Earnings Call: Q1 2011

May 4, 2011

Good day, and welcome to the Unum Group First Quarter 2011 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Senior Vice President, Investor Relations, Mr. Tom White. Please go ahead, sir. Great. Thank you, operator, and good morning, everyone, and welcome to the first 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 the results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the SEC, and are also located in the sections titled Cautionary Statement regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2010. Our SEC filings can be found in the investors section of our website at www.unum.com. I also 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 statement. 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, Randy Horn, and Jack McGarry. Now I'll turn the call over to Tom Watjen. Tom? Thank you, Tom, and good morning. Our first quarter results are a good, solid start to 2011 and are in line with our expectations. We continue to see generally stable risk experience, particularly in Unum US, but also in Unum UK and Colonial Life, where we have seen some volatility in past quarters. Rick and Tom will talk in greater depth about our results for the quarter, but before they do, let me just touch on a few highlights that I think are noteworthy. First, we continue to report modest EPS growth, in part driven by our continued improvement in Unum US earnings, as well as we're also continuing to benefit from our share repurchase program. Second, we continue to maintain a very strong capital position, driven by our solid operating results and strong investment performance. Our weighted average risk-based capital ratio ended the first quarter at approximately 395%, and our holding company's cash and marketable securities position is over $800 million. Third, we are growing in most of our target markets. Unum US operations showed a 10% growth in new sales this quarter, with a 10% growth in voluntary benefits, 7% growth in group LTD, and 8% in group life. At Colonial, we continue to see modest growth in our core commercial markets, which remains a sweet spot for Colonial, with pressure certainly continuing to come from our sales in the public sector and the large case marketplace, which we expect to continue to be choppy. As we expected, given the pricing actions we are taking in the U.K. market, sales are down in Unum UK, but we continue to have a very positive outlook about that marketplace. I might add that we have not seen any material change in the economic or competitive environment. We fully expect the environment obviously to improve at some point, but until it does, we remain committed to maintaining a disciplined strategy that has served us so well over the last several years. Fourth, our investment portfolio remains in excellent shape, with strong credit quality and generally stable portfolio yields. As you know, our current Chief Investment Officer, David Fussell, has been trying to retire for some time, and we are pleased that his replacement, Breege Farrell, has joined the company as our Chief Investment Officer. We look forward to the contributions that Breege will be making with our already strong investment team. Next, as I mentioned earlier, we continue to aggressively repurchase stock with a total of $224 million repurchased this quarter and $580 million repurchased over the past 12 months, or about 8% of our outstanding shares. Our capital strength and flexibility remains a significant asset. The last point I wanted to make before turning things over to Tom is that the consistency we are experiencing in our results today is no accident, but the result of a several year process to reinvent the company. Our strategy is grounded on maintaining a disciplined approach to the market with a focus on profitability, not just top line growth. As a result of our more disciplined, targeted efforts, we have shifted our business mix to a better balance of core markets versus large case business and a better spread of business, including a greater portion of our business coming from non-disability lines. We have therefore not experienced the volatility that some others have had, and we remain committed to following this more disciplined, measured approach to the business. Now I will ask Tom White to provide an overview of our operating results. Tom? Great. Thanks, Tom. Net income for the first quarter was $225.4 million, or $0.69 per diluted common share, compared to net income of $229.8 million, or $0.69 per diluted common share last year. Included in the results for the first quarter of 2011 are net realized after-tax investment gains of $9.7 million, or $0.03 per diluted common share, compared to net realized after-tax investment gains of $16.5 million, or $0.05 per diluted common share in the first quarter of 2010. Also included in the results for the first quarter of 2010 is a tax charge of $10.2 million, or $0.03 per diluted common share, related to the change in tax treatment of the Medicare subsidy for retiree health benefit plans. Net realized after-tax investment gains for the first quarter of 2011 include an after-tax gain of $9.1 million, resulting from changes in the fair value of an embedded derivative in a modified coinsurance contract, compared to an after-tax gain of $11.9 million in the first quarter of 2010. Also included in net realized after-tax investment gains for the first quarter this year are net realized after-tax investment gains of $600,000 related to sales and write-downs of investments compared to net after-tax gains of $4.6 million in the year-ago quarter. Excluding these items, after-tax operating income was $215.7 million, or $0.69 per diluted common share, compared to $223.5 million or $0.67 per diluted common share in the year-ago quarter. Turning to the operating segments, in total, Unum US operating income increased 5% to $209.1 million in the first quarter. Within Unum US, the group disability line reported another solid quarter from a risk perspective, though operating income declined 3% to $73.5 million as net investment income declined, primarily due to a decrease in the level of assets supporting this line of business. Within the group life and AD&D line, operating income increased 3.1% to $52.8 million in the first quarter, with higher revenues offsetting a slight uptick in the benefit ratio. In the supplemental and voluntary line, first quarter income increased 14.7% to $82.8 million. The year-over-year improvement was driven primarily by a strong rebound in earnings from the voluntary benefits business line, which more than offset small declines in income from the recently issued individual disability line and the long-term care line. Moving to Unum UK, operating income in this segment decreased 19.6% to $48.7 million in the first quarter of 2011. Operating income declined 21.9% in local currency. While premium income in local currency was down 1.8% in the first quarter, the benefit ratio was higher at 69.3% compared to 63.1%, reflecting the impact of higher inflation on claim reserves associated with policies containing an inflation-linked benefit increase feature, a lower level of claim resolutions in group LTD, and lower premium income. These items offset favorable group LTD claim incurrals relative to the year-ago quarter. Concluding our core operations, Colonial Life experienced a 5.5% decline in operating income compared to last year, as premium income growth of 5.8% was offset by a higher benefit ratio. The individual disability closed block operating income was $9.9 million first quarter 2011, compared to $11.7 million in the year-ago quarter. The interest-adjusted loss ratio was slightly higher at 84.7% this quarter, compared to 84.5% in the year-ago quarter. This was driven primarily by lower premium income, which declined 5.5% due to the expected runoff of the closed block. Net investment income declined 4.6% due to a lower level of bond call premiums and a decrease in the level of assets. Finally, the corporate and other segment reported an operating loss of $21.7 million, compared to a loss of $8.9 million in the year-ago quarter. Interest expense increased to $34.9 million this quarter, compared to $30.3 million in the year-ago quarter, reflecting the debt issuance from September of 2010. During the first quarter, we paid off at maturity $225 million of our 7.625% senior notes, which were due March of 2011. This will result in a lower interest expense going forward. In addition, net investment income in the corporate and other segment was lower, driven primarily by lower income from private equity partnerships and our investments in low-income housing tax credit partnerships. Our increased activity in tax credit partnerships over the past year contributed to a lower income tax rate in the first quarter compared to a year ago. With that overview of the operating results, I'll turn the call over to Rick McKenney for further analysis of this quarter's results. Great. Thank you, Tom. A few topics on the quarter, which continues with the theme of stability. The areas I'm going to cover are the key profitability drivers for our business lines, a snapshot of our investment portfolio, and an update on our capital position and actions. Starting with the risk experience for our primary business lines, in Unum US, risk experience remained generally stable again this quarter. Our group disability performance remains favorable with the benefit ratio declining slightly this quarter to just under 84%, which is down from the 84.2% we saw in the first quarter of last year and down sequentially from the fourth quarter. New claim incidents continue to show some volatility but was down slightly on a sequential basis relative to the fourth quarter, and it remains within a range of experience we've seen over the past several quarters. Claim recovery experience remained favorable in the first quarter. We have no reason to believe this will change, and we'll look for similarly consistent levels in the group disability benefit ratio in the future, and longer-term improvement and profitability will be driven from business mix shift to more core market and voluntary benefits. For the group life and AD&D line, results were generally stable with a slight uptick in mortality experience, producing a benefit ratio of 70%, which is consistent with the year-ago quarter. Looking to the supplemental and voluntary lines, voluntary benefit earnings were strongly up this quarter with favorable risk experience, especially in the disability and life lines of business. Premium income in this line was also quite strong, growing 11.2% year-over-year. The loss ratio on the recently issued individual disability line was slightly higher than the level of last year, but risk experience remained relatively stable. Finally, long-term care loss ratios were up year-over-year, but consistent with the fourth quarter. 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, and we filed in 46 states and the District of Columbia. So far, we have almost received 90% approval out of the 26 states that have reached a decision, and we continue to work with the remaining states. The additional premiums from this rate increase will emerge over 2012 and 2013. Moving to our Unum UK results, we are pleased with the stability and the financial performance for this segment in the first quarter compared to the fourth quarter of 2010. Though comparisons to the year-ago quarter show earnings that were substantially lower, as we have been discussing for several quarters. The benefit ratio for the first quarter was 69.3%, down from 71.7% in the fourth quarter, with favorable group long-term disability claim incidents offsetting some higher group life mortality experience. Finally, on Colonial Life, earnings and risk results for the first quarter were within our expected range, particularly for the accident, sickness, and disability line of business that produced adverse claims trends in the fourth quarter of 2010. The benefit ratio of 51.4% this quarter included less favorable risk results in the accident, sickness, and disability line due to a higher level of incurred claims, as well as slightly unfavorable mortality experience in the life line of business, but remained within our expected range of 50%-52% for the segment. Looking at the premium line, first with Unum US, new sales in the segment showed some positive momentum for us in the first quarter, growing 10% in total, with much of this growth coming from sales of new business to existing customers. On a product line basis, sales of group long-term disability increased 7%, and group life increased 8%. Within these group lines, our new case count sales were up 14% relative to last year, with particular strength in the smaller case size portion of the market. We continue to see strong new sales growth in the voluntary benefits marketplace, with premium sales this quarter increasing 10% and new case count growth of 21%. At Unum UK, we continue to work to increase price in the U.K. group risk market and are pleased that persistency, while lower than last year, is holding up well relative to our expectations. There is pressure on sales comparisons, which are down 29% compared to the year-ago quarter in local currency. This reflects the current competitive environment in the U.K. in conjunction with our pricing actions. In aggregate, we are seeing greater stability in our premium income line, which declined 1.8% to £104 million in the first quarter. We are pleased with the progress that Jack McGarry and his team are making in implementing several important operational initiatives, including these programs related to renewals of existing in-force business. Finally, sales in the Colonial Life segment were softer this quarter, declining 4% after several consecutive quarters of growth. Breaking it down, though, we continue to see positive momentum in the core commercial market segments, which are cases with less than 1,000 lives. This area saw 2% growth. However, sales were lower this quarter in two areas which can be more lumpy, and that is the large case commercial market and the public sector market. Our sales to existing accounts showed slight improvement compared to last year, driven by favorable results from new sales into existing cases. Importantly, on the recruiting front, our new rep contracts grew by 7% in the quarter. Turning attention to the balance sheet and the investment portfolio, we continue to see excellent results. The credit profile of our investment portfolio remains strong, with the net unrealized gain position in our fixed maturity securities portfolio at $3.3 billion at quarter end, and our portfolio watchlist showing no signs of deterioration in the first quarter. You should also note that since the end of 2009, in aggregate, we have booked a net gain in our results from the investment portfolio. Although challenging, the low interest rate environment continues to have only a marginal impact on the company. Our portfolio yields continue to hold up well with our aggregate portfolio yield of 6.69%, down only six basis points over the past year. The yields on the various investment portfolios backing our product lines also showed similar stability. The yield net of our discount rate for Unum US Group LTD business remains in good shape at 97 basis points at March 31, and our discount rate is unchanged. With these stable operating results, book value per share continues to grow, increasing 10% to $29.08 at March 31, 2011. Looking at our capital, our statutory earnings start out the first quarter of 2011 in line with our expectations. Net income on a statutory basis for our traditional U.S. life insurance subsidiaries in the first quarter was $142 million. This is a level consistent with our full-year expectations that we believe will continue to drive strong growth in our capital position. The weighted average risk-based capital ratio for our traditional U.S. life companies was approximately 395% at quarter end, toward the upper end of our target range for the year. Holding company cash and marketable securities totaled $816 million. During the first quarter, we paid off $225 million in maturing debt and repurchased $224 million of our stock. As Tom mentioned, in the last year, we have bought back roughly 8% of our shares, and we have remaining share repurchase authorization of $921 million at quarter end. Our leverage ratio finished the quarter at just under 21%. Finally, as we look forward and given consistent results, we are confirming our previous outlook for 2011, which calls for operating earnings per share growth of 6%-12%. I'll turn it back to Tom for his closing comments. Thanks, Rick. As I said in my opening remarks, I am pleased with our overall results for the quarter, particularly the stable risk experience we saw across the company. Economic and competitive conditions remain challenging, but I believe that our strategy of focusing on consistent, profitable growth is the right one for our company. Our strong capital position and financial flexibility, combined with our strong business model, continue to position us well for the future. Now this completes our formal comments, and operator, let's move to the question and answer session. Question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and take as many questions as time permits. Once again, it is star 1 for a question. We will pause for just a moment. We will take our first question from Darin Arita, Deutsche Bank. I had a question on the U.K. Good morning, Darin. I am sorry, we did not catch the question. Darin? Operator, why don't we go to the second question, maybe have Darin get back in the queue. He seemed to have lost it. Once again, it is star one for a question. We will move to our next question from Mark Sinfosin, Macquarie. Hey, good morning. Good morning, Mark. Maybe I will ask Darin's question. On the U.K., sales were obviously challenged in the quarter. Persistency levels came in a little bit. I guess what I am interested in is, I understand we want to be disciplined and profitability has gotten hurt over the last few quarters, and we are trying to correct that, which seems like the right answer. I guess I am just curious about how do you think about whether we have the right pricing in place? We have overshot a little bit. Just give us thoughts on that, please. Mark, it's a great question. I think, as you know, our company actually went through a very similar exercise with Unum US several years ago. We have a fair amount of experience thinking about how to go through a repricing exercise and keeping track of the right variables and metrics as we do so. Maybe, Jack, I'll ask you just to respond specifically to what we're doing in the U.K. and what you're seeing so far. Yeah. Clearly, sales are challenged. It continues to be a pretty intense competitive environment. But the fact of the matter is the way that these things are rolling out are very close to what we planned on, particularly around the persistency and renewal. I'd remind you that our historic persistency level has been in the high 80s rather than in the low 90s that we saw last year. We're slightly below that as a result of the renewal actions. But more importantly than that, we're getting the right actions we're asking for. We're clearly keeping the better-performing cases. The cases that we're losing would tend to be unprofitable cases for us. Oftentimes, in this environment, we're losing them at rates that are below the rates we were charging on in-force. So we're very encouraged about the margin improvement. We're also encouraged about the fact that the renewal program, as it's rolling out, is demonstrating our ability to sell value. We don't have to match the lowest rate in the marketplace to keep in-force business. In fact, we have a good margin there. So we feel like we're pretty much on track. It's very consistent with the experience we saw in the U.S. when we renewed business there, both from a persistency perspective, but also from a kind of margin improvement perspective in the difference between the things we're keeping and the things we're losing. So right now, we're watching it very closely. We're mindful of the impact on in-force premium, but we feel pretty good about where we are. Okay, so persistency is as you expected it to be with the rate increases. Yes. Okay. Just on the U.S. group long-term disability, the only data we have is what you put in the back of the supplement regarding reserve roll-forwards. This quarter was a really strong quarter for claim recovery patterns. I think it was the highest that you've had, at least according to that chart, as a ratio to beginning of period reserves in history, basically, with one quarter close. I guess, how sustainable is this level of claim recoveries? Is essentially the claim recoveries just offsetting the higher incidents that we're seeing from the economy? Can we expect this level of recoveries to continue, I guess is the question? Kevin, can you take Mark's question? Sure. Good morning, Mark. Morning. It was an extraordinarily, I think, good quarter. We've had rock-solid recovery patterns now, I think for, I don't know, 10, 12 quarters in a row. This one was particularly strong, I think both in terms of recovery counts and also in the average size of the reserves that were on those recoveries. To some extent, that offset what was incidence levels that were higher relative to last year's first quarter, but lower relative to last year's third and fourth quarter. The average size of new submits was a little bit lower than we've been experiencing last year. To some extent, within all that, you've got some volatility, particularly around average sizes of claims. I think in terms of solid recovery performance, I expect it to be sustainable. I don't see any reason that's going to change. It may not necessarily stay at the high level that we had in the first quarter. Okay. All right. Thank you. Good. Thank you, Mark. We will take our next question from Darin Arita, Deutsche Bank. Good morning, Darin. Good morning. Maybe we'll try this again. Can you hear me now? We can now. Thank you. Good. Mark did ask my first question there on the U.K. But I had one on the U.S. in terms of the voluntary benefits benefit ratio that's steadily declined over the past few years. I was wondering if you can talk about what's driving this and how much lower it can go. Great. Kevin, you want to grab that one? Yeah. Good morning, Darin. I think it's operating above what we expect it to operate, right in and around 50% or so as a loss ratio. It's been going down primarily because our growth rate in AD&D and critical illness voluntary lines has been growing faster than the growth rate in our life. The life portfolio is somewhat more mature and therefore has a higher loss ratio. So it's mostly been driven by business mix. Now, the other, I think, factor is that we have raised prices slightly in voluntary over the last several years on our portfolio. We continue to manage that business both in terms of participation rates and pricing, and size mix, et cetera, in line with our strategy. In terms of this business, we're seeing the premium income growth start to accelerate again. Where do we think the growth can go to here? On voluntary? That's right, the supplemental and voluntary business. I think that in general, we expect to outperform the marketplace. In voluntary, we expect right around double-digit growth, and sort of on the higher end of double-digit growth, if you will, sort of in the mid-teens, I think, is the target level for us in terms of the voluntary business as the economy recovers. Great. Thank you. Good. Thank you, Darin Arita. Now we'll move to our next question from Colin Devine, Citi. Changed my name. I didn't even know. Good morning, guys. Good morning, Colin. All right. I was wondering if we could touch on three things. First, with respect to long-term care, perhaps if you could expand a little bit on the average rate increase that you've received, what that really means to premium then over the, I guess if you like, the next year. And what, even more importantly, it's going to mean to that benefit ratio. So the first question there on long-term care. Second, with respect to the U.K., maybe I've missed it, but I've got to say, this is the first time that I've heard you acknowledge that you've got a pricing problem on the U.K. book, unless I misinterpreted what you said. I thought I've, well, Jack, Tom, you referred to, we've been through this in the U.S., we're doing it again. If you do then have a pricing issue on that block, maybe we can expand a little bit more on what you think the magnitude of that is. Then finally, I do not want to leave Randy out. On Colonial with the benefit ratio, clearly then the fourth quarter was not just an aberration. How long do you see this sort of elevated ratio continuing? Are we going to be at these levels for a while here, or can you get it back down? Good. Colin, let me just ask Kevin to take your first question on long-term care. Thank you. Good morning, Colin. Let me sort of work my way backwards. I think the result of the rate increases will be largely stabilization in terms of the loss ratio. The average size of the rate increases, our target level was in and around 25%. On the approvals we have received so far, it fell to that, primarily driven by the fact that about half of the states have approved the rate increase in the 23 percentage kind of average range, and half of them have only approved a partial rate increase in the maybe 10%-12% range with the idea that we would have to come back again for a second round. I think the premium, as Rick McKenney said in his remarks, will emerge more in 2012, 2013, sort of in the range of somewhere around $30 million by the time we're finished all the way through the rate increase actions. Okay. Thank you. If I could just tee up the U.K. point, actually, Colin Devine, let me just be sure I'm clear. We don't feel we have a problem in pricing like, for example, when I referred to the U.S. Obviously, the U.S. had to go through a fairly significant amount of repricing because we had very low returns in that business. The situation we find in the U.K. is actually we still have very strong returns. It's just those returns have come down. We want to take the actions necessary to bring them back up again. Maybe the process is somewhat similar, but the starting point and ultimately the ending point in terms of the U.S. versus U.K. is very, very different. Jack McGarry is always playfully saying to me that, "Don't give me too much grief when I have a 20% plus ROE business and you're talking about pricing actions." Because that's really what we're talking about is taking and improving the pricing and returns in a business which frankly already has some very good returns. We just think they can take them to a higher level. With that, Jack McGarry, maybe just sort of elaborate a little bit on just some of the things that we've been doing. I think you touched on this a little bit earlier, but maybe just pick up on just some of my comments. Yeah. We do have a 30% margin in the business. I don't think the problem is with pricing levels as much as perhaps the direction prices were headed in the marketplace, and the desire to stop and reverse that direction. I actually talked about this in fairly good level of detail at the investor relations meeting in November about the fact that we had reduced rates in 2009. The market had responded to that very aggressively. It still left us with very healthy margins, but had reduced rates across the marketplace pretty dramatically, and we were just looking to reverse that. We feel very comfortable with the level we're rating at now. We feel very comfortable with the profitability of our business. We feel comfortable that the profitability of that business will improve as a result of the rate actions that we're taking. We still view this as an extremely high margin, high return, attractive market, and one that has a huge opportunity for growth as well. I wouldn't label it a pricing problem so much as taking some management actions as the market leader to make sure that there isn't a pricing problem in the marketplace in the future. Okay, Jack, then just to be clear, so we can all relate this to what happened in the U.S., where you tactically shrunk the size of the book, premiums came down. What should we expect then really in the U.K. as you go through this? The sort of decline we saw here in the first quarter, more or relatively stable, or is it going to- I think we would expect fairly stable persistency as we move through the block. Hopefully, if the marketplace begins to harden somewhat, that persistency could drift up in the second half of the year. We expect to be completely through pricing actions over the next two years. We will have been through the entire block from that time, and we would expect persistency to improve over that two-year cycle. Okay. Thank you. Colin, unlike the U.S., as you know, Jack, there wasn't a big, large case block, for example, like we had to tackle in the U.S., which in effect meant there was big chunks of premium that really had to exit the income statement. That's not the same situation we find in the U.K. Yeah, no. It's more that a lot of the tactics we're using are similar. Some of the results in terms of keeping better business, losing the worst running business, the impact of persistency of the rate actions are similar, but at a very different level and at a very different profitability level than the U.S. Colin, if we could shift to your last question on Colonial, we have a sort of two-part answer. Maybe just ask Rick to speak a little bit to the benefit ratio and then ask Randy just to speak to just some of the operational trends and mix of business changes that have been going on in the sales activity. But Rick, on the benefit ratio? Yeah, the benefit ratio, Colin, you would have seen it has elevated from what were really some very low levels that we saw in 2009, 2008. I think as we booked about a 49.7% for last year in total, we've gone up to 51.7% in the first quarter. And our expectations for the full year will be in that 50%-52% range, really driven by mix and our expectations of how we price that book. I would tell you that even with those benefit ratios, we're generating very good margins in this book of business and very good ROEs. And I'll turn it over to Randy to talk about more on the operational side. And maybe just one second, Rick. When you mention the 52%, or for Randy, is that where you really see it stabilizing? It's not sort of trending back to the 55%, 56% of five or six years ago? Is that what we should- I would confirm that, yes. Yes. We're seeing stabilizing at those levels. Absolutely. Good. Yeah. Randy, go ahead. Thanks, Tom, and good morning, Colin. Yeah, definitely see stability in that 52 range. I guess just adding to what Rick said, in first quarter of last year, I think Rick gave the full year number. We had a very low benefit ratio of just north of 47%. Starting out from a low level there. You might recall we did see a pattern of increasing incurrals in the accident sickness and disability segment over the course of 2010. Just absolute higher incurrals for accident sickness. We did see an increase in incidents of disability claims over the course of 2010. Then we reflected that through some reserve adjustments we took in the fourth quarter of last year. At this point, we see things stabilizing very well. Our disability incidence has actually dropped back down here in the first quarter of 2011. We had a surge in open life claims, Colin, in March, but that really is just expected volatility. We get in that line from time to time. Do not see any kind of adverse trend or pattern there. In fact, we have seen that open claim level settle back down here so far in the second quarter. Long story short, yeah, we expect things to stabilize in that 52 range. We have introduced some new products, had some product mix shift that has helped drive it to that level. We think that will help us on the sales front, but still maintain very healthy margins and stable benefit ratios going forward. Very helpful. Thank you. Good. Thank you, Colin. We'll move to our next question from Ed Spehar, BofA Merrill Lynch. Good morning. Good morning, Ed. I have a question on the U.K. I guess when I look at the U.K., the difference from the U.S. market for Unum, I think, is that your market share is about 50%, I believe, in the U.K. So I thought you'd have more price leadership than what we seem to be seeing. I'm wondering, is there any concern that this is an indication that the overall return expectation for the Unum UK market's potentially moving more toward the U.S. level? Because as you highlighted, this is a very high ROE business. Let me start, but then ask Jack just to supplement. I think, Ed, as you know, I think it was alluded to by Jack in one of his earlier comments, we made some pricing decisions a couple of years ago where we had lowered prices. Actually, what happened is the market actually not just went to that level, but went below it. We didn't really exhibit the kind of market leadership we should, actually. As Jack mentioned, really much of what we're doing right now is acting like a market leader. Early indications are that we can be a market leader and continue to protect prices and protect returns. But Jack, again, maybe you could fill in the gaps a little bit on that. Yeah, I would agree with that, Tom. We are holding on to the cases, having good persistency. We continue to have not the sales level we were achieving last year, but good sales level. Most of our misses, in fact, in sales were in the group life side as opposed to the group income protection side. So I think we are demonstrating leadership. The worst thing we could do for the market is chase share with price down because we'd end up with fulfilling that prophecy. So we're going to exert some leadership. We recognize that by us raising rates on our in-force block and having somewhat poor persistency for a short period of time, that's going to mean sales for some of our competitors. Hopefully, they will recognize that and begin to recognize that they can take the opportunity to grow and increase their pricing levels as well. This is early days. We've been at it for a quarter now, really through January renewals. The marketplace hasn't had time to react yet from a pricing perspective. So we are very hopeful that during the second and third quarter, they'll have that opportunity. We're very optimistic about our ability to maintain. In fact, we are maintaining, in fact, we're improving margins as a result of our pricing actions. We're improving returns. We also harken back to the huge opportunity that exists in the U.K., with only one out of 10 people currently insured for group income protection in a social environment that is really going to be relying more on the private industry to provide protection. We are very optimistic about the market and our leadership position in it. My follow-up would be, I understand you are exhibiting price leadership, but if the market does not follow, why would not you go to the market? Is there something about the risk profile of this business that you deem a 20%+ ROE to be necessary? Because I am assuming that if you thought the risk profile was similar to the U.S. market, why would not you accept the same level of returns if the market does not come to where you are, especially considering that you are highlighting a better growth opportunity in the U.K. relative to the U.S.? Well, I think a part of it, because the market has not demonstrated that we need to go there. We are a 50% market share leader. We are taking a little hit on persistency right now with the rate actions we are taking, but well within our plan. We are improving margins. To drive the market to the U.S. level of profitability to gain another couple of percent market share does not seem like a very good value proposition for us. As long as we can maintain our market share, we can protect our margins, we can get the returns we are getting, and we can demonstrate that we do not need to be at the market to sell income protection because of our value proposition. We can sell at a premium. We are going to continue to do that. Yeah, I guess I am not suggesting that you are going to be aggressive to gain two points a share. I guess what I am suggesting, if there is some fundamental shift in this market where if you do not follow where everyone else is, your share goes from 50% to 25%. Is there some reason for you to require a 20% ROE for this business based on the risk profile of the U.K. market versus the U.S. market? Well, first, we see no evidence of that fundamental shift in the market. In fact, we see evidence much to the contrary in terms of what we're doing right now. There's no risk profile in this market that requires that level of return. It's the fact that the market, we're able to achieve that level. If I could add to what Jack just said, again, there really is no evidence there's any difference in the risk characteristics. If you look at the basic fundamental actuarial sort of components underneath this in terms of incidence and claim and duration, those sort of risk factors, they're very, very similar to what they are in the U.S. So there's no fundamental underpinnings in the U.K. that are all any different than what they are in the U.S. I think what we're getting at is when, as a market leader, we probably made a couple fundamental mistakes a couple of years ago, which is why we made the change in leadership, where we were leading with price, and we didn't need to lead with price. As Jack mentioned, we have a tremendous value proposition. People truly respect the claim expertise we have in the U.K., the service we have in the U.K. So it was a strategy change, really, where rather than focus on just leading with price, let's get back to delivering and leading with value, which is frankly, we find in the marketplace so far, the market is prepared to pay for that value. In addition to that, we do write at a higher margin than our competitors do. If customers value that additional value proposition. I would say we probably erred a couple of years ago on choosing to get away from so-called selling value and to selling price, and that's what we're actually backtracking on that with the actions we've talked about here the last 12 months. Okay. Thank you very much. Thanks, Ed. We'll move to our next question from Jimmy Bhullar, JP Morgan. Hi, thanks. Good morning. I had a question. One, just maybe if you could talk about competitive trends and just your sales outlook in the U.S. disability market. Obviously, this quarter you were up 7% in long-term disability. I think the last couple of quarters you were weak. Secondly, related to that, we've heard from a lot of companies saying that they're raising prices if you've seen that happen in the market. The other question that I had was just on the pace of buybacks. I think you did $224 million in the first quarter. You've got $921 million remaining on your authorization. I think that runs through sort of the first half of next year, but should we expect you to take that long to use all of that up, or would you be doing it faster? Just talk about the pace of share buybacks the next few quarters. Good, Jimmy. Let me ask Kevin really to speak to your first two questions, which really deal with the competitive dynamic. Sure. Morning, Jimmy. Hi. Well, we have heard some companies talk about making price adjustments, and I think we have seen some limited evidence of that. But at the same time, we see other companies that continue to be quite aggressive. In general, I would say there has not been a significant shift in the competitive environment. We have been consistent with our value proposition. Our prices actually in the marketplace are slightly higher at this time this year than they were last year, so we are maintaining that kind of discipline and focus. We continue to focus on growing in our core marketplace and in the less economically sensitive and risky industries. In general, we are focused on delivering our value proposition, our ability to market in the core market in packages with our voluntary benefits. We are not worrying too much about the price levels right now, and we are not seeing much difference. Thank you, Kevin. Rick, you want to pick up the question on share buybacks? Sure. If you look at the first quarter, the $224 million that we did, and you take the remaining authorization of $921 million, you'd see a similar level on average that we would continue to deploy over the authorization period. However, I would caution against that because we are going to be very opportunistic in terms of how we buy back stock. For modeling purposes, the average is okay. On how it actually comes out, I think it will be quite different depending on the market environment. By that, you're just implying if you get a better price, you'd buy more- Correct. Versus otherwise, right? Okay. Thank you. Good. Thank you, Jimmy. We'll move to our next question from Jeffrey Schuman, KBW. Good morning, Jeff. Good morning. Thanks. I'm going to ask a U.S. question first, and then I'll come back and get in my, I guess, mandatory U.K. question. On the U.S., just kind of a high-level question. As we look a couple of years down the road to what we hope is a stronger economy, better employment environment, it seems pretty straightforward there would be top-line implications for you. How should we think about kind of margin implications? Should we think of you as having better risk margins in that environment? Or maybe just realizing a little bit of operating leverage in a better growth environment? Or should we think about more kind of stable margin expectations versus where we sit today? Kevin, you want to talk about that as it relates to the Unum US business? Yes. Good morning, Jeff. I think as the economy recovers, we get some job growth, we get some wage growth as well. The implications I think would be more significant on the top line in terms of growth of the business, of rejuvenation of sort of NBOC, for example, and the addition of benefits. Overall, profit levels ought to increase as the top line increases. As far as margins, you might see a marginal improvement in profit margin, but I wouldn't see a significantly different risk profile than we're managing to right now. Okay. So it's mostly a top-line opportunity. I would think, yes. Absolutely. Okay. On the U.K., you made the point several times that you got aggressive on pricing in 2009, and now you're trying to kind of address that. But when I look at a much longer picture, particularly for the disability business, it seems that there's a much longer trend that it's hard not to be concerned about. If we look at disability sales in the U.K., and assuming I've got all the local currency numbers right, you really only had a modest blip up in sales in 2009, 3% sales growth. Other than that, sales peaked in 2004 and have declined quite steadily since then, in many cases, double digits. Premiums this quarter, disability premiums in the U.K. constant currency, I think are 30% below where they were three years ago. It appears that there is a long-term trend of giving up disability share in the U.K. that extends well beyond this period of sort of recent price adjustments. How do we think about you stabilizing or even reversing that long-standing market share trend? Yeah, let me start and going to ask Jack to sort of pick up. First off, I'm not sure the numbers you're looking at, Jeff, but actually I don't believe we've actually lost market share over the last sort of five years. Our biggest challenge, frankly, is that the market isn't growing. I think Jack alluded to, and he'll speak to it, I think a little bit more when I pass to him. But this is a market that's substantially under-penetrated relative to the U.S. for disability coverage, roughly 10%, let's say. And that 10% penetration rate in the U.K. has existed for decades. From a strategic point of view, our biggest issue isn't trying to reshape how much of the pie we own of the existing pie, because again, at roughly a 50% market share, there's little upside for doing that, and that's actually probably one of the things that led to a couple pricing things that we talked about earlier. Our biggest focus is kind of building a stable foundation to take advantage of the business opportunities that exist today. At the same time, as Jack alluded to earlier, recognizing the biggest leverage for us is expanding that market size from where it is today. If you take that 10% penetration to 15 or 20, that's where a lot of our focus is being spent. It's being spent on working at the policy level with those that are setting policy in the U.K. government to all the way down to simplifying our product and service offering. But again, Jack, you may want to speak to that because again, I think we've been fortunate enough to maintain a pretty consistent market share. But the lack of market growth is really the issue that's constrained our growth, and that's really where much of the focus is right now. Yeah. Actually, Tom, since 2002, I believe, our market share went from 30% up to 50%. A lot of that was the result of consolidation in the market. Several key players exiting the market, which we took over their blocks, took over their workforce, and got some of their sales from. That's buffeted the sales. But we've been steady at 50% market share for the last couple of years. The growth in the market has been severely impacted by the economy in the U.K., which took a big hit and has been impacted by pricing in the U.K. as well. The U.K. overall sales in the marketplace are down, and overall premium levels in the marketplace are down due to both the economy and pricing. Our position is really solid, and the value proposition we have is great. The opportunity, we have been working with public policymakers. We're looking on a promotional campaign to raise awareness of the need for disability products in the U.K. to U.K. workers, and we'll look to expand coverage. I mean, one out of 10. We have a group of in-force policyholders that are only insuring one out of seven of their employees. If they were in the U.S., they'd be insuring four out of seven. That's a tremendous opportunity that we're going to look to capitalize on over the next couple of years. Our goal is to grow the market. It's not to grow market share. Okay, that's helpful. Thank you. Good. Thank you. Jeff. We'll take our next question from Randy Binner, FBR Capital Markets. Great. Thank you. I'm just following up on some comments Tom White made earlier in the call, and it's apparent in the financials is that investment income is kind of trending down a bit as invested assets are a bit lower. Just wondering if there's anything that can be done to try and enhance investment income through a borrowing or matched activity. We've seen some other life insurers do that. Just wondering if that's something that could be in your playbook to help support your EPS growth goals. Well, thank you, Randy. Rick, you want to take that one? Yeah. In your suggestions, we look at it, but really, our investment income will trend very much with our book of business. Our assets are backing our liabilities. We'll continue to invest consistently the way we've done today on a good risk-managed basis. We'll continue to put it in corporate bonds. Today's environment is a little bit tougher given where credit spreads and the interest rate environment is. But prior to the credit downturn, et cetera, we didn't reach for yield, and we're not going to do that today as well to enhance those levels. We're pretty happy with where our investment income, where our investment team has been investing. We've grabbed some asset classes, particularly in 2010, which were opportunistic, and we feel very good about the credit quality of those assets. And that would be in the Build America bonds and in some tax-advantaged investments. Very high credit quality with some good enhanced yields. There's not going to be any systematic programs to try and juice our yields with leverage or something like that. If I could add one thing, Randy. Because we are a very large corporate bond buyer and corporate bond owner, we will have miscellaneous investment income. There are bonds that get called. You get paid bond call premiums, things like that. Those are hard to predict. They're volatile. Over long periods of time, it's generally pretty steady. We know they're going to come in. By quarter and by product portfolio, it's very hard to predict those. So yeah, it really shows up when you look at the closed disability block because you got a flat block of business and a general decline in the overall assets. But we'll have volatility quarter to quarter because you'll get some bond calls one quarter, and they won't be repeated the next quarter. I think that's just kind of inherent in having as large a corporate bond portfolio and private placement portfolio that we have. Maybe, Tom, again, we run the risk of over answering, but you may want to speak to the interest margin, because again, I think we tend to manage the portfolio for the interest margin. Actually, the interest margin continues to be very strong across all portfolios. Right. Yeah, that's really kind of the driver of our investment strategy, is to have investments that are providing a predictable yield that support the liability discount rate assumptions that we have. No, all that's very helpful. I guess just to follow up then, there's an EPS guidance range that's a percentage growth, and it seems like the benefit ratio of Colonial Life might be a little bit higher. These are all marginal things, maybe a little bit lower persistency at the U.K. this year. If the investment income's just slightly lower than we may have otherwise thought, is it possible for you to kind of quantify if we should think kind of middle, lower, upper part of that guidance range, given what we know kind of a quarter in? No, I'm not going to give you more guidance than the range that we have out there already today from our outlook. What I would say on the investment income line relative to your expectations, it may be a little bit lower given some of these tax advantage investments, which will come out of the investment income line and move to the tax line. You would note our tax rate was about 2 percentage points lower than it was a year ago. So there's a little bit of geography going on there as well, Randy. No, understood on that. It just seems like the asset levels are lower, but the responses are helpful. Thank you very much. Okay, good. Thanks, Randy. We'll move to our next question from Eric Berg, RBC Capital Markets. Thanks very much. Good morning to everyone. Good morning, Eric. Given all of the commentary around the success that you are enjoying in the U.K. in sort of righting your business, getting pricing right, pricing leadership, losing, editing the lineup, and deleting business that is sorely unprofitable, help me reconcile that with the very significant year-over-year increase in the loss ratio. Rick, do you want to take that one on the loss ratio in the U.K.? Yeah. When you look actually at the year-over-year in the U.K., there's a couple of things going on. One is last year we were seeing very good results, but you have to dig down underneath that. There's some inflation that's happened over the course of that line, and the premium income line has come down. That's something we talked about earlier, which has driven up that loss ratio. Although it's higher than it was a year ago, quite a bit higher than it was a year ago, it's within our line of expectations that we've seen over the last couple of quarters and how we've talked about that book of business. In the U.S., I just want to return to the earlier discussion about claims experience there. I understand from your comments and from reading your news release that the claims incidence is, let's see, was better in the March quarter than it was in the December quarter, but higher than the year-ago quarter. What I'm interested in knowing is how does the incident stack up relative to your expectations? In particular, a number of your competitors have reported what they call elevated incidents, which is a term that I interpret to mean it's just not going in line with their expectations. Putting aside the issue of comparisons, incidents versus December quarter, incidents versus the year-ago quarter, how is the incident stacking up relative to your expectations? Are you facing the same sort of negative surprises in incidents that some of your peers are facing? Kevin, you want to tackle that one? Yeah. Thanks, Eric. Good morning. On an actual to expected incidence basis, we're performing right where we expect to be and very consistent with our pricing assumptions. We've seen some volatility over the last year and a half in incidents, some ups and some downs, but pretty much in a fairly narrow range of incidents, both on a submitted and on a paid incidence basis. We're not seeing elevated incidents, in comparison to some of the others' comments. As you know, we manage our mix of business. We've moved our mix of business sort of down market, if you will, over the last several years. And the actual to expected incidence is performing very well, particularly in the smaller end of our book of business, which is the part of the business that's also growing the fastest in our core group business. We haven't really seen any volatility in claims by diagnosis or by industry. In fact, incidence has been either slightly improved or basically flat across industry sectors. That's very helpful. Thank you. Good. Thank you, Eric. We'll take our next question from Mark Hughes, SunTrust. Thank you. Did you share a natural growth number for the U.S. business for this quarter? Go ahead, Rick. Yeah. As we talked about the natural growth, for those of you, we look at our natural growth in terms of the block of business and what's happening from wage inflation and more lives taken, lives added to different cases. What we've seen over the last couple of years, two years ago, it was a negative 3%. Last year was negative one. Fourth quarter was pretty flat, and I'd say we'd probably say the first quarter was pretty flat as well. We're looking forward to the economy recovering. We haven't seen that naturally coming through in some of those metrics that we look at. Your sales in the group long-term disability up nicely this quarter. Was there anything unusual, any new initiatives on the marketing front or channel front that contributed to that? Should that kind of growth, any reason that wouldn't be sustainable going forward? Kevin, you want to? Yep. Morning, Mark. No new initiatives, at least specific to the quarter. We've been steadily rolling out our SimplyUnum platform, the ability to package our products together for more efficiency on the benefit buying side for the employer. Stronger employee communications support for the employers. We have more and more brokers in the marketplace selling packages of LTD with voluntary benefits. I think all of those kind of factors and the investments we've made strategically are paying off. I think that in general, we should see solid core market growth coupled with strong voluntary benefits growth. I do think you'll see some volatility from quarter to quarter, sort of within lines. It won't always be LTD's up seven and life's up five or life's up eight. It will bounce around a little bit, depending on what is out there in the marketplace in terms of health and out-to-bid activity. Thank you. Thanks, Mark. Actually, I know we are running a little late, but we had a couple more questions in the queue, so we will take those before we close. Operator, let us just go with the next couple of questions that are in the queue. Our next question comes from Chris Giovanni, Goldman Sachs. Good morning, Chris. Morning. Thanks so much. Just wanted to focus on capital. I guess first, you've typically used the mid-May sort of board meeting as an opportunity to increase the dividend 10% plus, and just wanted to see if this was still the expectation again this year. Does the emphasis on share repurchases that you started last May sort of mute the likelihood of this pace of dividend increase? Rick, you want to cover that? Certainly. On the dividends, I think you're right. It is a topic of discussion with the board pretty consistently, but May, over the last couple of years, has been a decision point in time. Given the capital position that we're in today, I think those discussions are really on two different sides. One is going to be the capital that we take out through recurring dividends that we see coming off our operating income. We'll discuss that, but it does not in any way impact the amount of capital we have available to ourselves for the share repurchase. So I wouldn't necessarily say that one excludes the other. Yeah, I would echo that, Chris. I think that we view both dividends and share buybacks as two very necessary tools to put that excess capital to work, and the fact that we do one versus another, I think we look at those as both very important creators of value for our shareholders. Okay, thanks. Next, just in terms of debt maturity, you obviously just did the piece in March retiring the $225 million. Now you're looking out to 2015 before the next debt maturity of about $300 million. With the leverage ratio, what you said today, just below 21%, is there any talk of potentially taking that up here in the near term? I wouldn't say that given what rate that we're running at, that we would take it up for any specific opportunity that we would have out there to deploy debt and capital via the M&A markets or anything else. But you are right that as we look out over the next couple of years, we'll see a natural de-leveraging, which we don't need to have. We're at a very low leverage ratio today, and so you'll probably see us be consistent right around that 20% level in the wake of not doing something else with debt. Okay. Thanks so much. Thank you, Chris. Our final question comes from John Nadel, Sterne Agee. Good morning, John. Hey, thanks for extending. Appreciate it. No problem. Just a couple real quick ones. Just to follow up a little bit on the January renewal season and pricing trends from, I think, an earlier question. Just wondering if you dissect that a bit more and think about size plans, small market, mid-market, et cetera, whether you'd see anything different happening in either or in any of those markets vis-a-vis the other. The only other question I have that's left over is just to think about the tax-advantaged investments that you guys have been making and how to think about what that does to your tax rate as we look forward. Tax-equivalent yield, that sort of thing. Good. Thanks, John. Kevin, you want to take to the renewal season? Yeah. Good morning, John. Good morning, Kevin. I think it's been a pretty uneventful kind of renewal season. We went into the renewals during the fourth quarter last year, looking forward to the first quarter of this year, thinking that if prices in the market didn't harden, that we might be under some pressure. That hasn't, for the most part, really materialized. I think we're feeling very successful with our renewal program. We're, I think, slightly ahead of plan, relative to where we want to be right now. Out-to-bid levels are actually lower at this time this year compared to the same time last year. So I think we're feeling pretty successful with our renewal program right now. Okay. Good. Rick, do you want to take the tax advantage? Yeah. I'll take it. I was going to take it myself, but I thought I'd leave it with you. It's always good to have a tax question be the last one on the call. Sorry, bad timing. But when you look at our tax rate, actually what you saw in the quarter, about 31.5%, we'd see it probably a little bit higher than that, just slightly higher than that over the course of the year from a planning perspective. Specific to the investments, we were very active last year on tax-advantaged investments. We saw very good returns. Those returns have come in quite a bit here over the last six months as a lot of other players who are out of that market are getting back into it. So we'll still do some of those. But it's not quite the rich yield that we saw. And you'll see our tax rate, as I say, kind of plumbed in slightly higher, but about the level that it's at today. Okay. We're definitely seeing that sustainable. At a lower level at least, relative to the last couple of years. Got it. Yes. Thanks very much, guys. Well, thanks, John, and thank you all for taking time to join us this morning. This will complete our first quarter 2011 earnings call. That concludes our conference for today, and we thank you for your attendance.