Unum Group (UNM)

Earnings Call: Q2 2011

← View all transcripts

Aug 3, 2011

Good day, and welcome to the Unum Group second quarter 2011 earning results conference call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead. Great. Thank you, Tim. Good morning, everyone, and welcome to the second quarter 2011 analyst and investor call for Unum Group. Our remarks this morning will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the section titled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2010, and in our subsequently filed Form 10-Q. Our SEC filings can be found in the investors section of our website at www.unum.com. I remind you that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on our website, also in the investors section. Participating in this morning's conference call are Tom Watjen, President and CEO, and Rick McKenney, Executive Vice President and CFO, and also our business segment presidents, Kevin McCarthy for Unum US, Randy Horn for Colonial Life, and Jack McGarry for Unum UK. Now I'll turn the call over to Tom Watjen. Thank you, Tom, and good morning. The second quarter was another good quarter for Unum. Before I turn things back over to Rick and Tom to cover more extensive remarks, let me touch on just a few highlights that I think I'd ask you to take away from the quarter. First, driven by slightly higher operating earnings in our core operating segments and a lower share count as a result of our share repurchase program, we reported a 9% growth in our operating earnings per share for the quarter, which again, I think is a very good result in this environment. Second, we continue to see modest growth in most of our target markets, with, as expected, the majority of that coming from our U.S. businesses. Unum US posted 9% growth in new sales this quarter, including 19% growth in group LTD sales and 12% growth in our group life and AD&D sales. While Unum US voluntary benefit sales declined by 14% this quarter, we're up against a very tough comparison from the same quarter last year. At Colonial Life, new sales grew approximately 2% this past quarter, following a slight decline in the first quarter. The primary driver was stronger sales in the public sector, which had been lagging a bit this year. Not surprisingly, sales in Unum UK declined by 34% in local currency this quarter due to our pricing actions in that market. We did, however, see an increase in sales to existing customers, which is certainly a very good sign to our continued grip in that marketplace. As usual, Kevin, Randy, and Jack are here to answer any questions you may have about their operations, but also the market conditions in each of their markets in the Q&A session. Third, despite the low interest rate environment and the global economic concern, our investment portfolio remains in excellent shape with strong credit quality, minimal realized investment losses, and generally stable port- Good day, and welcome to the Unum Group second quarter 2011 earning results conference call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead. Great. Thank you, Tim. Good morning, everyone, and welcome to the second quarter 2011 analyst and investor call for Unum Group. Our remarks this morning will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the section titled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2010, and in our subsequently filed Form 10-Q. Our SEC filings can be found in the investors section of our website at www.unum.com. I remind you that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on our website, also in the investors section. Participating in this morning's conference call are Tom Watjen, President and CEO, and Rick McKenney, Executive Vice President and CFO, and also our business segment presidents, Kevin McCarthy for Unum US, Randy Horn for Colonial Life, and Jack McGarry for Unum UK. Now I'll turn the call over to Tom Watjen. Thank you, Tom, and good morning. The second quarter was another good quarter for Unum. Before I turn things back over to Rick and Tom to cover more extensive remarks, let me touch on just a few highlights I think I'd ask you to take away from the quarter. First, driven by slightly higher operating earnings in our core operating segments and a lower share count as a result of our share repurchase program, we reported a 9% growth in our operating earnings per share for the quarter, which again, I think is a very good result in this environment. Second, we continue to see modest growth in most of our target markets, with, as expected, the majority of that coming from our U.S. businesses. Unum US posted 9% growth in new sales this quarter, including 19% growth in group LTD sales and 12% growth in our group life and AD&D sales. While Unum US voluntary benefit sales declined by 14% this quarter, we were up against a very tough comparison from the same quarter last year. At Colonial, new sales grew approximately 2% this past quarter, following a slight decline in the first quarter. The primary driver was stronger sales in the public sector, which had been lagging a bit this year. Not surprisingly, sales in Unum UK declined by 34% in local currency this quarter due to our pricing actions in that market. We did, however, see an increase in sales to existing customers, which is certainly a very good sign to our continued grip in that marketplace. As usual, Kevin, Randy, and Jack are here to answer any questions you may have about their operations, but also the market conditions in each of their markets in the Q&A session. Third, despite the low interest rate environment and the global economic concern, our investment portfolio remains in excellent shape with strong credit quality, minimal realized investment losses, and generally stable port- Good day and welcome to the Unum Group second quarter 2011 earnings results conference call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead. Great. Thank you, Tim. Good morning, everyone, and welcome to the second quarter 2011 analyst and investor call for Unum Group. Our remarks this morning will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the section titled "Cautionary Statement regarding forward-looking statements and risk factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2010, and in our subsequently filed Form 10-Q. Our SEC filings can be found in the investors section of our website at www.unum.com. I remind you that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on our website, also in the investors section. Participating in this morning's conference call are Tom Watjen, President and CEO, Rick McKenney, Executive Vice President and CFO, and also our business segment presidents, Kevin McCarthy for Unum US, Randy Horn for Colonial Life, and Jack McGarry for Unum UK. Now I'll turn the call over to Tom Watjen. Thank you, Tom, and good morning. The second quarter was another good quarter for Unum. Before I turn things back over to Rick and Tom to cover more extensive remarks, let me touch on just a few highlights I think I'd ask you to take away from the quarter. First, driven by slightly higher operating earnings in our core operating segments and a lower share count as a result of our share repurchase program, we reported a 9% growth in our operating earnings per share for the quarter, which again, I think is a very good result in this environment. Second, we continue to see modest growth in most of our target markets, with, as expected, the majority of that coming from our U.S. businesses. Unum US posted 9% growth in new sales this quarter, including 19% growth in group LTD sales and 12% growth in our group life and AD&D sales. While Unum US voluntary benefit sales declined by 14% this quarter, we were up against a very tough comparison from the same quarter last year. At Colonial, new sales grew approximately 2% this past quarter, following a slight decline in the first quarter. The primary driver was stronger sales in the public sector, which had been lagging a bit this year. Not surprisingly, sales in Unum UK declined by 34% in local currency this quarter due to our pricing actions in that market. We did, however, see an increase in sales to existing customers, which is certainly a very good sign to our continued grip in that marketplace. As usual, Kevin, Randy, and Jack are here to answer any questions you may have about their operations, but also the market conditions in each of their markets in the Q&A session. Third, despite the low interest rate environment and the global economic concern, our investment portfolio remains in excellent shape with strong credit quality, minimal realized investment losses, and generally stable portfolio yields that serve to protect our reserve position. While we would certainly like to see interest rates rise, we are well positioned if this trend continues. Fourth, as a result of our strong financial results and investment performance, we continue to maintain a very solid capital position. Our weighted average risk-based capital ratio is 394% at quarter end, and our holding company's cash and marketable securities position is over $925 million, providing the company with, as you can imagine, enormous financial flexibility. Finally, we continued our stock buyback activity with a total of $146 million of stock repurchased this quarter. Over the past five quarters, we have repurchased $726 million of stock and reduced our share count by 9%, while, as I said earlier, also maintaining a very solid balance sheet. In summary, over the past several years, we have built our business plan around a focus on discipline in all that we do, trading growth for maintaining solid margins. This has not surprisingly led to more consistent financial results that we produced over the last several years, as well as the strong financial position we enjoy today. We are certainly looking for opportunities for accelerated growth and ROE expansion, but we will continue to do so in a disciplined manner. Now I'll turn things back over to Tom White for his remarks. Tom? Great. Thank you, Tom. Net income for the second quarter, as you see, was $229.8 million, or $0.75 per diluted common share. This compares to net income of $209.7 million, or $0.63 per diluted common share last year. Included in the results for the second quarter of 2011 are net realized investment losses of $2.2 million, or less than $0.01 per diluted common share, compared to net realized after-tax investment losses of $18.9 million, or $0.06 per diluted common share in the second quarter of 2010. Net realized after-tax investment losses for the second quarter 2011 included an after-tax loss of $3.1 million, resulting from changes in the fair value of an embedded derivative in a modified co-insurance contract, compared to an after-tax loss of $15.3 million in the second quarter of 2010. Excluding these items, after-tax operating income was $232 million for the quarter, or $0.75 per diluted common share, compared to $228.6 million, or $0.69 per diluted common share in the year-ago quarter. Turning to the operating segments, Unum US operating income increased 1% to $218.1 million in the second quarter. Within Unum US, the Group Disability line reported another solid quarter from a risk perspective, as Rick will describe, though operating income declined 6.7% to $78.5 million as net investment income declined due primarily to a decrease in the level of assets supporting this line of business, and also premium income declined by 2.6%. Within the Group Life and AD&D line, operating income increased 3.3% to $53.2 million in the second quarter, benefiting from slightly higher revenue and a stable benefit ratio. In the Supplemental and Voluntary line, second quarter income increased 7.5% to $86.4 million. The year-over-year improvement was driven primarily by strong results in the Voluntary Benefit yields that serve to protect our reserve position. While we would certainly like to see interest rates rise, we are well positioned if this trend continues. Fourth, as a result of our strong financial results and investment performance, we continue to maintain a very solid capital position. Our weighted average risk-based capital ratio is 394% at quarter end, and our holding company's cash and marketable securities position is over $925 million, providing the company with, as you can imagine, enormous financial flexibility. And finally, we continued our stock buyback activity with a total of $146 million of stock repurchased this quarter. Over the past five quarters, we have repurchased $726 million of stock and reduced our share count by 9%, while, as I said earlier, also maintaining a very solid balance sheet. In summary, over the past several years, we have built our business plan around a focus on discipline in all that we do, trading growth for maintaining solid margins. This has not surprisingly led to more consistent financial results that we produced over the last several years, as well as a strong financial position we enjoy today. We are certainly looking for opportunities for accelerated growth and ROE expansion, but we will continue to do so in a disciplined manner. And now I'll turn things back over to Tom White for his remarks. Tom? Great. Thank you, Tom. Net income for the second quarter, as you see, was $229.8 million, or $0.75 per diluted common share. This compares to net income of $209.7 million, or $0.63 per diluted common share last year. Included in the results for the second quarter 2011 are net realized after-tax investment losses of $2.2 million, or less than one cent per diluted common share, compared to net realized after-tax investment losses of $18.9 million, or six cents per diluted common share in the second quarter of 2010. Net realized after-tax investment losses for the second quarter 2011 included an after-tax loss of $3.1 million, resulting from changes in the fair value of an embedded derivative in a modified co-insurance contract, compared to an after-tax loss of $15.3 million in the second quarter of 2010. Excluding these items, after-tax operating income was $232 million for the quarter, or 75 cents per diluted common share, compared to $228.6 million or 69 cents per diluted common share in the year-ago quarter. Turning to the operating segments, Unum US operating income increased 1% to $218.1 million in the second quarter. Within Unum US, the Group Disability line reported another solid quarter from a risk perspective, as Rick will describe, though operating income declined 6.7% to $78.5 million as net investment income declined due primarily to a decrease in the level of assets supporting this line of business, and also premium income declined by 2.6%. Within the Group Life and AD&D line, operating income increased 3.3% to $53.2 million in the second quarter, benefiting from slightly higher revenue and a stable benefit ratio. In the Supplemental and Voluntary line, second quarter income increased 7.5% to $86.4 million. The year-over-year improvement was driven primarily by strong results in the Voluntary Benefit yields that serve to protect our reserve position. While we would certainly like to see interest rates rise, we are well positioned if this trend continues. Fourth, as a result of our strong financial results and investment performance, we continue to maintain a very solid capital position. Our weighted average risk-based capital ratio is 394% at quarter end, and our holding company's cash and marketable securities position is over $925 million, providing the company with, as you can imagine, enormous financial flexibility. Finally, we continued our stock buyback activity with a total of $146 million of stock repurchased this quarter. Over the past five quarters, we have repurchased $726 million of stock and reduced our share count by 9%, while, as I said earlier, also maintaining a very solid balance sheet. In summary, over the past several years, we have built our business plan around a focus on discipline in all that we do, trading growth for maintaining solid margins. This has not surprisingly led to more consistent financial results that we produced over the last several years, as well as the strong financial position we enjoy today. We are certainly looking for opportunities for accelerated growth and ROE expansion, but we will continue to do so in a disciplined manner. Now I'll turn things back over to Tom White for his remarks. Tom? Great. Thank you, Tom. Net income for the second quarter, as you see, was $229.8 million, or $0.75 per diluted common share. This compares to net income of $209.7 million or $0.63 per diluted common share last year. Included in the results for the second quarter of 2011 are net realized after-tax investment losses of $2.2 million, or less than $0.01 per diluted common share, compared to net realized after-tax investment losses of $18.9 million, or $0.06 per diluted common share in the second quarter of 2010. Net realized after-tax investment losses for the second quarter 2011 included an after-tax loss of $3.1 million, resulting from changes in the fair value of an embedded derivative in a modified co-insurance contract, compared to an after-tax loss of $15.3 million in the second quarter of 2010. Excluding these items, after-tax operating income was $232 million for the quarter, or $0.75 per diluted common share, compared to $228.6 million, or $0.69 per diluted common share in the year-ago quarter. Turning to the operating segments, Unum US operating income increased 1% to $218.1 million in the second quarter. Within Unum US, the group disability line reported another solid quarter from a risk perspective, as Rick will describe, though operating income declined 6.7% to $78.5 million as net investment income declined due primarily to a decrease in the level of assets supporting this line of business, and also premium income declined by 2.6%. Within the group life and AD&D line, operating income increased 3.3% to $53.2 million in the second quarter, benefiting from slightly higher revenue and a stable benefit ratio. In the supplemental and voluntary line, second quarter income increased 7.5% to $86.4 million. The year-over-year improvement was driven primarily by strong results in the voluntary benefits business line, as well as solid growth in the recently issued individual disability line, the effects of which were more offset by a slight decline in income in the long-term care business. Moving to Unum UK, operating income in this segment decreased 3.4% to $54.7 million in the second quarter. Operating income declined 5.6% in local currency. While premium income in local currency was up 5.2% in the second quarter, the benefit ratio was higher at 69.8% compared to 66%, reflecting the impact of higher inflation on claim reserves associated with policies containing an inflation-linked benefit increase feature and a lower level of claim resolutions in group LTD, partially offset by favorable claim incidents also in group LTD. Concluding our core operations, Colonial Life experienced a 1.8% increase in operating income compared to the year-ago quarter, as premium income growth of 5.3% and unusually strong net investment income were partly offset by a higher benefit ratio. The individual disability closed block operating income was $10.4 million in the second quarter 2011, compared to $12.4 million in the year-ago quarter. This was driven primarily by lower premium income, which declined 7.6% due to the expected runoff of the closed block. Net investment income declined 3.7% due to a lower level of bond call premiums and a decrease in the level of assets. The interest-adjusted loss ratio was slightly lower at 84.3% this quarter, compared to 85.4% in the year-ago quarter, reflecting more favorable claim recovery trends this quarter. The corporate and other segment reported an operating loss of $16.8 million, compared to a loss of $17.6 million in the year-ago quarter. The improvement was driven by lower operating expenses, including a decline in litigation expense, partially offset by higher debt interest expense. Interest expense increased to $32.3 million this quarter, compared to $30.8 million in the second quarter of 2010. In addition, net investment income in the corporate and other segment was lower, driven primarily by lower short-term interest rates and our investment in low-income housing tax credit partnerships. Our increased level of investment in tax credit partnerships over the past year contributed to the lower income tax rate for the second quarter compared to a year ago. With that brief overview on our operating results, I'll turn the call over to Rick McKenney for further analysis of this quarter's results. Thank you, Tom. The key theme for this quarter is going to be the consistency of our results. I'll highlight this through the key profitability drivers for our business lines, provide a snapshot of our investment portfolio, and give you an update on our capital strategy. I'll start with our risk experience for our primary lines of business, beginning with Unum US. Once again, this quarter, risk experience was generally stable. Our group disability performance remained strong with a benefit ratio in a narrow band, with the second quarter at 84.4%. Compared to 84.6% a year ago quarter, 83.9% in the first quarter, and 84.4% this line, as well as solid growth in the recently issued individual disability line, the effects of which were more offset by a slight decline in income in the long-term care business. Moving to Unum UK, operating income in this segment decreased 3.4% to $54.7 million in the second quarter. Operating income declined 5.6% in local currency. While premium income in local currency was up 5.2% in the second quarter, the benefit ratio was higher at 69.8% compared to 66%, reflecting the impact of higher inflation on claim reserves associated with policies containing an inflation-linked benefit increase feature, and a lower level of claim resolutions in group LTD, partially offset by favorable claim incidents also in group LTD. Concluding our core operations, Colonial Life experienced a 1.8% increase in operating income compared to the year ago quarter, as premium income growth of 5.3% and unusually strong net investment income were partly offset by a higher benefit ratio. The individual disability closed block operating income was $10.4 million in the second quarter 2011, compared to $12.4 million in the year ago quarter. This was driven primarily by lower premium income, which declined 7.6% due to the expected runoff of the closed block. Net investment income declined 3.7% due to a lower level of bond call premiums and a decrease in the level of assets. The interest-adjusted loss ratio was slightly lower at 84.3% this quarter, compared to 85.4% in the year ago quarter, reflecting more favorable claim recovery trends this quarter. Finally, the corporate and other segment reported an operating loss of $16.8 million, compared to a loss of $17.6 million in the year ago quarter. The improvement was driven by lower operating expenses, including a decline in litigation expense, partially offset by higher debt interest expense. Interest expense increased to $32.3 million this quarter, compared to $30.8 million in the second quarter of 2010. In addition, net investment income in the corporate and other segment was lower, driven primarily by lower short-term interest rates and our investment in low-income housing tax credit partnerships. Our increased level of investment in tax credit partnerships over the past year contributed to the lower income tax rate for the second quarter compared to a year ago. With that brief overview on our operating results, I will turn the call over to Rick McKenney for further analysis of this quarter's results. Thank you, Tom. The key theme for this quarter is going to be the consistency of our results. I will highlight this through the key profitability drivers for our business lines, provide a snapshot of our investment portfolio, and give you an update on our capital strategy. I will start with our risk experience for our primary lines of business, beginning with Unum US. Once again, this quarter, risk experience was generally stable. Our group disability performance remained strong with a benefit ratio in a narrow band with the second quarter at 84.4% compared to 84.6% a year ago quarter, 83.9% in the first quarter, and 84.4% in the full year 2010. Group long-term disability new claim incidents continues to show some volatility and was slightly higher in the second quarter compared to the first quarter, but was slightly lower than what we experienced in the second half of 2010. As with previous quarters, our claim recovery experience remains solid. We have not changed our expectations, although we are carefully monitoring it, and we expect the benefit ratio to remain within the range of results we have experienced over the past several quarters. For the group life and AD&D line, results also remain generally stable, with the benefit ratio at 70.3% for the second quarter, flat with the year ago quarter and consistent with a 70% benefit ratio the first quarter. Looking to the supplemental and voluntary lines, voluntary benefits earnings remain quite strong again in the second quarter, with favorable risk experience continuing in the life line of business. The loss ratio on the recently issued individual disability line was lower relative to last year's second quarter and generally stable with the first quarter results. Finally, long-term care loss ratios were up year-over-year and slightly higher compared to the first quarter, driven by the continued buildup of active life reserves and a slight uptick in new claim incidents. We continue to make good progress on the individual long-term care rate increases that we began to file in the fourth quarter of last year. We have completed our filings in 47 states and D.C. So far, we have received rate increases approvals in 30 states. As well, we have achieved 84% of the requested rate increase in those states that have reached a decision, and we continue to work with remaining states. The additional premium from this rate increase will emerge over 2012 and 2013. In the U.K., we continue to see greater stability in our risk results. While the benefit ratio is higher this quarter relative to a year ago, it is generally stable with the levels over the previous two quarters at just under 70%. The impact of higher inflation in the U.K. has caused much of the increase in the benefit ratio on a year-over-year basis. In isolating on claims experience for group long-term disability, we have seen favorable claim incidence trends, but some deterioration in claim resolution experience. Jack and his team are implementing many of the claims management processes that have served us well in the U.S., and we believe that these practices will benefit our performance in the U.K. over the long term. Finally, on Colonial Life, the benefit ratio for the second quarter remained within our expected range of 50%-52%. At 51.2%, the benefit ratio was higher than a year ago, but generally consistent with the experience of the past two quarters. The accident, sickness, and disability line of business, which produced adverse claim trends in the fourth quarter of 2010, has stabilized over the first half of the year. Turning to the top line, new sales in Unum US continue to show some good momentum, increasing 8.6% for the second quarter and 9.3% for the first half of the year. Group LTD sales grew at 19% this quarter, with better sales results coming from the core market, where pricing appears to be firming somewhat, as well as a healthy mix between core market and large case business. Group Life and AD&D also had solid results, with sales up 11.8%, driven by good growth trends in this core market. Our sales in voluntary benefits declined 13.5% this quarter, but I will note that last year's second quarter was especially strong, with heavier than normal large case activity pushing last year's growth rate over 50%. Premium income in the voluntary benefits grew by 8% this quarter, as we continue to see solid growth in the full year 2010. Group long-term disability new claim incidents continues to show some volatility and was slightly higher in the second quarter compared to the first quarter, but was slightly lower than what we experienced in the second half of 2010. As with previous quarters, our claim recovery experience remains solid. We have not changed our expectations, although we are carefully monitoring it, and we expect the benefit ratio to remain within the range of results we have experienced over the past several quarters. For the Group Life and AD&D line, results also remain generally stable, with the benefit ratio at 70.3% for the second quarter, flat with the year ago quarter and consistent with a 70% benefit ratio the first quarter. Looking to the supplemental and voluntary lines, voluntary benefits earnings remain quite strong again in the second quarter, with favorable risk experience continuing in the life line of business. The loss ratio on the recently issued individual disability line was lower relative to last year's second quarter and generally stable with the first quarter results. Finally, long-term care loss ratios were up year-over-year and slightly higher compared to the first quarter, driven by the continued buildup of active life reserves and a slight uptick in new claim incidents. We continue to make good progress on the individual long-term care rate increases that we began to file in the fourth quarter of last year. We have completed our filings in 47 states and the District of Columbia. So far, we have received rate increases approvals in 30 states. As well, we have achieved 84% of the requested rate increase in those states that have reached a decision, and we continue to work with the remaining states. The additional premium from this rate increase will emerge over 2012 and 2013. In the U.K., we continue to see greater stability in our risk results. While the benefit ratio is higher this quarter relative to a year ago, it is generally stable with the levels of the previous two quarters at just under 70%. The impact of higher inflation in the U.K. has caused much of the increase in the benefit ratio on a year-over-year basis. In isolating on claims experience for group long-term disability, we have seen favorable claim incidence trends, but some deterioration in claim resolution experience. Jack and his team are implementing many of the claims management processes that have served us well in the U.S., and we believe that these practices will benefit our performance in the U.K. over the long term. Finally, on Colonial Life, the benefit ratio for the second quarter remained within our expected range of 50%-52%. At 51.2%, the benefit ratio was higher than a year ago, but generally consistent with the experience of the past two quarters. The accident, sickness, and disability line of business, which produced adverse claim trends in the fourth quarter of 2010, has stabilized over the first half of the year. Turning to the top line, new sales in Unum US continue to show some good momentum, increasing 8.6% for the second quarter and 9.3% for the first half of the year. Group LTD sales grew at 19% this quarter, with better sales results coming from the core market, where pricing appears to be firming somewhat, as well as a healthy mix between core market and large case business. Group Life and AD&D also had solid results, with sales up 11.8%, driven by good growth trends in this core market. Our sales in voluntary benefits declined 13.5% this quarter, but I will note that last year's second quarter was especially strong, with heavier than normal large case activity pushing last year's growth rate over 50%. Premium income in the voluntary benefits grew by 8% this quarter, as we continue to see solid growth in this line. We remain pleased with the underlying sales trends in our voluntary benefits business and the pipeline of activity we are seeing. Overall, however, economic uncertainties in the U.S. continue to dampen our top-line growth trends, and we continue to see essentially no benefit to our premium line from the natural lift to our business from a growing employment base. At Unum UK, our emphasis remains on firming rates in the group risk market, and as a result, new sales remain challenging, but we are pleased the persistency is holding up well relative to our expectations. Additionally, we're seeing good upsell trends as existing customers add to their coverage. Premium income was encouraging this quarter at GBP 107.8 million, an increase from both a year ago and prior quarters. Jack and his team continue to make good progress in implementing several important operational initiatives for a business that is already producing a 20% plus ROE. Finally, sales in Colonial Life regained some positive momentum after a soft first quarter. Second quarter sales increased by 2.1%, primarily driven by higher sales activity in the public sector. Our commercial market sales were down slightly this quarter on a difficult comparison with a 13% increase last year and our withdrawal from the market of a limited benefit medical product. Recruiting trends at Colonial Life remain positive, with new rep contract growth of 5% this quarter and up 6% year to date. Moving on to the investment portfolio. We continue to be very pleased with the results we're producing. Profile of our investment portfolio remains in excellent shape with the net unrealized gain position in our fixed maturity securities portfolio at $3.9 billion at the quarter end and our portfolio watchlist declining even further this quarter. Miscellaneous net investment income, which results primarily from bond call premiums, was a slight net positive to our results this quarter compared to the year-ago quarter and was slightly higher than our historical quarterly run rate. The Colonial Life and Unum UK segments were beneficiaries of this source of net investment income this quarter relative to a year-ago quarter, while miscellaneous net investment income in Unum US in the closed block was slightly lower than we saw a year ago. Putting money to work at good rates is extremely challenging right now, but it continues to only have marginal impact on the company. As we laid out at our last Investor Day, we benefit from a low level of new cash flow to invest relative to the size of our existing portfolios and the hedges we have in place in our long duration LTC portfolio. Our portfolio yields continue to hold up well with our aggregate portfolio yield of 6.68%, down a basis point from the first quarter. The yields on the investment portfolios backing our various product lines also showed similar stability. The yield net of our discount rate for Unum US Group LTD business is in very good shape at 96 basis points as of June 30th. Given these strong ongoing financial results, book value per share continues to grow, increasing 10.4% from June 30th, 2010 to $29.94 to June 30th, 2011. Moving on to the balance sheet and our capital position, statutory earnings remained strong in the second quarter at $171 million. This level of statutory earnings continues to drive strong growth in our capital position. The weighted average risk-based capital ratio for our traditional U.S. life insurance companies was approximately 394% at quarter end, toward the upper end of our target range of 375%-400%. Holding company cash and marketable securities totaled $927 million. We remain active repurchasing our shares with the second quarter totaling $146 million, and for the first half of the year was $370 million. Our leverage ratio remained at just under 21% for the second quarter. An item to note, which is in our earnings release and our soon-to-be filed Form 10-Q, is that we're providing our current estimate to the future adoption of the accounting standards update, which clarifies which costs qualify as deferrable acquisition costs. As you're aware, beginning in 2012, only the incremental direct costs associated with successful acquisition of new or renewal insurance contracts can be capitalized. We currently estimate that our retrospective adoption would result in a cumulative effect adjustment to the opening balance sheet of between $400 million and $600 million in the year of adoption. This is for U.S. GAAP accounting only and therefore is a non-cash and does not impact our statutory capital, our RBC, or our holding company liquidity. We also currently estimate that the adoption of this update will result in an immaterial decrease in net income in 2012 and in the years preceding to which the retrospective adoption will be applied. It also doesn't impact any of our plans in the coming years. Finally, as we look forward to the second half of 2011 and given a very solid first half of the year, we're confirming our previous outlook for 2011, which calls for operating earnings per share growth of 6% to 12%. Now I'll turn the call back to Tom for his closing comments. Thanks, Rick. In closing, I'm generally pleased with our results this quarter. The economy and today's employment trends continue to make top-line growth a challenge, but our ongoing focus on consistent profitable growth has positioned us very well. Our strong capital position and financial flexibility are valuable assets and I believe will continue to provide us with opportunities to profitably grow our business and continue to follow the capital management strategy of dividend increases and share buybacks that have served our shareholders well. This completes our formal comments and operator, let's move to the question and answer session. At this time, if you'd like to ask questions, please press star then the number 1 on your telephone keypad. Once again, that's star 1 to ask a question. We'll take our first question from Jimmy Bhullar with J.P. Morgan. Hi, good morning. Hi, Jimmy. First, maybe if you could discuss just market conditions in the disability market, just in terms of pricing, claims incidents, recoveries. Obviously, your margins have been stable for the last several quarters, but other companies have seen deterioration. On the U.K. business, your ROE was high to begin with. You are raising prices. I think the thought was that competitors would follow and your margins would go even higher, and that doesn't seem to have happened. I was just wondering if you could discuss if your sales remain weak, would you lower prices, or are you seeing evidence that competitors might follow suit down the road? Thanks, Jimmy. Let me just ask Kevin actually talk to just the U.S. market and the pricing themes. Then Jack obviously can touch on just an update on what's happening in the U.K. Kevin? Thanks, Tom. Morning, Jimmy. Hi. First on the competitive side, I think I characterize the marketplace as fairly stable. Seems to be some firming up of pricing, particularly in the small and mid-market. On the other hand, incumbent carriers continue to defend vigorously their in-force business. I would say that from a competitive environment standpoint, those factors plus the steady movement of brokers toward more voluntary benefits, all of that speaks well for our strategy. On this line, we remain pleased with the underlying sales trends in our voluntary benefits business and the pipeline of activity we are seeing. Overall, however, economic uncertainties in the U.S. continue to dampen our top-line growth trends, and we continue to see essentially no benefit to our premium line from the natural lift to our business from a growing employment base. At Unum UK, our emphasis remains on firming rates in the group risk market, and as a result, new sales remain challenging. But we're pleased the persistency is holding up well relative to our expectations. Additionally, we're seeing good upsell trends as existing customers add to their coverage. Premium income was encouraging this quarter at GBP 107.8 million, an increase from both a year ago and prior quarters. Jack and his team continued to make good progress in implementing several important operational initiatives for a business that is already producing a 20% plus ROE. Finally, sales in Colonial Life regained some positive momentum after a soft first quarter. Second quarter sales increased by 2.1%, primarily driven by higher sales activity in the public sector. Our commercial market sales were down slightly this quarter on a difficult comparison with a 13% increase last year, and our withdrawal from the market of a limited benefit medical product. Recruiting trends at Colonial Life remain positive with new rep contract growth of 5% this quarter and up 6% year to date. Moving on to the investment portfolio, we continue to be very pleased with the results we're producing. The credit profile of our investment portfolio remains in excellent shape with the net unrealized gain position in our fixed maturity securities portfolio at $3.9 billion at the quarter end, and our portfolio watchlist declining even further this quarter. Miscellaneous net investment income, which results primarily from bond call premiums, was a slight net positive to our results this quarter compared to the year ago quarter and was slightly higher than our historical quarterly run rate. The Colonial Life and Unum UK segments were beneficiaries of this source of net investment income this quarter relative to a year ago quarter, while miscellaneous net investment income in Unum US in the closed block was slightly lower than we saw a year ago. Putting money to work at good rates is extremely challenging right now, but it continues to only have marginal impact on the company. As we laid out at our last Investor Day, we benefit from a low level of new cash flow to invest relative to the size of our existing portfolios and the hedges we have in place in our long duration LTC portfolio. Our portfolio yields continue to hold up well with our aggregate portfolio yield of 6.68%, down 1 basis point from the first quarter. The yields on the investment portfolios backing our various product lines also showed similar stability. The yield net of our discount rate for Unum US Group LTD business is in very good shape at 96 basis points as of June 30. Given these strong ongoing financial results, book value per share continues to grow, increasing 10.4% from June 30, 2010 to $29.94 to June 30, 2011. Moving on to the balance sheet and our capital position, statutory earnings remained strong in the second quarter at $171 million. This level of statutory earnings continues to drive strong growth in our capital position. The weighted average risk-based capital ratio for our traditional U.S. life insurance companies was approximately 394% at quarter end, toward the upper end of our target range of 375%-400%. Holding company cash and marketable securities totaled $927 million. We remain active repurchasing our shares with the second quarter totaling $146 million, and for the first half of the year was $370 million. Our leverage ratio remained at just under 21% for the second quarter. An item to note, which is in our earnings release and our soon-to-be filed 10-Q, is that we're providing our current estimate to the future adoption of the accounting standards update, which clarifies which costs qualify as deferred acquisition costs. As you're aware, beginning in 2012, only the incremental direct costs associated with successful acquisition of new or renewal insurance contracts can be capitalized. We currently estimate that our retrospective adoption would result in a cumulative effect adjustment to the opening balance sheet of between $400 million and $600 million in the year of adoption. This is for U.S. GAAP accounting only and therefore is a non-cash and does not impact our statutory capital, our RBC, or our holding company liquidity. We also currently estimate that the adoption of this update will result in an immaterial decrease in net income in 2012 and in the years proceeding to which the retrospective adoption will be applied. It also doesn't impact any of our plans in the coming years. Finally, as we look forward to the second half of 2011 and given a very solid first half of the year, we're confirming our previous outlook for 2011, which calls for operating earnings per share growth of 6%-12%. Now I'll turn the call back to Tom for his closing comments. Thanks, Rick. In closing, I am generally pleased with our results this quarter. The economy and today's employment trends continue to make top-line growth a challenge, but our ongoing focus on consistent profitable growth has positioned us very well. Our strong capital position and financial flexibility are valuable assets and I believe will continue to provide us with opportunities to profitably grow our business and continue to follow the capital management strategy of dividend increases and share buybacks that have served our shareholders well. This completes our formal comments and operator, let's move to the question and answer session. At this time, if you would like to ask questions, please press star then the number one on your telephone keypad. Once again, that's star one to ask a question. We will take our first question from Jimmy Bhullar with J.P. Morgan. Hi, good morning. Good morning. First, maybe if you could discuss just market conditions in the disability market, just in terms of pricing, claims incidents, recoveries. Obviously, your margins have been stable for the last several quarters, but other companies have seen deterioration. On the U.K. business, your ROE was high to begin with. You are raising prices, and I think the thought was that competitors would follow and your margins would go even higher, and that doesn't seem to have happened. I was just wondering if you could discuss if your sales remain weak, would you lower prices or are you seeing evidence that competitors might follow suit down the road? Thanks, Jimmy. Let me just ask Kevin actually talk to just the U.S. market and the pricing themes, then Jack obviously can touch on just an update on what's happening in the U.K. Kevin? Thanks, Tom. Morning, Jimmy. Hi. First on the competitive side I think I characterize the marketplace as fairly stable. Seems to be some firming up of pricing, particularly in the small and mid-market. On the other hand, incumbent carriers continue to defend vigorously their in-force business. I would say that from a competitive environment standpoint, those factors, plus the steady movement of brokers toward more voluntary benefits, all of that speaks well for our strategy. Deferrable versus maybe the amount related to unsuccessful sales. Any further commentary would be appreciated. Sure. I think when you look at that one, I note that it's still early in the process. We put the range out there. We thought we had a good estimate around where we were, so we wanted to take that out to our investors. I would say that we're not finished. When you look at the overall impact, we probably lay out that about two-thirds of it's going to be costs that are not deferrable anymore, and about one-third is successful sales impacts. When you think about those two categories, think about the not deferrable anymore, does not have direct line of sight to the sale. You could think about rent at a sales office, where before we would've said that was directly attributable to sales. Now, without that direct line of sight, we won't be deferring those costs anymore. If you think about the unsuccessful sales, think about underwriting and things like that, where we think they were built on the acquisition, and they won't be anymore. So that gives you a sense of the types of things. As I said, we are early in the process, and I wouldn't extrapolate or generalize too much because it is a very detailed roll-up that you need to go through to understand where you are. Hopefully, that gives you a little bit of insight. Obviously, we'll bring more to you line of business and that type of view as we get closer to Investor Day and outlooks for 2012. Okay, that's helpful. Then maybe for Kevin McCarthy, regarding the long-term care book of business, can you give us an update in terms of where you are with the filing of rate increases? Then when we think about the interest-adjusted benefit ratio, where you think that kind of settles in as we've seen increase in active life reserves with hopefully an offset from higher premiums. Yeah, thanks, Chris. Good morning. As Rick said in his earlier remarks, we are well on pace to achieve so far what looks to be about 84% of our desired price increases. We will continue to push that through. We have gotten some optimistic signs even from some states that we thought might be more difficult. So I am feeling pretty optimistic that we are going to achieve our price increase goal, and then as Rick said, that will flow through in 2012 and 2013 into top line and bottom line. In terms of interest-adjusted loss ratio, I think we are making all these moves right now in terms of building up active life reserves and placing rate increases in order to get that loss ratio stabilized probably somewhere in the mid-80s. Okay. Thank you very much. Thanks, Chris. We will take our next question from Colin Devine with Citi. Morning, gentlemen. Morning, Colin. I've got three. First, with respect to the pace of buybacks. A little slower this quarter than the first. Tom, I think you've been quoted in the media talking a little bit more about M&A lately. Is there anything we should be reading into that? Is the first question. Second, with respect to the change in DAC, Rick, I assume most of the adjustments coming on the supplemental and voluntary line, and perhaps if you could just give us some idea, because it does represent, I guess, about 25% roughly of your outstanding DAC, that you're going to adjust downward or about $2 a share. And then for Kevin, looking at persistency trends this quarter, should we start to infer perhaps somewhat slower momentum heading into next year? And I guess tied to that, obviously, there was some fairly flat premium growth this year. Thanks, Colin. Let me start, and as I said, we'll move to Rick and Kevin for his two pieces. But I- Deferrable versus maybe the amount related to unsuccessful sales. Any further commentary would be appreciated. Sure. I think when you look at that one, I note that it's still early in the process. We put the range out there. We thought we had a good estimate around where we were, so we wanted to take that out to our investors. I would say that we're not finished. When you look at the overall impact, we probably lay out that about two-thirds of it's going to be costs that are not deferrable anymore, and about one-third is successful sales impacts. When you think about those two categories, think about the not deferrable anymore, does not have direct line of sight to the sale. You could think about rent at a sales office, where before we would've said that was directly attributable to sales. Now, without that direct line of sight, we won't be deferring those costs anymore. If you think about the unsuccessful sales, think about underwriting and things like that, where we think they were built on the acquisition, and they won't be anymore. So that gives you a sense of the types of things. As I said, we are early in the process, and I wouldn't extrapolate or generalize too much because it is a very detailed roll-up that you need to go through to understand where you are. Hopefully, that gives you a little bit of insight. Obviously, we'll bring more to you line of business and that type of view as we get closer to Investor Day and outlooks for 2012. Okay, that's helpful. Then maybe for Kevin McCarthy, regarding the long-term care book of business, can you give us an update in terms of where you are with the filing of rate increases? Then when we think about the interest-adjusted benefit ratio, where you think that kind of settles in as we've seen increase in active life reserves with hopefully an offset from higher premiums. Yeah. Thanks, Chris. Good morning. As Rick said in his earlier remarks, we are well on pace to achieve so far what looks to be about 84% of our desired price increases. We will continue to push that through. We have gotten some optimistic signs even from some states that we thought might be more difficult. So I am feeling pretty optimistic that we are going to achieve our price increase goal, and then as Rick said, that will flow through in 2012 and 2013 into top line and bottom line. In terms of interest-adjusted loss ratio, I think we are making all these moves right now in terms of building up active life reserves and placing rate increases in order to get that loss ratio stabilized, probably somewhere in the mid-80s. Okay. Thank you very much. Thanks, Chris. Yeah. We will take our next question from Colin Devine with Citi. Morning, gentlemen. Morning, Colin. I have three. First, with respect to the pace of buybacks. A little slower this quarter than the first. Tom, I think you have been quoted in the media talking a little bit more about M&A lately. Is there anything we should be reading into that? Is the first question. Second, with respect to the change in DAC, Rick, I assume most of the adjustments coming on the supplemental and voluntary line, and perhaps if you could just give us some idea, because it does represent, I guess, about 25% roughly of your outstanding DAC, that you are going to adjust downward or about what, $2 a share. Then for Kevin, looking at persistency trends this quarter, should we start to infer perhaps somewhat slower momentum heading into next year? I guess tied to that, obviously, there was the fairly flat premium growth this year. Thanks, Colin. Let me start, and as I said, we'll move to Rick and Kevin for his two pieces. You're right, we have been sort of talking a bit more about M&A, but I must say, we really haven't changed direction in terms of the fact, the primary focus is running our operations. Secondarily, it's putting our capital back in the hands of our shareholders through dividend actions and share buybacks. Oh, by the way, if we can find M&A transactions that fit onto our strategic plan and financial foundation, we'll do it. We certainly are looking at some things. But I wouldn't want you or anyone to think that we're holding back on capital in anticipation of M&A. Our view, I think, frankly, has always been, if we saw the right thing that fit strategically and financially, we'll find the capital to support it. Let's not hold back too much capital in anticipation of something that actually may never happen. Because as you know, we're incredibly disciplined about the things we look at. But we are trying to be active. Just as a general matter, there's not a lot out there. But again, I don't think that we're warehousing for that because as I said, I have a strong belief that if the right thing comes along strategically and financially, we'll find the capital to support that. I think, Rick, you were talking about the pace of buybacks, and I think nothing's really changed on that score. Okay. Want to pick up, Rick, the DAC question just about the general. Yeah. On the DAC front, to give you some general, I mean, it's across the board, quite frankly, in terms of where it is. I think the percentage you talk about of the write-off would represent probably the write-off you'd see on a pro rata basis across the board. Like I said, we'll have to give more details out there. There may be a little bit higher percentages in some of our group lines, but those that carry lower DAC balances and all that's in the back of the statistical supplement. And. Will this drive any change to how you are going to operate Colonial with the career force? No, it will not. When you look at it in terms of where we are and the variable cost base that we have in Colonial Life today, I think we will continue to operate it very much the same way. I do not actually see us changing operating practices around Randy Horn at all as a result of this. Kevin, you want to pick up the persistency question? Sure. Morning, Colin. Morning, Kevin. I think persistency is pretty stable. I think it was virtually stable in every single line of business. It was a little bit of that downtick in group life, I think primarily driven by a couple of expected sort of large case terminations. Otherwise, very stable. I think that's a reflection to some extent of our customer relationship metrics, which are all extremely sound on the satisfaction side. I think it's also a reflection of a little bit of market inertia. I think out to bid seemed to be sort of at a lower level over the last year or so than they had been in prior years. Probably is a reflection a little bit of more stable pricing in the marketplace, and so there's less opportunity to go to bid and get a better deal, maybe. I expect persistency to sort of hold up and stay about where it is. Then I think on the flat premium side of the question, I think that's more a reflection of lack of employment growth and lack of wage inflation, and that's really sort of all about the economy. Also, as you remember, last year and the year before, we were lagging on what we call MBOC sales to existing customers, primarily driven, I think, by customers tightening up a little bit and sitting tight on their benefits. We did see some uptick two out of the last three quarters now in terms of MBOC sales, and that would have a positive impact on 2012, 2013 premium if that continued. Okay. Just sort of extending that a little bit. You're now heading into the renewal season. I assume that the pencil is sharpened up. Perhaps history can lead us to the final one. Been active repurchasing our shares with the second quarter totaling $146 million, and for the first half of the year was $370 million. Our leverage ratio remained at just under 21% for the second quarter. An item to note, which is in our earnings release and our soon-to-be filed 10-Q, is that we're providing our current estimate to the future adoption of the accounting standards update, which clarifies which costs qualify as deferred acquisition costs. As you're aware, beginning in 2012, only the incremental direct costs associated with successful acquisition of new or renewal insurance contracts can be capitalized. We currently estimate that our retrospective adoption would result in a cumulative effect adjustment to the opening balance sheet of between $400 million and $600 million in the year of adoption. This is for U.S. GAAP accounting only and therefore is a non-cash and does not impact our statutory capital, our RBC, or our holding company liquidity. We also currently estimate that the adoption of this update will result in an immaterial decrease in net income in 2012 and in the years proceeding to which the retrospective adoption will be applied. It also doesn't impact any of our plans in the coming years. Finally, as we look forward to the second half of 2011 and given a very solid first half of the year, we're confirming our previous outlook for 2011, which calls for operating earnings per share growth of 6%-12%. Now I'll turn the call back to Tom for his closing comments. Thanks, Rick. In closing, I'm generally pleased with our results this quarter. The economy and today's employment trends continue to make top-line growth a challenge, but our ongoing focus on consistent profitable growth has positioned us very well. Our strong capital position and financial flexibility are valuable assets, and I believe will continue to provide us with opportunities to profitably grow our business and continue to follow the capital management strategy of dividend increases and share buybacks that have served our shareholders well. This completes our formal comments, and operator, let's move to the question and answer session. At this time, if you would like to ask questions, please press star then the number 1 on your telephone keypad. Once again, that is star 1 to ask a question. We will take our first question from Jimmy Bhullar with J.P. Morgan. Hi, good morning. Hi, Jimmy. First, maybe if you could discuss just market conditions in the disability market, just in terms of pricing, claims, incidents, recoveries. Obviously, your margins have been stable for the last several quarters, but other companies have seen deterioration. On the Unum UK business, your ROE was high to begin with. You are raising prices, and I think the thought was that competitors would follow and your margins would go even higher, and that does not seem to have happened. I was just wondering if you could discuss, if your sales remain weak, would you lower prices, or are you seeing evidence that competitors might follow suit down the road? Thanks, Jimmy. Let me just ask Kevin to talk to just the U.S. market and the pricing themes. Then Jack obviously can touch on just an update on what's happening in the U.K. Kevin? Thanks, Tom. Good morning, Jimmy. Hi. First, on the competitive side, I think I characterize the marketplace as fairly stable. There seems to be some firming up of pricing, particularly in the small and mid-market. On the other hand, incumbent carriers continue to defend vigorously their in-force business. I would say that from a competitive environment standpoint, those factors plus the steady movement of brokers toward more voluntary benefits, all of that speaks well for our strategy. You're right. We have been sort of talking a bit more about M&A, but I must say, we really haven't changed direction in terms of the fact, the primary focus is running our operations. Secondarily, it's putting our capital back in the hands of our shareholders through dividend actions and share buybacks. Oh, by the way, if we can find M&A transactions that fit onto our strategic plan and financial foundation, we'll do it. We certainly are looking at some things, but I wouldn't want you or anyone to think that we're holding back on capital in anticipation of M&A. Our view, I think, frankly, has always been, if we saw the right thing that fit strategically and financially, we'll find the capital to support it. Let's not hold back too much capital in anticipation of something that actually may never happen, because as you know, we're incredibly disciplined about the things we look at. But we are trying to be active. Just as a general matter, there's not a lot out there. But again, I don't think that we're warehousing for that because as I said, I have a strong belief that if the right thing comes along strategically and financially, we'll find the capital to support that. I think, Rick, you were talking about the pace of buybacks, and I think nothing's really changed on that score. Okay. You want to pick up, Rick, the DAC question? Yeah, on the DAC front, to give you some general, it's across the board, quite frankly, in terms of where it is. I think the percentage you talk about of the write-off would represent probably the write-off you'd see on a pro rata basis across the board. Like I said, we'll have to give more details out there. There may be a little bit higher percentages in some of our group lines. But those carry lower DAC balances and all that's in the back of the statistical supplement. Will this drive any change to how you're going to operate Colonial with the career force? No, it won't. When you look at it in terms of where we are and the variable cost base that we have in Colonial Life today, I think we'll continue to operate it very much the same way. I tried to make that. I don't actually see us changing operating practices around Randy Horn at all as a result of this. Okay. Kevin, you want to pick up the persistency question? Sure. Morning, Colin. Hi, Kevin. I think persistency is pretty stable. I think it was virtually stable in every single line of business. It was a little bit of that downtick in group life, I think, primarily driven by a couple of expected sort of large case terminations. Otherwise, very stable. I think that's a reflection to some extent of our customer relationship metrics, which are all extremely sound on the satisfaction side. I think it's also a reflection of a little bit of market inertia. I think out to bid seemed to be sort of at a lower level over the last year or so than they had been in prior years, probably as a reflection, a little bit of more stable pricing in the marketplace, and so there's less opportunity to go to bid and get a better deal, maybe. I expect persistency to sort of hold up and stay about where it is. Then I think on the flat premium side of the question, I think that's more a reflection of lack of employment growth and lack of wage inflation, and that's really sort of all about the economy. Also, as you remember, last year and the year before, we were lagging on what we call MBOC, sales to existing customers, primarily driven, I think, by customers tightening up a little bit and sitting tight on their benefits. We did see some uptick two out of the last three quarters now in terms of MBOC sales, and that would have a positive impact on 2012, 2013 premium if that continued. Okay. Just sort of extending that a little bit. You're now heading into the renewal season. I assume that the pencil's sharpened up. Perhaps just to leave it as a final one, what sort of premium increase do you think we're going to see this year? Rate increase. I think we'll probably be in the low single digits going forward. I think some of it will be a reflection of sort of the natural aging of the block, a little bit of a reflection of our normal triage process, where we identify where we need to get those rate increases. The increase this year has been about 2%, and although the ask increase on cases that terminated was at 8%. So- I'd expect to see us sort of in that same kind of range. We'll also monitor some of the activity that's going on with the Social Security Administration around their approval rates and that kind of thing. To the extent that we think that Social Security offsets could be under pressure, then we'd be moving rates up there as well. I mean, in the low single digits. Thank you. Sure. Thanks, Colin. We'll take our next question from Steven Schwartz with Raymond James and Associates. Yeah, good morning, everybody. I did want to ask about Social Security, so I think you just handled that. I think what you are telling me or telling us is that if Social Security comes under pressure, that that would affect you negatively, and that you would have to take actions. Yeah. Good morning, Steven. Yeah. Basically, if Social Security sort of changed its approval practices and we started to see fewer approvals, if you will, then we would have to price for that. But I think we are well prepared for that. We have a very robust and well-structured renewal program that has been very successful for us over the last five years. We would just start to build that into pricing over time. I was thinking, there is that, but I was thinking more along the lines of, say, whatever Congress comes into commission vis-a-vis cuts and potential cuts to Social Security. In terms of cuts to Social Security benefit design? Right. Exactly right. Yeah. It's very hard to prognosticate about that. There's so much politics involved in that particular question. It's hard to know what's real and what's not real. I'd be very surprised if Social Security disability benefits, in terms of benefit design, are cut. I think what's more likely is they might tighten up their claim management practices a little bit, given the economic pressures that they're under, and that's really what I'm referring to. Okay, great. Just as a background point, it's worth noting too that a very small percentage of those who actually have disability benefits actually have private disability insurance. So, it's a very, very small piece of the puzzle, actually. Absolutely right. Okay. I think it is more likely Social Security be looking at a large majority of the claimants that they would be looking at would not necessarily be people that are covered by us. That is right. Okay. If I could, I think, Rick, you said that the overall effective interest rate or the yield on the overall portfolio was 6.68%. Was that correct? Correct. Could you give us a sense of what you are investing at new money at? Much lower than that. Yes. Thank you. No, I tried to reflect our remarks. It is tight today. We would have seen this environment last year, if you go back to August of last year, where rates came down for different reasons. Credit spreads were a little bit wider then. They are actually quite tight right now. The good news is, and you have to take it back to our company, we are not putting a lot of cash to work. We are able to wait, sit on our hands until the deal comes along that hits the targets we are looking at. But it is a very tough environment for our investment team right now. Okay, so no number for us? In terms of where new money is, you have to go across the curve, but you can do as well as I. Take the 10-year Treasury and add 200 basis points on top of it. Last year, we would've had the opportunity to go into some different asset classes. What sort of premium increase do you think we're going to see this year? Rate increase? I think we'll probably be in the low single digits going forward. I think some of it will be a reflection of sort of the natural aging of the block, a little bit of a reflection of our normal triage process, where we identify where we need to get those rate increases. The increase this year has been about 2%, although the ask increase on cases that terminated was at 8%. I'd expect to see us sort of in that same kind of range. We'll also monitor some of the activity that's going on with the Social Security Administration around their approval rates and that kind of thing. To the extent that we think that Social Security offsets could be under pressure, then we'd be moving rates up there as well. I mean, in the low single digits. Thank you. Sure. Thanks, Colin Devine. We'll take our next question from Steven Schwartz with Raymond James and Associates. Yeah, good morning, everybody. I did want to ask about Social Security, so I think you just handled that. I think what you're telling me or telling us is that if Social Security comes under pressure, that that would affect you negatively, and that you would have to take actions. Yeah. Good morning, Steven. Yeah. Basically, if Social Security sort of changed its approval practices and we started to see fewer approvals, if you will, then we'd have to price for that. But I think we're well prepared for that. We have a very robust and well-structured renewal program that's been very successful for us over the last five years. We would just start to build that into pricing over time. I was thinking, there's that, but I was thinking more along the lines of, say, whatever Congress comes into commission vis-a-vis cuts and potential cuts to Social Security. In terms of cuts to Social Security benefit design? Right. Exactly right. Yeah. Yeah. It's very hard to prognosticate about that. There's so much politics involved in that particular question. It's hard to know what's real and what's not real. I'd be very surprised if Social Security disability benefits, in terms of benefit design, are cut. I think what's more likely is they might tighten up their claim management practices a little bit, given the economic pressures that they're under, and that's really what I'm referring to. Okay, great. Just as a background point, it's worth noting, too, that a very small percentage of those who actually have disability benefits actually have private disability insurance. So, it's a very, very small piece of the puzzle, actually. Absolutely right. Okay. I think it's more likely Social Security be looking at a large majority of the claimants that they'd be looking at wouldn't necessarily be people that are covered by us. That is right. Okay. If I could, I think, Rick, you said that the overall effective interest rate or the yield on the overall portfolio was 6.68%. Was that correct? Correct. Could you give us a sense of what you are investing at new money at? Much lower than that. Yes. Thank you. No, and I tried to reflect our remarks. It's tight today. We would've seen this environment last year, if you go back to August of last year, where rates came down for different reasons. Credit spreads were a little bit wider then. They're actually quite tight right now. The good news is, and you have to take it back to our company, we're not putting a lot of cash to work. We are able to wait, sit on our hands until the deal comes along that hits the targets we're looking at. But it is a very tough environment for our investment team right now. Okay, so no number for us? In terms of where new money is, you have to go across the curve, but you can do as well as I. Take the 10-year Treasury and add 200 basis points on top of it. Last year, we would have had the opportunity to go into some different asset classes, which would give us some different yield. Tom mentioned that in his comments around tax advantage investments. We had Build America bonds and things that fit very nicely in our portfolio. Some of those don't exist this year, or we've been priced out of the market on that front. So it is quite difficult. Okay, thank you. Just a reminder though, too, maybe Tom or Rick, the amount of cash we have to put out that's unhedged actually over the next couple of quarters is pretty limited. Yeah. If you look at, I take you back to the, this is Tom White, the information from Investor Day back in November. We've got about $2.5 billion of new money to invest on a $42 billion-$43 billion investment portfolio. As you break that out by line of business, there's a little bit more proportionally in long-term care, and there we've got about 30% of that money hedged. So, as Rick said, it's a challenging environment. This past quarter, new money yield was a little less than 6%. We benefit from the hedge unwinds that occurred, and they'll continue to occur over the next couple of years. Okay, thanks, guys. Good. Thank you. We will take our next question from Mark Hughes with SunTrust. Yeah, thank you very much. The Colonial sales force, how was the recruiting activity in the quarter? How do you see that going forward? Randy, you want to touch on that? Sure, Tom. Good morning, Mark. Yeah, the recruiting was up a little above 5% for the quarter, and that was on top of a very strong second quarter last year. We still feel like we have a very strong recruiting system. We have all the right alignment, Mark, that we need within our field leadership structure, and it is a key area of focus for us. So we still have a positive outlook in terms of ongoing growth in new rep recruiting. Got you. How about on the voluntary side? You had, obviously, a tough comp this quarter. Have you seen the dynamics there change at all, or is it still good increasing demand? Well, maybe, Mark, we talk on both sides. Randy, while you've got the mic, why don't you speak to just what you're seeing in the voluntary sales in Colonial Life, then Kevin, if you could, because I think we're talking about the tough comp was more the issue with Unum US. Yeah. Mark, on our side of it, we're still seeing a good opportunity out there in the market. I think Rick and Tom mentioned earlier, the success we had specifically in the public sector part of the market in the second quarter. Very strong new account sales there. Although there certainly are continuing economic headwinds, we're all very aware of that. I think the general trend toward more employee responsibility for their benefits serves us well and is going to continue to create opportunities for us. Kevin, you want to speak, because again, you had the tougher sort of comparison. Yeah. Good morning, Mark. In terms of voluntary trends, we are very bullish on voluntary. I think the tough comparison is driven by, we had two very large takeover cases last year, existing voluntary plans that moved from another company to us, and that was worth about $8 million-$10 million. Voluntary sales would have been up in this quarter other than that comparison. We see more brokers every day getting into the voluntary business. Our voluntary core market sales are growing. Our voluntary case sales have been steadily growing. In our smaller case into the marketplace, our Simply Unum platform, our voluntary sales associated with group grew 23%. I think all in all we are looking to give us some different yield. Tom mentioned that in his comments around tax advantage investments. We had Build America bonds and things that fit very nicely in our portfolio. Some of those don't exist this year, or we have been priced out of the market on that front. It is quite difficult. Okay, thank you. Just a reminder, though, too, maybe Tom or Rick, the amount of cash we have to put out that is unhedged actually over the next couple of quarters is pretty limited. Yeah, if you look at, I take you back to the, this is Tom White, the information from Investor Day back in November. We have got about $2.5 billion of new money to invest on a $42 billion-$43 billion investment portfolio. As you break that out by line of business, there is a little bit more proportionally in long-term care, and there we have got about 30% of that money hedged. So, as Rick said, it is a challenging environment. This past quarter, new money yield was a little less than 6%. We benefit from the hedge unwinds that occurred, and they will continue to occur over the next couple of years. Okay, thanks, guys. Good. Thank you. We will take our next question from Mark Hughes with SunTrust. Yeah, thank you very much. The Colonial sales force, how was the recruiting activity in the quarter? How do you see that going forward? Randy, you want to touch on that? Sure, Tom. Good morning, Mark. The recruiting was up a little above 5% for the quarter, and that was on top of a very strong second quarter last year. We still feel like we have a very strong recruiting system. We have all the right alignment, Mark, that we need within our field leadership structure, and it's a key area of focus for us. So we still have a positive outlook in terms of ongoing growth in new rep recruiting. Got you. How about on the voluntary side? You had, obviously, a tough comp this quarter. Have you seen the dynamics there change at all, or is it still good increasing demand? Well, maybe, Mark, we talk on both sides. Randy, while you've got the mic, why don't you speak to just what you're seeing in the voluntary sales in Colonial Life, then Kevin, if you could, because I think we're talking about the tough comp was more the issue with Unum US. Yeah. Bob? Yeah, Mark, on our side of it, we're still seeing a good opportunity out there in the market. I think Rick and Tom mentioned earlier, the success we had specifically in the public sector part of the market in the second quarter, very strong new account sales there. Although there certainly are continuing economic headwinds, we're all very aware of that, I think the general trend toward more employee responsibility for their benefits serves us well and is going to continue to create opportunities for us. Kevin, you want to speak, because again, you had the tougher sort of comparison. Yeah. Good morning, Mark. In terms of voluntary trends, we're very bullish on voluntary. I think the tough comparison is driven by, we had two very large takeover cases last year, existing voluntary plans that moved from another company to us, and that was worth about $8 million-$10 million. Voluntary sales would have been up in this quarter other than that comparison. We see more brokers every day getting into the voluntary business. Our voluntary core market sales are growing. Our voluntary case sales have been steadily growing. In our smaller case, into the marketplace, our Simply Unum platform, our voluntary sales associated with group grew 23%. I think all in all, we're looking pretty good. The pipeline's feeling pretty good as well. Thank you. Thanks, Mark. We'll take our next question from Bob Glasspiegel with Langen McAlenney. Good morning, everyone. Rick, you said that the accounting change doesn't change any of your components of your plan, but on my math calculation, it does boost ROE by 60 bps. Since this is a noneconomic, non-cash event, is it fair to say that you would increase your ROE by 60 bps for your plan and how the board sort of is assessing performance, et cetera? Yes. I mean, that's accurate. It will have that impact on our ROE. When I talked about our plans, it was more operational plans that I was referring to, and we're going to run the business the same way. But you will see impact. You will see the ROE go up roughly half a point. You will see book value per share come down. Somewhere in the middle of that range would be probably in the $1.50 range. But net net, I was talking about our operational plans. We're going to run the company the same way. But you're paid more on book value growth. I mean, you're paid more on ROE than book value growth, or am I wrong on that sort of assumption as far as the plan? Yes, we are, but that'll be a 2012 item we'll talk about on a recasted basis with our board when we get to setting plan targets. Okay. On the macro basis, and we talked a little bit about this, but what I hear from you is a 2.60 ten-year and risk of a double dip and sloppier economic growth doesn't really move the needle as far as any of your plan, any of your strategy. From here, you just assume this is sort of short term rather than something structural that needs to result in a significant business plan adjustment? Bob, I'll start with that and maybe ask others to pitch in, but I don't think anything that we're seeing now is changing our strategic direction or our focus in the marketplace. It's not changing how we've sort of organized ourselves operationally to think about supporting the marketplace. And certainly doesn't change, as Rick said, really the material aspects of our financial outlook. Obviously, we could use a better economic environment as measured by employment growth. We could use a better environment in terms of interest rates. But I think we've proven, even over the last couple of years during the financial crisis and the economic sort of headwinds we've had to face, that our plan hangs in there quite well, actually, even in those tougher times. Now we're continuing to reinvent ourselves. We're continuing to do things to make our products and services even more competitive. So don't get me wrong, we're certainly not complacent, but it's not as if this environment is causing us to do a dramatic change in direction. The 2.60 ten-year doesn't say we got to increase our rate increases, because you went through this a year ago and you just sort of think this is a short term blip and rates will go higher? Yeah. I think as Rick's always said, we monitor these things carefully. We have a very close connection between market interest rates, our pricing assumptions, how we think about discount rates on new claims. So all those pieces of the decision process are very tightly tethered, and I think just as we've always said in the past, we don't move quickly to short term movements anyway. I think that's the key. Our pricing, one of our hallmarks in the market is stability of pricing that we've taken out there. So we may move there on a gradual basis, and they reflect a longer term view of where things have been and where they're going, and I think that we'll continue to run the business that way. Okay. It seems like- deductible versus maybe the amount related to unsuccessful sales, and then any further commentary would be appreciated. Sure. I think when you look at that one, I note that it's still early in the process. We put the range out there. We thought we had a good estimate around where we were, and so we wanted to take that out to our investors. But I would say that we're not finished. When you look at the overall impact, we probably lay out that about two-thirds of it's going to be costs that are not deferrable anymore and about one-third is successful sales impacts. When you think about those two categories, think about the not deferrable anymore, does not have direct line of sight to the sale. You could think about rent at a sales office where before we would've said that was directly attributable to sales. Now, without that direct line of sight, we won't be deferring those costs anymore. If you think about the unsuccessful sales, think about underwriting and things like that, where we think they were built on the acquisition, and they won't be anymore. That gives you a sense of the types of things. As I said, we are early in the process, and I wouldn't extrapolate or generalize too much because it is a very detailed roll-up that you need to go through to understand where you are. Hopefully, that gives you a little bit of insight. Obviously, we'll bring more to you line of business and that type of view as we get closer to Investor Day and outlooks for 2012. Okay, that's helpful. Then maybe for Kevin, regarding the long-term care book business, can you give us an update in terms of where you are with the filing of rate increases? When we think about the interest-adjusted benefit ratio, where you think that kind of settles in as we've seen increase in active life reserves with hopefully an offset from higher premiums. Yeah, thanks, Chris. Good morning. As Rick said in his early remarks, we're well on pace to achieve so far what looks to be about 84% of our desired price increases. We'll continue to push that through. We've gotten some optimistic signs even from some states that we thought might be more difficult. I'm feeling pretty optimistic that we're going to achieve our price increase goal, and then that, as Rick said, that'll flow through in 2012 and 2013 into top line and bottom line. In terms of interest-adjusted loss ratio, I think we're making all these moves right now in terms of building up active life reserves and placing rate increases in order to get that loss ratio stabilized probably somewhere in the mid-80s. Okay. Thank you very much. Thanks, Chris. We'll take our next question from Colin Devine with Citi. Morning, gentlemen. Morning, Colin. I've got three. First, with respect to the pace of buybacks. A little slower this quarter than the first. Tom, I think you've been quoted in the media talking a little bit more about M&A lately. Is there anything we should be reading into that? Is the first question. Second, with respect to the change in DAC, Rick, I assume most of the adjustments coming on the supplemental and voluntary line, and perhaps if you could just give us some idea because it does represent, I guess about 25% roughly of your outstanding DAC, that you're going to adjust downward or about what, $2 a share. And then for Kevin, looking at persistency trends this quarter, should we start to infer perhaps somewhat slower momentum heading into next year? And I guess tied to that, obviously, there was some fairly flat premium growth this year. Thanks, Colin. Let me start, and as I said, we'll move to Rick and Kevin for his two pieces. But I think the pipeline is feeling pretty good as well. Thank you. Thanks, Mark. We will take our next question from Bob Glasspiegel with Langen McAlenney. Good morning, everyone. Hey, Bob. Rick, you said that the accounting change does not change any of your components of your plan. But on my math calculation, it does boost ROE by 60 bps. Since this is a noneconomic, non-cash event, is it fair to say that you would increase your ROE by 60 bps for your plan and how the board sort of is assessing performance, et cetera? Yes, that's accurate. It will have that impact on our ROE. When I talked about our plans, it was more operational plans that I was referring to, and we're going to run the business the same way. But you will see impact. You will see the ROE go up roughly half a point. You will see book value per share come down. Somewhere in the middle of that range would be probably in the $1.50 range. But net, I was talking about our operational plans. We're going to run the company the same way. But you're paid more on book value growth. I bet you're paid more on ROE than book value growth, or am I wrong on that sort of assumption as far as the plan? Yes, we are, but that'll be a 2012 item we'll talk about on a recasted basis with our board when we get to setting plan targets. Okay. On a macro basis, and we talked a little bit about this, but what I hear from you is a 2.60 ten-year and risk of a double dip and sloppier economic growth doesn't really move the needle as far as any of your plan, any of your strategy. From here, you just assume this is sort of short term rather than something structural that needs to result in a significant business plan adjustment. Bob, I'll start with that and maybe ask others to pitch in. I don't think anything that we're seeing now is changing our strategic direction or our focus in the marketplace. It's not changing how we've sort of organized ourselves operationally to think about supporting the marketplace. And certainly doesn't change, as Rick said, really the material aspects of our financial outlook. Obviously, we could use a better economic environment as measured by employment growth. We could use a better environment in terms of interest rates. But I think we've proven even over the last couple of years during the financial crisis and the economic sort of headwinds we've had to face that our plan hangs in there quite well actually, even in those tougher times. Now we're continuing to reinvent ourselves. We're continuing to do things to make our products and services even more competitive. Don't get me wrong, we're certainly not complacent. But it's not as if this environment is causing us to do a dramatic change in direction. And the 2.60 ten-year doesn't say we got to increase our rate increases because you went through this a year ago, and you just sort of think this is a short-term blip and rates will go higher? Yeah, I think as Rick always said, we monitor these things carefully. We have a very close connection between market interest rates, our pricing assumptions, how we think about discount rates on new claims. So all those pieces of the decision process are very tightly tethered. And I think just as we've always said in the past, we don't move quickly to short-term movements, I think. I think that's the key. Our pricing, one of our hallmarks in the market is stability of pricing that we've taken out there. We may move there on a gradual basis, and they reflect a longer-term view of where things have been and where they're going, and I think that we'll continue to run the business that way. Okay. It seems like long-term care is probably the most sensitive to a sustained long-term low interest rate environment. Is that fair? Yeah. I probably wouldn't use the word sensitive, but it's certainly something you have to watch the most in terms of where it goes over time. Tom mentioned our hedges that we have in place. That's where I'm watching the 30 year, not the 10 year, which has come down equally as quickly. Then you look at the credit spreads on the long end. So we've been fortunate to get some long assets behind that at some pretty good rates over the course of last year. When you throw the hedges on top of that, we've been fine. Right now, it's tough to put 30-year money out there at a reasonable rate. Thanks for the thoughtful answers. Good. Thanks, Bob. We'll take our next question from John Nadel with Sterne Agee. Hey, good morning, everybody. I have a couple for you. A couple of data points. In the U.K. businesses, I know the inflation-linked group life business is having an impact on this benefit ratio. Is it possible for you guys to give us an adjusted benefit ratio that removes that impact so we can get a sense for the trend underlying? Yeah, when we look at that, actually, that's something we're looking at how we would take that on in the future, given that the volatility of the interest, I should say, the inflation moves in the U.K. are so great. So certainly something we're thinking about, and we'll work on breaking that out. I think it's been more of a general trending item that we've talked about this quarter. Okay with inflation moving. That's something we're considering, and we'll certainly have more discussion on that. During the quarter, did you take any dividends up from the operating subs to the holding company? We did. We took about $140 million out of the operating subs in the U.S. We also have dividends flowing from the U.K. up as well. Oh, okay. How much was that from the U.K.? U.K. was, in GBP, somewhere between 35 million and 40 million. Okay. I would highlight, those are very consistent dividend levels, and that's what we're looking at, is consistent streams of dividends up from operating companies to holding company to putting it back to work. Got it. Then if I could follow up on the DAC accounting change. As we look forward, and if I assume you guys make no changes to your sales-oriented expenses, about how much of the cost that you now defer will no longer be deferred? Cost that we deferred will no longer be deferred. It would be about that same ratio of the write-off that you would see. Yeah, no, so it'd be between that 25% and 30%. Okay. So it's about 25%-35%? Yep. So at the end of the day, the result here on forward earnings is really no meaningful impact, just to confirm. That's correct. Okay. Kevin, it wouldn't be a quarterly call if I didn't try to get a sense, a little bit more detail on pricing shifts in the market. Maybe to be a bit more specific. This may be difficult, but if I held all the variables constant for you, wages, employee numbers, benefit plans, attachment points, et cetera, can you characterize for us in the small, mid, and large case market how much pricing in group disability and group life is up today versus maybe a year or two ago? You're right. We have been sort of talking a bit more about M&A, but I must say, we really haven't changed direction in terms of the fact, the primary focus is running our operations. Secondarily, it's putting our capital back in the hands of our shareholders through dividend actions and share buybacks. Oh, by the way, if we can find M&A transactions that fit onto our strategic plan and financial foundation, we'll do it. We certainly are looking at some things. But I wouldn't want you or anyone to think that we're holding back on capital in anticipation of M&A. Our view, I think, frankly, has always been, if we saw the right thing that fit strategically and financially, we'll find the capital to support it. Let's not hold back too much capital in anticipation of something that actually may never happen, because as you know, we're incredibly disciplined about the things we look at. But we are trying to be active. Just as a general matter, there's not a lot out there. But again, I don't think that we're warehousing for that because as I said, I have a strong belief that if the right thing comes along strategically and financially, we'll find the capital to support that. I think, Rick, you were talking about the pace of buybacks, and I think nothing's really changed on that score. Okay. You want to pick up, Rick, the DAC question just about the general. The DAC one, to give you some general, it's across the board, quite frankly, in terms of where it is. I think the percentage you talk about of the write-off would represent probably the write-off you'd see on a pro rata basis across the board. Like I said, we'll have to give more details out there. There may be a little bit higher percentages in some of our group lines. But those carry lower DAC balances and all that's in the back of the statistical supplement. Would this drive any change to how you're going to operate Colonial with the career force? No, it won't. When you look at it in terms of where we are and the variable cost base that we have in Colonial Life today, I think we'll continue to operate it very much the same way. Try to make that. I don't actually see us changing operating practices around Randy Horn at all as a result of this. Okay. Good. Kevin, you want to pick up the persistency question? Sure. Good morning, Colin. Hi, Kevin. I think persistency is pretty stable. I think it was virtually stable in every single line of business. It was a little bit of a downtick in group life, I think primarily driven by a couple of expected large case terminations. Otherwise, very stable. I think that's a reflection to some extent of our customer relationship metrics, which are all extremely sound on the satisfaction side. I think it's also a reflection of a little bit of market inertia. I think out to bid seemed to be at a lower level over the last year or so than they had been in prior years. Probably is a reflection a little bit of more stable pricing in the marketplace, and so there's less opportunity to go to bid and get a better deal, maybe. I expect persistency to hold up and stay about where it is. Then I think on the flat premium side of the question, I think that's more a reflection of lack of employment growth and lack of wage inflation, and that's really all about the economy. Also, as you remember, last year and the year before, we were lagging on what we call MBOC, sales to existing customers, primarily driven, I think, by customers tightening up a little bit and sitting tight on their benefits. We did see uptick two out of the last three quarters now in terms of MBOC sales, and that would have a positive impact on 2012, 2013 premium if that continued. Okay. Just extending that a little bit. You're now heading into the renewal season. I assume that the pencil is sharpened up. Perhaps history can leave it as a final one. Thanks, John. Appreciate that. I'll get you later. Okay. The market prices for LTD are fairly flat when you look in total. Usually, when we talk about soft pricing in the marketplace, it has more to do with sort of the number of competitors that are pricing low as opposed to sort of overall pricing level. Overall pricing levels have been fairly flat. We've been moving rates up, as you know, over the last five years, but now we're sort of in the low single-digit rate adjustment every year, which is mostly driven just by the aging of the block. I think the question going forward is that the industry margins have been shrinking steadily over the last four years. I think you can take a look at the Gen Re, JHA data. Our margins, of course, have been increasing during that same period of time. I think that our discipline has worked out really well for us on that side of the page. I think maybe that's what we're starting to see in the marketplace, is some competitors starting to firm it up, recognizing the deterioration in margins. I think you look at the STD business, I think it's the same kind of story. Margins have been deteriorating. I think if you look in the Gen Re studies, STD as an entire industry was slightly south of break even last year. The ASO business was even further south of break even. So I think you might see some hardening on the STD side as well. Group life, I think, is very stable in the small and mid-markets. That hasn't moved very much. Mortality's been very stable. I think in the large case marketplace, it's a different story. As you know, we don't sell, for the most part, large standalone group life. The reason that we don't is that tends to be a significant commodity play, price shopping play, price negotiation play. That marketplace, I think, is extremely volatile. That's great. Thank you very much. All right. Thanks, John. We'll take our next question from Thomas Gallagher with Credit Suisse. Hey, good morning. Hey, good morning, Tom. First, I had a question for Rick. Just following up on Steven Schwartz's question about difference between new money and portfolio yield. The numbers would be, let's say, new money is 4.5% to 5%, portfolio yield 6.68%. But that 6.68% is duration-weighted book yield. If I look at your nominal portfolio yield, which is how we all model earnings, that number's a lot lower. It's actually 5.4%. Using the numbers that matter from an earnings standpoint for Unum, the difference wouldn't appear to be that great. I guess my question to you is, which ratio, which statistic matters more to you? How is 6.68% relevant to you? Because your comments sort of indicated that there was a very big gap between the two. But from an absolute earnings standpoint, the gap doesn't appear as wide. Anyway, can you comment in terms of how you would view that? That's why I caution it's really across the curve, and there's not any good aggregate measure you look at. What I think about is more given the duration weight, at which talks much more about the long assets we have, as opposed to necessarily the reported yield that we have today at the 6.68%. I'd look at the 30 year, and then I'd use the credit spreads off of that. You have a very fair point that when you look at that duration. Thanks, John, appreciate that. I'll get you later. Okay. The market prices for LTD are fairly flat when you look in total. Usually, when we talk about soft pricing in the marketplace, it has more to do with the number of competitors that are pricing low as opposed to overall pricing level. Overall pricing levels have been fairly flat. We've been moving rates up, as you know, over the last five years, but now we're in the low single-digit rate adjustment every year, which is mostly driven just by the aging of the block. I think the question going forward is that the industry margins have been shrinking steadily over the last four years. I think you can take a look at the Gen Re, JHA data. Our margins, of course, have been increasing during that same period of time. I think that our discipline has worked out really well for us on that side of the page. I think maybe that's what we're starting to see in the marketplace, is some competitors starting to firm it up, recognizing the deterioration in margins. I think you look at the STD business, I think it's the same kind of story. Margins have been deteriorating. I think if you look in the Gen Re studies, STD as an entire industry was slightly south of break even last year. The ASO business was even further south of break even. So I think you might see some hardening on the STD side as well. Group life, I think, is very stable in the small and mid-markets. That hasn't moved very much. Mortality's been very stable. I think in the large case marketplace, it's a different story. As you know, we don't sell, for the most part, large standalone group life. The reason that we don't is that tends to be a significant commodity play, price shopping play, price negotiation play. That marketplace, I think, is extremely volatile. That's great. Thank you very much. All right. Thanks, John. We'll take our next question from Thomas Gallagher with Credit Suisse. Hey, good morning. Hey, good morning, Tom. First, I had a question for Rick. Just following up on Steven Schwartz's question about difference between new money and portfolio yield. The numbers would be, let's say, new money is 4.5% to 5%, portfolio yield 6.68%. But that 6.68% is duration-weighted book yield. If I look at your nominal portfolio yield, which is how we all model earnings, that number is a lot lower. It's actually 5.4%. Using the numbers that matter from an earnings standpoint for Unum, the difference wouldn't appear to be that great. I guess my question to you is, which ratio, which statistic matters more to you? How is 6.68% relevant to you? Because your comments sort of indicated that there was a very big gap between the two. But from an absolute earnings standpoint, the gap doesn't appear as wide. Anyway, can you comment in terms of how you would view that? That's why I caution it's really across the curve, and there's not any good aggregate measure to look at. What I think about is more, given the duration weighted, which talks much more about the long assets we have as opposed to necessarily the reported yield that we have today at the 668. I'd look at the 30 year, and then I'd use the credit spreads off of that. You have a very fair point that when you look at that duration weighted, it's a lot higher. And actually rates, even with the low levels that they're at today, you'd have to take the 390 or more, roughly 4% around the 30 year, and then take credit spread off of that, which would get you much closer to that portfolio rate. You really have to disaggregate it portfolio by portfolio. That's actually how I think about it. It's no aggregate levels. We manage this portfolio by portfolio, and we've done very well, even in a fairly low interest rate environment over the last year to hit our bogeys along the way. I'd say it's tough, but we're not letting up on our investment team to find the jewels out there as we continue to go through this to hit our targets. And I think, Rick, it's safe to say, too, actually, believe it or not, our results were pretty close to plan, actually, as it related to some of the investment activity we intended. So that's the other element here, which is what we expected. Yeah. No, I'm giving you more of a sense of that it's hard out there, which I don't think is a surprise to you, as opposed to how we've been able to operate and work our way through the low interest rate environment to date and really how we expect our team to operate through this low interest rate environment going forward. And just a follow-up. So, as I think about the potential headwind of rates, to me, the difference that we're seeing today would only be 100 basis points, just using nominal yield. It wouldn't be 200 basis points, because if you're using 200 basis points, and somehow that is the real economic difference, I think it's a bigger headwind. So I guess the follow-up is, as you think about your business, is there some offset that I'm not thinking about from a liability standpoint that economically the kind of disparity or difference is really more 200 basis points? Or is it just a nominal 100 basis point spread is the more accurate way to think about the forward earnings impact? Yeah. No, I'd probably be much more on that 100 range from a spot perspective. It's going to be dependent on the deal, and then you'd have to disaggregate it. So when I'm talking about 10-year money, I'm thinking more about our group long-term disability line. When I'm thinking about our long-term care, I'm thinking about our 30-year money. And so, we're lower than the portfolio rates there today. But over the last year in a very tough, what I would say was last year was also a tough investment environment. We've actually been able to hit our bogeys along the way. So as I look forward, it's going to be tough, but I wouldn't see our portfolio creeping down or moving down very quickly. I think we've highlighted that the portfolio yield and aggregate over the last year has barely moved. And rates have not been very high. It's something we worry about and we work on, but there's no near-term pressure that I'm feeling as a result. Okay. Then just a question on long-term care. That interest-adjusted benefit ratio is creeping up. Can you comment on how much margin do you have left there? I know you haven't separately disclosed or broken out what the GAAP margins are there, but I think in prior quarters when that benefit ratio was lower, you had mentioned there was a little bit of room, not a lot. As that creeps up, are we in jeopardy of having that turn to a negative margin for the block? Yeah, I don't think we ever said there was a little bit of margin, if you go back to what we've said. There's margin in the block. I take you back to the dynamics around it, which is exactly what Kevin McCarthy said. Yes, the adjusted loss ratios are going up. That's an expectation of that block, given the very high persistence that we've got. It's a lot higher. Actually rates, even with the low levels that they're at today, you'd have to take the 390 or more, roughly 4% around the 30 year, and then take credit spread off of that, which would get you much closer to that portfolio rate. You really have to disaggregate it portfolio by portfolio. That's actually how I think about it. It's no aggregate levels. We manage this portfolio by portfolio, and we've done very well, even in a fairly low interest rate environment over the last year to hit our bogeys along the way. I'd say it's tough, but we're not letting up on our investment team to find the jewels out there as we continue to go through this to hit our targets. And I think, Rick, it's safe to say, too, actually, believe it or not, our results were pretty close to plan, actually, as it related to some of the investment activity we intended. So that's the other element here, which is what we expected. Yeah. No, I'm giving you more of a sense of that it's hard out there, which I don't think is a surprise to you, as opposed to how we've been able to operate and work our way through the low interest rate environment to date and really how we expect our team to operate through this low interest rate environment going forward. And just a follow-up. So, as I think about the potential headwind of rates, to me, the difference that we're seeing today would only be 100 basis points, just using nominal yield. It wouldn't be 200 basis points, because if you're using 200 basis points. And somehow that is the real economic difference. I think it's a bigger headwind. So I guess the follow-up is, as you think about your business, is there some offset that I'm not thinking about from a liability standpoint that economically the kind of disparity or difference is really more 200 basis points? Or is it just a nominal 100 basis point spread is the more accurate way to think about the forward earnings impact? Yeah, no, I'd probably be much more on that 100 range from a spot perspective. It's going to be dependent on the deal, and then you'd have to disaggregate it. So when I'm talking about 10-year money, I'm thinking more about our group long-term disability line. When I'm thinking about our long-term care, I'm thinking about our 30-year money. And so, we're lower than the portfolio rates there today. But over the last year, in a very tough, what I would say was last year was also a tough investment environment. We've actually been able to hit our bogeys along the way. So as I look forward, it's going to be tough, but I wouldn't see our portfolio creeping down or moving down very quickly. I think we've highlighted that the portfolio yield in aggregate over the last year has barely moved. And rates have not been very high. It's something we worry about and we work on, but there's no near-term pressure that I'm feeling as a result. Okay. Just a question on long-term care, that interest-adjusted benefit ratio is creeping up. Can you comment on how much margin do you have left there? I know you haven't separately disclosed or broken out what the GAAP margins are there, but I think in prior quarters when that benefit ratio was lower, you had mentioned there was a little bit of room, not a lot. As that creeps up, are we in jeopardy of having that turn to a negative margin for the block? Yeah, I don't think we ever said there was a little bit of margin. If you go back to what we've said, there's margin in the block. I take you back to the dynamics around it, which is exactly what Kevin McCarthy said. Yes, the adjusted loss ratios are going up. That's an expectation of that block, given the very high persistence that we've got. And we're taking pricing actions to combat that. The pricing actions will take a little bit longer to come in, so we're not surprised that the interest-adjusted loss ratio is still going up until those pricing actions take effect. But to be clear, it's a tough business and the long-tail nature of it, we're taking the actions necessary to manage the block. Okay, and then last question. Just on the disability underwriting results and how those have held in so well. If I understand it correctly, over the last several quarters, you've had very good claim recovery results that have offset a slight pickup in incidents. On the claim recovery side, can you give us a little bit more in terms of what's going on underneath the covers there? Is there any diminishing return benefit that's going to go away? Or is that a sustainable trend where you think you can continue to see good claim recoveries even if the employment picture sort of remains where it is today? Yeah. Good morning, Tom, it's Kevin. I'm very confident in the consistency of performance in our claim management operation. I think they're very much on top of managing their inventory. They're very much on top of quality control and quality assurance reviews. I think they pay close attention to what's going on with Social Security. I think they're very careful about managing the claims practices right to the contract. I think we've improved steadily over the last five years in terms of relationship management with claimants and with claimants' employers, and between our doctors and claimants' doctors. And I don't see any reason that we won't be able to sustain that claim recovery performance. Got it. Thank you. Thank you, Tom. And I think, operator, we'll just have time for one. We're a little sensitive to time. One more question. All right, we'll take our last question from Eric Berg with RBC Capital Markets. Thanks very much. Hey, Eric. Good morning. Glad to sneak in under the wire here. Just a few quick ones. First, I want to follow up on Thomas Gallagher's question, which I thought was a very interesting one, an excellent question. If the duration weighted book yield is in fact capturing the true economics of your portfolio, what's going on considering the length of time that those bonds are outstanding as opposed to a nominal yield, which I gather would just treat all bonds identically and is not an economic view of your yield. Why isn't the book yield, pardon me, why isn't the duration weighted book yield the right number to be looking at when comparing the yield on the portfolio to new money? That's my first question. Yeah, to answer your question, the reason we focus on that duration weighted is because we think that is the right answer when you look at it. That's where I think you're absolutely right, Eric. Looking at the duration weighted is important when we look at our liabilities and our assets. That's really what we're matching up to. So I think that you're right on the money there. Okay, thanks for clarifying. I had a misunderstanding. Second question of three is really for Kevin. In thinking about pricing, you are the latest disability executive. Yesterday, someone at Met was talking about pricing firming. My question is, and he was talking about large case, you today were talking about small and mid-size. My question is why is it firming, especially in the context of a weak economy? I would think it would be difficult. We are taking pricing actions to combat that. The pricing actions will take a little bit longer to come in, so we are not surprised that the interest-adjusted loss ratio is still going up until those pricing actions take effect. To be clear, it is a tough business and the long-tail nature of it, we are taking the actions necessary to manage the block. Okay. Last question, just on the. On the disability underwriting results and how those have held in so well. If I understand it correctly, over the last several quarters, you have had very good claim recovery results that have offset a slight pickup in incidents. On the claim recovery side, can you give us a little bit more in terms of what is going on underneath the covers there? Is there any diminishing return benefit that is going to go away, or is that a sustainable trend where you think you can continue to see good claim recoveries even if the employment picture sort of remains where it is today? Yeah. Good morning, Tom. It's Kevin. Yeah, I'm very confident in the consistency of performance in our claim management operation. I think they're very much on top of managing their inventory. They're very much on top of quality control and quality assurance reviews. I think they pay close attention to what's going on with Social Security. I think they're very careful about managing the claims practices right to the contract. I think we've improved steadily over the last five years in terms of relationship management with claimants and with claimants' employers, and between our doctors and claimants' doctors, and I don't see any reason that we won't be able to sustain that claim recovery performance. Got it. Thank you. Thank you, Tom. I think, operator, we'll just have time for one. We're a little sensitive to time. One more question. All right, we'll take our last question from Eric Berg with RBC Capital Markets. Thanks very much. Glad to sneak in under. Good morning. Good morning. Glad to sneak in under the wire here. Just a few quick ones. First, I want to follow up on Thomas Gallagher's question, which I thought was a very interesting one, an excellent question. If the duration-weighted book yield is in fact capturing the true economics of your portfolio, what's going on considering the length of time that those bonds are outstanding as opposed to a nominal yield, which I gather would just treat all bonds identically and is not an economic view of your yield. Why isn't the book yield, pardon me. Why isn't the duration-weighted book yield the right number to be looking at when comparing the yield on the portfolio to new money? That's my first question. Yeah, no. To answer your question, the reason we focus on that duration-weighted is because we think that is the right answer when you look at it. So that's where I think you're absolutely right, Eric, that looking at the duration-weighted is important when we look at our liabilities and our assets. That's really what we're matching up to. So I think that you're right on the money there. Okay. Thanks for clarifying. I had a misunderstanding. Second question of three is really for Kevin. In thinking about pricing, you are the latest disability executive. Yesterday, someone at MetLife was talking about pricing firming. My question is, and he was talking about large case, you today were talking about small and midsize. My question is why is it firming? Especially in the context of a weak economy, I would think it would be difficult for suppliers of any product, a service, or a good to push through price increases and to get firming prices. Why are we seeing a firming of pricing and how is this happening in the context of a weak economy? Well, I think, Eric, we're talking about orders of magnitude here. I think pricing had been, as I said, in disability in particular, sort of very flat, some volatility by market segment, particularly in the mid and large. I think over the last couple of years, especially the last 12 months, a number of companies have had deterioration of results, or our competitors have had deterioration of results. I think several companies have pointed out that they intend to increase prices. I can think of at least three that have mentioned that, if not more. I think that's what's firming up the pricing. I think that it's not sort of an order of magnitude that's having, I think, a big impact on an employer. You think about disability, we're talking about a premium for life that's in the $250 to $300 per year per person kind of range. I think firming up a price is maybe shoring up everyone's persistency and maybe helping to shore up, eventually, industry profitability. Last question also for you, Kevin, relates to the voluntary business. While I certainly understand the long-term case for growth in the voluntary area, the reasons for it are apparent. I can't help wondering, in a difficult economic environment, while employers may be more willing, more interested than ever in having their employees pay because voluntary coverage, as I understand it, typically involves some contribution, if not a significant or total contribution by the employee. What about what the employees are thinking? In other words, I would think that in a difficult employment environment, employees offered benefits might say, "Not now. Maybe when I feel more comfortable." How does all that work? I think regardless of what's going on in the defined benefit to defined contribution shift from employer to employee, the fact remains that employees still need financial protection. The financial protections that we provide in our product lines, particularly our voluntary product lines, are extremely affordable and cover significant risks. I mean, whether it's a critical illness risk, a short-term disability risk, an accident risk, or a life risk, I think in every one of those cases, employees and their families need that level of protection, and it's a very affordable level of protection for a very high level of potential risk. I think that's what's driving it. If you look back at the last couple of years of deterioration in our economy, we have not seen persistency in voluntary move at all. We haven't really seen participation rates move down either. I think in going forward over time, as more and more brokers are involved in voluntary, as we get out there and increase public awareness around the protection and safety net that you can get from our products, I think if anything, you'll see participation rates go up. Thank you. Good. Thank you, Eric. Operator, I think we want to thank everyone for joining us this morning. I think at this point, operator, this will conclude our second quarter of 2011 earnings call. Thank you. That concludes today's conference call. We appreciate your participation. Give us some different yield. Tom mentioned that in his comments around tax advantage investments. We had Build America bonds and things that fit very nicely in our portfolio. Some of those don't exist this year or we've been priced out of the market on that front. So it is quite difficult. Okay. Thank you. Just a reminder though, too, maybe Tom or Rick, the amount of cash we have to put out that's unhedged actually over the next couple of quarters is pretty limited. Yeah. If you look at, this is Tom White, the information from Investor Day back in November. We've got about $2.5 billion of new money to invest on a $42 billion-$43 billion investment portfolio. As you break that out by line of business, there's a little bit more proportionally in long-term care, and there we've got about 30% of that money hedged. As Rick said, it's a challenging environment. This past quarter, new money yield was a little less than 6%. We benefit from the hedge unwinds that occurred, and they'll continue to occur over the next couple of years. Okay. Thanks, guys. Good. Thank you. I'll take our next question from Mark Hughes with SunTrust. Yeah, thank you very much. The Colonial sales force, how was the recruiting activity in the quarter? How do you see that going forward? Randy, you want to touch on that? Sure, Tom. Good morning, Mark. The recruiting was up a little above 5% for the quarter, and that was on top of a very strong second quarter last year. We still feel like we have a very strong recruiting system. We have all the right alignment, Mark, that we need within our field leadership structure, and it's a key area of focus for us. So we still have a positive outlook in terms of ongoing growth in new rep recruiting. Got you. How about on the voluntary side? You had, obviously, a tough comp this quarter. Have you seen the dynamics there change at all, or is it still good increasing demand? Well, maybe, David, Mark, we talk on both sides. Randy, while you've got the mic, why don't you speak to just what you're seeing in the voluntary sales in Colonial Life, then Kevin, if you could, because I think we're talking about the tough comp was more the issue with Unum US. Yeah, Mark, on our side of it, we're still seeing a good opportunity out there in the market. I think Rick and Tom mentioned earlier, the success we had specifically in the public sector part of the market in the second quarter, very strong new account sales there. Although there certainly are continuing economic headwinds, we're all very aware of that, I think the general trend toward more employee responsibility for their benefits serves us well and is going to continue to create opportunities for us. Kevin, you want to speak, because again, you had the tougher sort of comparison. Yeah. Good morning, Mark. In terms of voluntary trends, we're very bullish on voluntary. I think the tough comparison is driven by, we had two very large takeover cases last year, existing voluntary plans that moved from another company to us. That was worth about $8 million-$10 million. Voluntary sales would've been up in this quarter other than that comparison. We see more brokers every day getting into the voluntary business. Our voluntary core market sales are growing. Our voluntary case sales have been steadily growing. In our smaller case into the marketplace are Simply Unum platform. Voluntary sales associated with group grew 23%. I think all in all- For suppliers of any product, a service or a good to push through price increases and to get firming prices. Why are we seeing a firming of pricing, and how is this happening in the context of a weak economy? Well, I think, Eric, we are talking about orders of magnitude here. I think pricing had been, as I said, in disability in particular, sort of very flat, some volatility by market segment, particularly in the mid and large. I think over the last couple of years, especially the last 12 months, a number of companies have had deterioration of results, or our competitors have had deterioration of results. I think several companies have pointed out that they intend to increase prices. I can think of at least three that have mentioned that, if not more. And I think that is what is firming up the pricing. And I think that it is not sort of an order of magnitude that is having, I think, a big impact on an employer. You think about disability, we are talking about a premium for life that is in the $250 to $300 per year per person kind of range. I think firming up a price is I think maybe shoring up everyone's persistency and maybe helping to shore up, eventually, industry profitability. Last question also for you, Kevin McCarthy, relates to the voluntary business. While I certainly understand the long-term case for growth in the voluntary area, the reasons for it are apparent. I cannot help wondering, in a difficult economic environment, while employers may be more willing, more interested than ever in having their employees pay because voluntary coverage, as I understand it, typically involves some contribution, if not a significant or total contribution by the employee. What about what the employees are thinking? In other words, I would think that in a difficult employment environment, employees offered benefits might say, "Not now. Maybe when I feel more comfortable." How does all that work? I think, regardless of what's going on in the defined benefit to defined contribution shift from employer to employee, the fact remains that employees still need financial protection. The financial protections that we provide in our product lines, particularly our voluntary product lines, are extremely affordable and cover significant risks. Whether it's a critical illness risk A short-term disability risk, an accident risk, or a life risk. I think in every one of those cases, employees and their families need that level of protection, and it's a very affordable level of protection for a very high level of potential risk. I think that's what's driving it. If you look back at the last couple of years of deterioration in our economy, we have not seen persistency in voluntary move at all. We haven't really seen participation rates move down either. I think in going forward over time, as more and more brokers are involved in voluntary, as we get out there and increase public awareness around the protection and safety net that you can get from our products, I think if anything, you'll see participation rates go up. Thank you. Good. Thank you, Eric Berg. Operator, I think we want to thank everybody for joining us this morning. I think at this point, operator, this will conclude our second quarter of 2011 earnings call. Thank you. That concludes today's conference call. We appreciate your participation. Pretty good. The pipeline's feeling pretty good as well. Thank you. Thanks, Mark. We will take our next question from Robert Glasspiegel with Langen McAlenney. Good morning, everyone. Hey, Bob. Rick, you said that the accounting change does not change any of your components of your plan. But on my math calculation, it does boost ROE by 60 bps. Since this is a noneconomic, non-cash event, is it fair to say that you would increase your ROE by 60 bps for your plan and how the board sort of is assessing performance, et cetera? Yes, that's accurate. It will have that impact on our ROE. When I talked about our plans, it was more operational plans that I was referring to, and we're going to run the business the same way. But you will see impact. You will see the ROE go up roughly half a point. You will see book value per share come down. Somewhere in the middle of that range would be probably in the $1.50 range. But net, I was talking about our operational plans. We're going to run the company the same way. But you're paid more on book value growth. I mean, you're paid more on ROE than book value growth, or am I wrong on that sort of assumption as far as the plan? Yes, we are, but that'll be a 2012 item we'll talk about on a recasted basis with our board when we get to setting plan targets. Okay. On a macro basis, and we talked a little bit about this, but what I hear from you is a 2.60 ten-year and risk of a double dip and sloppier economic growth doesn't really move the needle as far as any of your plan, any of your strategy. From here, you just assume this is sort of short-term rather than something structural that needs to result in a significant business plan adjustment. Bob, I'll start with that and maybe ask others to pitch in. I don't think anything that we're seeing now is changing our strategic direction or our focus in the marketplace. It's not changing how we've sort of organized ourselves operationally to think about supporting the marketplace and certainly doesn't change, as Rick said, really the material aspects of our financial outlook. Obviously, we could use a better economic environment as measured by employment growth. We could use a better environment in terms of interest rates. I think we've proven, even over the last couple of years during the financial crisis and the economic sort of headwinds we've had to face, that our plan hangs in there quite well, actually, even in those tougher times. We're continuing to reinvent ourselves. We're continuing to do things to make our products and services even more competitive. Don't get me wrong, we're certainly not complacent, but it's not as if this environment is causing us to do a dramatic change in direction. The 2.60 ten-year doesn't say we got to increase our rate increases because you went through this a year ago, and you just sort of think this is a short-term blip and rates will go higher? Yeah, I think as Rick's always said, we monitor these things carefully. We have a very close connection between market interest rates, our pricing assumptions, how we think about discount rates on new claims. All those pieces of the decision process are very tightly tethered, and I think just as we've always said in the past, we don't move quickly to short-term movements anyway. I think that's the key. Our pricing, one of our hallmarks in the market is stability of pricing that we've taken out there. When we may move, they're on a gradual basis, and they reflect a longer-term view of where things have been and where they're going, and I think that we'll continue to run the business that way. Okay. It seems like long-term care is probably the most sensitive to a sustained long-term low interest rate environment. Is that fair? Yeah, I probably wouldn't use the word sensitive, but it's certainly something you have to watch the most in terms of where it goes over time. Tom mentioned our hedges that we have in place. That's where I'm watching the 30 year, not the 10 year, which has come down equally as quickly. Then you look at the credit spreads on the long end. We've been fortunate to get some long assets behind that at some pretty good rates over the course of last year. When you throw the hedges on top of that, we've been fine. Right now, it's tough to put 30-year money out there at a reasonable rate. Thanks for the thoughtful answers. Good. Thanks, Bob. We'll take our next question from John Nadel with Sterne Agee. Hey, good morning, everybody. I have a couple for you. A couple data points. In the U.K. business, I know the inflation-linked group life business is having an impact on this benefit ratio. Is it possible for you guys to give us an adjusted benefit ratio that removes that impact so we can get a sense for the trend underlying? Yeah, when we look at that, actually, that's something we're looking at how we would take that on in the future, given that the volatility of the interest, I should say, the inflation moves in the U.K. are so great. So certainly something we're thinking about, and we'll work on breaking that out. I think it's been more of a general trending item that we've talked about this quarter with inflation moving. So that's something we're considering, and we'll certainly have more discussion on that. Okay. During the quarter, did you take any dividends up from the operating subs to the holding company? We did. We took about $140 million out of the operating subs in the U.S. We also have dividends flowing from the UK up as well. Oh, okay. How much was that from the UK? UK was, in pounds, somewhere between GBP 35 million and GBP 40 million. Okay. I would highlight, those are very consistent dividend levels and that's what we're looking at, is consistent streams of dividends up from operating companies to holding company to putting it back to work. Got it. Then, if I could follow up on the DAC accounting change. As we look forward and if I assume you guys make no changes to your sales-oriented expenses, about how much of the cost that you now defer will no longer be deferred? Costs deferred will no longer be deferred. It would be about that same ratio of the write-ups that you would see. Yeah, no, it would be between that 25% and 30%. Okay. So it's about 25%-35%? Okay. Yep. So at the end of the day, the result here on forward earnings is really no meaningful impact, just to confirm. That's correct. Okay. And then finally, Kevin, it wouldn't be a quarterly call if I didn't try to get a sense, a little bit more detail on pricing shifts in the market. Maybe to be a bit more specific, this may be difficult, but if I held all the variables constant for you, wages, employee numbers, benefit plans, attachment points, et cetera, can you characterize for us in the small, mid, and large case market how much pricing in group disability and group life is up today versus maybe a year or two ago? Oh. Thanks, John. Appreciate that. I'll get you later. Okay. The market prices for LTD are fairly flat when you look in total. Usually, when we talk about soft pricing in the marketplace, it has more to do with sort of the number of competitors that are pricing low as opposed to sort of overall pricing level. Overall pricing levels have been fairly flat. We've been moving rates up, as you know, over the last 5 years, but now we're sort of in the low single-digit rate adjustment every year, which is mostly driven just by the aging of the block. I think the question going forward is if the industry margins have been shrinking steadily over the last 4 years. I think you can take a look at the Gen Re, JHA data. Our margins, of course, have been increasing during that same period of time. I think that our discipline has worked out really well for us on that side of the page. I think maybe that's what we're starting to see in the marketplace is some competitors starting to firm it up, recognizing the deterioration in margins. I think you look at the STD business, I think it's the same kind of story. Margins have been deteriorating. I think if you look in the Gen Re studies, STD as an entire industry was slightly south of breakeven last year. The ASO business was even further south of breakeven, so I think you might see some hardening on the STD side as well. Group life, I think, is very stable in the small and mid-markets. That hasn't moved very much. Mortality's been very stable. I think in the large case marketplace, it's a different story. As you know, we don't sell, for the most part, large standalone group life. The reason that we don't is that tends to be a significant commodity play, price shopping play, price negotiation play. That marketplace I think is extremely volatile. That's great. Thank you very much. All right. Thanks, John. We'll take our next question from Thomas Gallagher with Credit Suisse. Hey, good morning. Hey, good morning, Tom. First, I had a question for Rick. Just following up on Steven Schwartz's question about difference between new money and portfolio yield. The numbers would be, let's say new money's 4.5% to 5%. Portfolio yield, 6.68%. But that 6.68% is duration-weighted book yield. If I look at your nominal portfolio yield, which is how we all model earnings, that number's a lot lower. It's actually 5.4%. So using the numbers that matter from an earnings standpoint for Unum, the difference wouldn't appear to be that great. So I guess my question to you is, which ratio, which statistic matters more to you? How is 6.68% relevant to you? Because your comments sort of indicated that there was a very big gap between the two. But from an absolute earnings standpoint, the gap doesn't appear as wide. Anyway, can you comment in terms of how you would view that? That's why I caution. It's really across the curve, and there's not any good aggregate measure to look at. What I think about is more given the duration weighted, which talks much more about the long assets we have as opposed to necessarily the reported yield that we have today at the 6.68%. I'd look at the 30 year, and then I'd use the credit spreads off of that. So you have a very fair point that when you look at that duration weighted, it's a lot higher. And actually rates, even with the low levels that they're at today, you'd have to take the 3.90% or more, roughly 4% around the 30 year. And then take credit spread off of that, which would get you much closer to that portfolio rate. You really have to disaggregate it portfolio by portfolio. That's actually how I think about it. It's no aggregate levels. We manage this portfolio by portfolio. And we've done very well, even in a fairly low interest rate environment over the last year to hit our bogeys along the way. I'd say it's tough, but we're not letting up on our investment team to find the jewels out there as we continue to go through this to hit our targets, so. And I think we're safe to say too, our results were pretty close to plan, as it relates to some of the investment activity we intended. That's the other element here, which is what we expected. Yeah. No, I'm giving you more of a sense of that it's hard out there, which I don't think is a surprise to you, as opposed to how we've been able to operate and work our way through the low interest rate environment to date, and really how we expect our team to operate through this low interest rate environment going forward. Just a follow-up. As I think about the potential headwind of rates, to me, the difference that we're seeing today would only be 100 basis points, just using nominal yield. It wouldn't be 200 basis points, because if you're using 200 basis points, and somehow that is the real economic difference, I think it's a bigger headwind. I guess the follow-up is, as you think about your business, is there some offset that I'm not thinking about from a liability standpoint that economically the kind of disparity or difference is really more 200 basis points or is it just a nominal 100 basis point spread is the more accurate way to think about the forward earnings impact? Yeah, no. I'd probably be much more on that 100 range from a spot perspective. It's going to be dependent on the deal. Then you'd have to disaggregate it. When I'm talking about 10-year money, I'm thinking more about our group long-term disability line. When I'm thinking about our long-term care, I'm thinking about our 30-year money. We're lower than the portfolio rates there today. But over the last year in a very tough, what I would say was last year was also a tough investment environment. We've actually been able to hit our bogeys along the way. As I look forward, it's going to be tough, but I wouldn't see our portfolio creeping down or moving down very quickly. I think we've highlighted that the portfolio yield in aggregate over the last year has barely moved. And rates have not been very high. It's something we worry about and we work on, but there's no near-term pressure that I'm feeling as a result. Okay. Just a question on long-term care, that interest-adjusted benefit ratio is creeping up. Can you comment on how much margin do you have left there? I know you haven't separately disclosed or broken out what the GAAP margins are there, but I think in prior quarters when that benefit ratio was lower, you had mentioned there was a little bit of room, not a lot. As that creeps up, are we in jeopardy of having that turn to a negative margin for the block? Yeah, I don't think we ever said there was a little bit of margin, if you go back to what we've said. There's margin in the block. I take you back to the dynamics around it, which is exactly what Kevin McCarthy said. Yes, the adjusted loss ratios are going up. That's an expectation of that block, given the very high persistence that we've got. And we're taking pricing actions to combat that. The pricing actions will take a little bit longer to come in, so we're not surprised that the interest-adjusted loss ratio is still going up until those pricing actions take effect. But to be clear, it's a tough business, and the long-tail nature of it, we're taking the actions necessary to manage the block. Okay, and then last question. Just on the disability underwriting results and how those have held in so well. If I understand it correctly, over the last several quarters, you've had very good claim recovery results that have offset a slight pickup in incidents. On the claim recovery side, can you give us a little bit more in terms of what's going on underneath the covers there? Is there any diminishing return benefit that's going to go away? Or is that a sustainable trend where you think you can continue to see good claim recoveries even if the employment picture sort of remains where it is today? Yeah. Good morning, Tom. It's Kevin. Yeah, I'm very confident in the consistency of performance in our claim management operation. I think they're very much on top of managing their inventory. They're very much on top of quality control and quality assurance reviews. I think they pay close attention to what's going on with Social Security. I think they're very careful about managing the claims practices right to the contract. I think we've improved steadily over the last five years in terms of relationship management with claimants and with claimants' employers, and between our doctors and claimants' doctors. I don't see any reason that we won't be able to sustain that claim recovery performance. Got it. Thank you. Thank you, Tom. I think, operator, we'll just have time for one. We're a little sensitive to time. One more question. All right, we'll take our last question from Eric Berg with RBC Capital Markets. Thanks very much. You are welcome. Good morning. Glad to sneak in under the wire here. Just a few quick ones. First, I want to follow up on Thomas Gallagher's question, which I thought was a very interesting one, an excellent question. If the duration-weighted book yield is in fact capturing the true economics of your portfolio, what is going on considering the length of time that those bonds are outstanding as opposed to a nominal yield, which I gather would just treat all bonds identically and is not an economic view of your yield. Why is not the duration-weighted book yield the right number to be looking at when comparing the yield on the portfolio to new money? That is my first question. Yeah, no. To answer your question, the reason we focus on that duration-weighted, because we think that is the right answer when you look at it. That is where I think you are absolutely right, Eric, that looking at the duration-weighted is important when we look at our liabilities and our assets. That is really what we are matching up to. I think that you are right on the money there. Okay, thanks for clarifying. I had a misunderstanding. Second question of three is really for Kevin McCarthy. In thinking about pricing, you are the latest disability executive. Yesterday, someone at MetLife was talking about pricing firming. He was talking about large case, you today were talking about small and midsize. My question is, why is it firming? Especially in the context of a weak economy, I would think it would be difficult for suppliers of any product, a service or a good, to push through price increases and to get firming prices. Why are we seeing a firming of pricing, and how is this happening in the context of a weak economy? Well, I think, Eric Berg, we're talking about orders of magnitude here. I think pricing had been, as I said, in disability in particular, sort of very flat, some volatility by market segment, particularly in the mid and large. I think over the last couple of years, especially the last 12 months, a number of companies have had deterioration of results, or our competitors have had deterioration of results. I think several companies have pointed out that they intend to increase prices. I can think of at least three that have mentioned that, if not more. I think that's what's firming up the pricing. I think that it's not sort of an order of magnitude that's having, I think, a big impact on an employer. You think about disability, we're talking about a premium for life that's in the $250 to $300 per year per person kind of range. I think firming up a price is, I think, maybe shoring up everyone's persistency and maybe helping to shore up, eventually, industry profitability. Last question, also for you, Kevin McCarthy, relates to the voluntary business. While I certainly understand the long-term case for growth in the voluntary area, the reasons for it are apparent. I can't help wondering, in a difficult economic environment, while employers may be more willing, more interested than ever in having their employees pay, because voluntary coverage, as I understand it, typically involves some contribution, if not a significant or total contribution by the employee. What about what the employees are thinking? In other words, I would think that in a difficult employment environment, employees offered benefits might say, "Not now, maybe when I feel more comfortable." How does all that work? I think, regardless of what's going on in the defined benefit to defined contribution shift from employer to employee, the fact remains that employees still need financial protection. And the financial protections that we provide in our product lines, particularly our voluntary product lines, are extremely affordable and cover significant risks. I mean, whether it's a critical illness risk, a short-term disability risk, an accident risk, or a life risk, I think in every one of those cases, employees and their families need that level of protection, and it's a very affordable level of protection for a very high level of potential risk. And I think that's what's driving it. If you look back at the last couple of years of deterioration in our economy, we have not seen persistency in voluntary move at all. And we haven't really seen participation rates move down either. I think in going forward over time, as more and more brokers are involved in voluntary, as we get out there and increase public awareness around the protection and safety net that you can get from our products, I think if anything, you'll see participation rates go up. Thank you. Good. Thank you, Eric. And operator, I think we want to thank everyone for joining us this morning. I think at this point, operator, this will conclude our second quarter of 2011 earnings call. Thank you. That concludes today's conference call. We appreciate your participation.

Data Source: Quartr Last updated: Aug 3, 2011

Earnings call transcripts are provided by Quartr and are published within hours after each earnings call.

Update frequency:

Quarterly

Data Sources Report a data error

• Quarterly report
• Earnings release