the business. That word gets oftentimes overused, but I think it's very important here because we have a very disciplined plan of attack for all of our businesses. We have very disciplined pricing and underwriting in all of our businesses. As you know, if you look over a longer period, that means at times we haven't grown as fast as some of our competitors actually have grown because we put a higher priority on margin, manageability, and risk management, frankly, than some have done. I think to a degree, as Mike makes his comments, I think as an overall institution, we put a lot of priority on that importance of discipline and staying focused and being sure we incent people to do the right thing as it relates to those kind of things. There are certainly probably some nuances about why we can do a little better, but I would say first and foremost, it's that disciplined approach to the marketplace, I think that frankly, all of our businesses benefit from. Mike, want to pick up on that a little bit? Yeah, sure. Just to build on Tom's point. What you would have seen from us over the last several years is earned premium that's relatively flat to a tick or two down in long-term disability. I think part of that is the pricing discipline out there in the market. It was good to see the segment start to grow just a little bit here, but I think it is reflective of front-end acquisition pricing as well as on the back end. Even here in the second quarter, strong sales, but we continue to look through the block on cases in the renewal program. We achieved increases of sort of the 6%-8% range, depending on whether you're talking about core or large case, where we've had strong persistency, 89%. The business that is termed has come off and has been performing at 5-8 points lower than the active block. It is a continuous active pruning process in terms of the pricing. But then, yes, absolutely, we sort of look at, okay, what are the investments that we have made in underwriting and in the benefits organization in general. To give you a little color, LTD submitted incidents, for instance, was pretty much in line, but a little bit volatile. Paid incidents was rock steady. What actually comes through in terms of liability acceptance rates, in terms of paid incidents, recovery trends, what we have been able to achieve in terms of settlements and offsets, all those operational metrics have been in line with expectations to slightly improve. Again, can not comment on any particular competitor, but feel very good about the position of the block and what our anticipated trends will be going forward. Okay. Thanks. That is helpful. The next question is, stat earnings looked solid. Can you comment on a more consolidated enterprise-wide basis? How were the captive results this quarter? I presume based on the performance, at least the GAAP numbers on the Closed Block, those probably were additive, but just wanted to see what that adjustment would be to the 171. Rick? Yeah, certainly, Tom. When you think about our different captives that we have out there, I think the one that I would note is Northwind was probably a little bit lighter this quarter, but that goes back to what we saw from the individual disability results in our Closed Block. So that is the only one of note that I would say that was really off from that perspective. As you know, the capital results in there are for a very different operation and structure and everything else. That is why we exclude it from our normal stat earnings, and I think that is still appropriate. Rick, did Northwind lose money this quarter? If so, how much? Yeah, I don't think I could quantify that at the moment, but I think it's going to be pretty break-even, I think is ultimately where it came down to. Got it. I'd have to check on that for you, Tom. Okay. I guess my last question is on long-term care, which would be for Rick McKenney. The favorable claims that you are seeing right now, and I know it is doing better than your longer-term expectations, but if we assume that it continues to remain anywhere, let us say, a couple of hundred basis points around this level, would this get you out of harm's way with the potential risk of a GAAP balance sheet charge if you look out over the next few years? I know the GAAP balance sheet issue is more. I know there is a heavy-duty interest rate component to that, but I just want to understand the sensitivities based on where we are trending right now and whether that might actually alleviate the need to strengthen GAAP. Sure. Tom, when you think about it, the claim trends that we are seeing right now are certainly very good and much better than we would have seen a year ago. The question is, how do those influence our longer-term expectations around the block of business? That is a little bit more challenging. Time is a dimension to that. You said if we continue to see this for a long period of time, it becomes a trend, that is certainly quite helpful. But the question is, how will that influence our long-term trends? We are going through a process, and that is where I take you back. You highlighted another aspect that we obviously have to continue to look at. Price increases continue to go well out there in the marketplace, so I would iterate that. The liabilities of our book of business, which include this claims trend that we are seeing right now, pretty good. Happy about what we saw here in the second quarter. The third piece is interest rates, and interest rates obviously continue to be quite challenging. You take all those different pieces together, we will continue to look at them and monitor them and work through that as we get closer to our year-end process. Rick, would an update on all that likely occur in 4Q of this year? I think that's probably realistic. We don't like to talk about specific quarters because we reflect it as we know things. I think that fourth quarter traditionally has been where we've brought all that together in a comprehensive look. Rick, not just this block, but all of our blocks. All of our blocks. That's our normal processes as we get closer to year-end. Okay, thanks. Good. Thanks, Tom. Our next question comes from Christopher Giovanni with Goldman Sachs. Please go ahead, sir. Good morning, Chris. Morning. In the U.K., I believe you noted you retained more of the group life reinsurance program you had. If that's the case, just wondering what percentage of that program you recaptured, and where you think that could trend to now that it appears you've stabilized and improved the profitability there. Rick, do you want to pick that one up? Yes. I'd take you back, Chris, to the process we went through actually two years ago, in actually reinsuring the majority of, I should say, the half of that block of business, and other lines of business. I think that was a good move. We were seeing volatility at that time, and we're going through repricing, so I think we're happy we did that. At the beginning of this year, we retained 25% of that. So we actually recaptured a quarter of the block back. As we get into year-end, we'll have to make those decisions in terms of where pricing in the market is, where our profitability levels are, et cetera. But I think the actions we've taken and the team in the U.K. have taken have been very prudent to date, and we'll evaluate that as we get closer to year-end. Okay. Wondering what impact the strong sales growth is having on RBC strain. If it's not that material, just given the continued favorable trends you guys are seeing, the potential for buybacks maybe to accelerate maybe towards the top end of the target you provided in December. Yeah. Thanks, Chris. No, I'd like to have that discussion because as we see this growth, I think that we've always said that the first thing we want to do with our capital is continue to grow our business. I think we're seeing that. We're very happy about that. The second piece of that is when does it become material to change our capital outlook? We're not near that yet. So think about it from a premium perspective and the growth that we're seeing. It's certainly something we'll continue to update you on, but that's something we'd like to see, but we're not in any kind of point where we're changing our outlook around how we deploy capital in the near term. But that would be a great discussion to have if we continue to grow at a more rapid rate than even what we're seeing today from a premium perspective. Okay, and then last one. Don't even know if there's a discussion to be had here, but for Jack, any evolving kind of thoughts or developments around potential reinsurance or risk reduction opportunities in long-term care? Jack? We continue to stay abreast of the market. We continue to talk about it. I don't think there's been a material change where the marketplace is. Still a lot of interest in the asset side of long-term care and much less interest in the liability side of long-term care. And so I think until we get more stability in the marketplace, and those two views come closer together. We'll continue to look at it, but it's not a short-term option right now. Thanks so much. Thanks, Chris. Our next question comes from Seth Weiss with Bank of America Merrill Lynch. Morning, Seth. Morning, and thank you for taking the question. I just wanted to, again, return to sales and maybe just baseline my understanding of what the outlook was and when you were talking about the strength in two-quarter sales You spoke about the anomaly in terms of the easy comps and skipping over 2013 and looking back to 2012. Does that extend for the entire year, 7%-10% sales growth? The reason I ask is, I suppose if I was looking at this over just 2013 levels, which was, of course, a lower sales year, the 7%-10% would imply, I believe, flat sales growth for the back half of the year. But if I'm looking relative to kind of a compounded rate of growth over 2012, which was obviously a higher rate of sales, we're talking kind of mid double-digit growth in the back half of the year. Just trying to baseline what the expectations are. Yeah, sure. We will run into tougher comparables as momentum picked up over the second half of last year. We talked about it earlier, there is a lot of work to do between now and the end of the year. We have 55%-60% of the sales year yet to book. I'm going to be a little bit cautious about making predictions, but I would anticipate that we put guidance out in the 7%-10% for the year. I think that's actually a reasonable guidance for the peer second half as well, sort of in that mid-single digit, approaching 10%. All that with the caveat that there is a lot of work to do, and as we've talked about numerous times, part of the determination will be what's the pricing environment out there, because we'll stay pretty consistent, and if the market allows us to do that, we'll certainly take it. If not, we'll live with a lower number. Okay. The full-year sales growth outlook, though, relative to 2013, at least in the U.S., you would expect to exceed that 10% range in the easier half. I think it would be right at the top of the range and maybe a bit over it, potentially. But again, a lot of work to do between now and then. I think what you hear is a sense of optimism about the things that we can control, and I think that is where Mike, I think, is right to point to the fact that, listen, we have got some good pipeline activity underway. We always do worry about a second half when some competitors are behind sales plans as they do crazy things in the marketplace. Please do not misconstrue anything we are saying for a lack of confidence in the second half. On the other hand, we cannot control what happens in the marketplace, and we have seen times where people have done some crazy things when they get behind sales plans. No, that is helpful, and was mainly looking to baseline expectations here. In terms of premium growth, I think you also mentioned this year, maybe hit sort of the upper end of that range and next year maybe get a tick or two higher than kind of the 2% premium growth. Given a normal sales environment, is that type of top-line growth we should be looking for? Or as we look out farther in a normalized environment, we see premium growth maybe even a little more than 3%? Yeah, Rick, why don't you take that? Because I think maybe it is also a reminder. I think you said it in your comments. We try not to go back and redo the outlook sort of midpoint unless there is something really significant going on. But obviously, our Investor Day meeting is a chance to kind of recalibrate everything. But maybe just talk about how you would recalibrate. Yeah. Actually, with Seth, we would look to recalibrate that as we continue to go. A couple of things I'd highlight from the overall. Mike said it very well, as has Randy. I think when you look at where we are, our sales look good today. Our competitiveness feels pretty good where we are today. Importantly, our persistency is holding very well, and I think that's something we don't talk probably as much about, but that's very good. Our customers are certainly keeping us on the books. The last piece, which is something we don't know yet today, but I think we're giving you the indication that we're seeing better employment picture out there, and that's the first time we really have done that. If all three of those things work in concert, I think you'll see some good premium numbers as we take you to our outlook at the end of the year. Okay. Appreciate the comments. Thank you. Thank you, Seth. Our next question comes from Colin Devine with Jefferies. Please go ahead, sir. Good morning, Colin. Good to hear from you. Good morning. A couple of questions. One, if I think about the U.S. business, really for the last eight years, if I look at the benefit ratio on a trailing 12-month basis, including this quarter, it has been a very steady trend down. Yet, if I look at the expense ratio, for the most part, it has been fairly flat. There has been some improvement, but not a lot. Is that something, as you look ahead, where you might be able to leverage technology to drive some change there? So that is one question. Second, for Rick, with respect to capital. I look at every one of the businesses, the U.S., U.K., Colonial, all solid 15% at least ROEs this quarter, yet we still got the Closed Block, obviously, probably producing about four. When I think of the IDI piece of that, which I assume is still about half, about half of the debt has been retired from when you did the securitization a few years back. Is there an opportunity to roll that so we can get a little bit more leverage on that to help boost the overall ROE? Thanks. Good. Thanks, Colin. Mike, you want to pick the first one up about the U.S. business and kind of the component pieces of benefits and expenses? Yeah, sure. Thanks for the question, Colin. I think there's actually a relationship that's worth pointing out between the two, benefit ratio and expense ratio. One of the drivers that's led to that pretty steady improvement in the benefit ratio is the shift in the mix of business, where we've moved with greater growth rates in the core, smaller end of the market, and we've shifted more towards employee pay. Both of those businesses tend to have lower loss ratios, but they also tend to have higher operating expense ratios. You're dealing with more transactions to get at the same number of insureds. Actually, it's taken a series of investments in technology and business process to maintain the operating expense ratio, because without the actions, we would've naturally seen the operating expense ratio drift up a bit as we shifted the mix the way that we have. As we look forward, we'll continue to look for stronger growth in those businesses in particular, and I think feel confident that we can offset that natural mix shift and the pressure that it creates on the operating expense ratio. Maybe do a little bit better than that as we look at, probably not quarter to quarter, but over the next several years, continue to find some ways to improve that operating expense ratio. The priority, though, is about better serving clients and finding ways that we can grow that top line, because as you pointed out, we feel actually pretty good about where benefit ratios are. We'll see a little bit of improvement, but we're looking to generate operating earnings out of disciplined top-line growth, and that's where the priority's going to be. I might add, Mike, that investment in certain expenses, which ultimately help the service levels improve our ability to cross-sell, which we talked about earlier. That's right. Good. Rick, do you want to pick up on the capital question? Yeah, no, I'd like to. Colin, actually, I think that it's a great question, and we think about all of our liabilities, including those liabilities and others, in terms of what we can do. We try to be very active in terms of how we manage that. You would've seen that in this quarter with the retirement of our U.K. debt and looking at that. Particular to the instruments that you're talking about that are backing our Closed Block, you're about right. It has run down over time and has halved. The liabilities have run down as well over that period of time. I would tell you that the team that put that in place prior to my time here did a very good job and got a very good structure. It is floating rate in nature, so they actually, the interest rates being down do not help you from a refinancing perspective, but it is certainly something we look at, just like we look at all of our liabilities in terms of is there opportunity there. But the more ideas you have like that around our capital, Colin, we would be happy to take them on and look at them, because I think it is something we have tried to be very active on, is managing the balance sheet on an ongoing basis. Thanks for the question. Yeah, just one quick follow-up. Is the old IDI block still running, I guess, about a cash flow neutral where you just do not have the interest rate sensitivity there anymore for what is coming in in premiums and it is basically paying the claims? That is exactly right. It is still like that. I think the only place that you have to watch that is as bonds get called in in this low rate environment, but to date, that has run very much cash flow neutral. Okay, thanks. Thank you, Colin. It appears there are no further questions at this time. I'd like to turn things over to Mr. White for any closing remarks. Well, let me just finish up here, Danny, if I could. Certainly for those on the line, we know there's a lot going on this morning, and thank you all for taking time to join us. Danny, this will complete our second quarter 2014 earnings call. As a reminder to our phone audience, that does conclude today's participation.