Unum Group
Q2 2009 Earnings Call Transcript

Published: 5 Aug 2009

[Operator:]

Good day and welcome to the Unum Group second quarter 2009 earning 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 Head of Investor Relations, Mr. Tom White. Please go ahead, sir.

[Tom White:]

Thank you. Good morning, everyone and welcome to the second quarter 2009 analysts and investor conference call for Unum. I'd like to remind you that our remarks this morning will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ, appears in our filings with the Securities and Exchange Commission and are also located in the sections titled "Cautionary Statement Regarding Forward-looking Statements" and "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2008 as well as our first quarter 2009 Form 10-Q. Our SEC filings can be found in the Investors section of our website at unum.com. Please take note that the statement 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 the website in the Investors section. Yesterday afternoon, Unum Group reported earnings for the second quarter of 2009. Net income in the quarter was $267.2 million or $0.80 per diluted common share compared to net income of $240.3 million or $0.69 per diluted common share last year. Included in the results for the second quarter 2009 are net realized after-tax investment gains of $51.4 million or $0.15 per diluted common share and $17 million or $0.04 per diluted common share in the second quarter 2008. These gains include the impact of the embedded derivative and modified coinsurance arrangement previously referred to as DIG B36, which resulted in a second quarter 2009 realized after-tax investment gain of $91 million compared to a $16.2 million after-tax gain in the year-ago quarter. Net realized after-tax investment losses related to sales and write-downs of investments were $39.6 million in the second quarter of 2009 compared to a gain of $900,000 in the year-ago quarter. So excluding these items, after-tax operating income was $215.8 million for this quarter or $0.65 per diluted common share compared to $223.2 million or $0.65 per diluted common share in the year-ago quarter. And at this time I'd like to turn the call over to Tom Watjen.

[Tom Watjen:]

Thank you, Tom and good morning. Joining us this morning on our call are as usual the heads of our three operating segments

[Tom White:]

Great. Thanks, Tom. I'd like to start with a few comments on operating results in the second quarter then move to a summary of capital management and investment portfolio results. At Unum U.S., the second quarter continued the primary themes of the past several quarters, that is, solid margin improvement in group disability, generally stable results in group life and AD&D, and continued growth in our supplemental and voluntary lines driving an 11.5% increase in income for the segment. Within Unum U.S., the group disability line reported another strong quarter with income up 45% to $68.3 million. We continue to see improvement in the benefit ratio, which declined to 87% in the second quarter compared to 88% in the first quarter of this year and 90.5% in the year-ago second quarter. A number of factors are driving this continued improvement, including

[Tom Watjen:]

Thanks, Tom. Before we move to your questions, let me touch on a few additional items including an update on how the recession is impacting our business. It's important to note that the economy is not currently impacting our risk results as evidenced by the performance of virtually all of our business lines this past quarter. We are, however, experiencing some impact on our premium income. In all of our businesses, we are seeing a lower level of new sales to existing customers, which indicates that because of the economic pressures, customers are hesitant to add new lines of coverage. We're also seeing some pressure on the natural growth of the in-force block. The lower levels of employment and the reduced rate of salary growth combined to lower compensation of many employers, which adversely affects the level of in-force premium. Instead of adding 1% or 2% to our premium growth on an annual basis, it's now reducing our block growth by about that amount, which is why it's so important we continue to add new customers, and again which all of our businesses have done very well this past quarter. These factors will continue to impact our top-line growth as long as the recession continues and unemployment levels remain high, but again they are not impacting our profitability. So while we're not immune to the effects of the recession, we do believe that we are well positioned to effectively manage through it because we've got a very high-quality offering in the marketplace. We have an excellent value proposition. Our employees are very engaged in the business right now serving our customers. We have a more diversified platform to build and grow from than we've ever had before. And as we said in our comments today, we have a very strong financial position and have maintained strong financial flexibility to obviously weather whatever difficult times may still lie ahead. Finally, I will conclude my prepared comments by updating our guidance for 2009 operating earnings per share. We're revising upward our guidance for this year to a range of $2.50 to $2.60 per share, which is an increase of $0.05 per share. The more positive outlook is driven primarily by two factors

[Bob Greving:]

Thanks, Tom. I'll keep my comments brief. I appreciate the opportunity to leave you with just a couple of thoughts. We've had our share of challenges over the last 12 years, but I'm real pleased with how well the company has performed during this current difficult economic environment and especially where it stands today. The company is well positioned with consistent operating performance, a strong investment portfolio and sound capital levels and I've been very proud to be a part of this hard-working and disciplined management team. I also know that I leave the company and the CFO position in the extremely capable hands of Rick McKenney and a strong finance and actuarial team. And lastly, I want to thank all of you on the call that I've had an opportunity to come to know and interact with over my career. I've enjoyed working with you and I want to wish you all the best. Thank you. Tom?

[Tom Watjen:]

Thanks, Bob. And again, we certainly have valued your contribution over what's been a very interesting 12 years, hasn't it?

[Bob Greving:]

It certainly has.

[Tom Watjen:]

And again, I think things have been left in a good state and certainly you and Rick have done a wonderful job in the transition process. And so we certainly want to thank you for all the good work that you also make for a very smooth transition. So, at this time, operator, I think we're ready to begin the question-and-answer session.

[Operator:]

(Operator Instructions) We'll take our first question today from Colin Devine at Citigroup.

[Colin Devine:]

I've got a couple of questions. Simply Unum, if you could just expand a little bit more about how you're marketing that product and why it's working? I know Tom White touched on it briefly in his comments, but it seems like that's such a big part of the growth strategy going forward? For Randy, with Colonial, once again your operations results seem to be coming in much stronger than I guess your leading competitor, Aflac, in terms of other persistency with their lives right now were 30% of sales, you are doing better. What is about Colonial that's giving you the success there? And then we don't want to let Bob Greving get away without one last question. I want to talk about the pension. Is there a chance here, what is this funded status now and is there a chance to fund this thing up and get away from a bit of this ongoing drag that we've been seeing? And then finally, for Susan, in the U.K., maybe just to talk a little bit about, is AEGON getting out of the business there? Can it help that much given the concentration you've got and I know U.K. regulatory authorities are a little worried about the size of your market share as it stands?

[Tom Watjen:]

Good. Thanks, Colin. We'll start with the first one on Simply Unum, Kevin?

[Kevin McCarthy:]

Simply Unum has been a pretty good success story for us so far. We're very pleased with the results. From a marketing standpoint, I think the easiest way to think about it is that it's a total offering. We basically approach the employer with the idea that we can manage their overall benefits portfolio in a simpler way than they've purchased and administered that portfolio in the past. So we package products together both employer-paid and employee-paid products. We provide a single enrollment process with benefits communication to communicate the entire package, and we provide a simple one platform administrative process that's easier and less expensive and more productive for the employer and the human resources benefits administration department. And I think from the broker's standpoint, it allows them to present a total offering. From the customer's standpoint, it allows them to purchase a total offering and do it in an efficient way both from a funding and administrative cost standpoint and I think that story plays well.

[Tom Watjen:]

That was a trend we were seeing three or four years ago, but certainly in the environment we're in now, we can even see an acceleration in the needs for those attributes you talked about.

[Kevin McCarthy:]

Absolutely both the combination of the employers maybe needing to share the funding of benefits products with their employees and at the same time, employers needing to feel confident about the way in which they do that doesn't jeopardize their employee relations, but rather enhances it.

[Tom Watjen:]

Thanks, Kevin. Randy, you want to pick up on Colin's question with respect to your operational performance and just some of the dynamics that are driving that.

[Randy Horn:]

You bet, Tom and good morning, Colin. I think it really just comes down to us really staying focused on the basics of our business. So, I can't speak to specific initiatives and strategies of our top competitors, but in terms of what we can control we're staying focused on growth of our agency system. That is really job one for us. We've been doing that for the last two to three years staying very focused on our recruiting infrastructure and helping these new sales reps get productive very quickly. We've seen our new rep recruiting up over 25% again so far this year and that's on top of some very good results in 2008. And again, we're looking at the productivity of these new folks very closely and we're very pleased with what we're seeing there as well. We continue to see, Colin, our value proposition and our core markets resonating very well. That's coming through in terms of activity levels as evidenced by growth in our average weekly producers. That's up close to 6% here so far this year. Growth in new accounts, Tom White went through some of those stats with you earlier, continue to be very, very strong. And we're also continuing to expand our broker relationship. So I really think it just comes back to staying focused on the basics, what we can control and at the same time maintaining our financial discipline. And all that just seems to be working pretty well right now.

[Colin Devine:]

Randy, could you tell us what your level of weekly average producers is? That might actually be a helpful thing to add to the stats since I know it's a big part of sort of what drives your growth?

[Randy Horn:]

The actual number of average weekly producers is right around 2,100, right in that area.

[Tom Watjen:]

The only thing I would add to it, I think you continue to invest heavily in your service infrastructure and as we actually do have outside reviews of service quality and the service quality metrics continue to improve, actually. They're already at a very high level, but continue to show steady improvement obviously which is very important to customers in these trying times.

[Randy Horn:]

That's right, Tom. We continue to give very, very high marks and that serves us well.

[Tom Watjen:]

Good. Let me shift, Bob, to the pension question.

[Bob Greving:]

Yeah, Colin, on the pension plan, we contributed $70 million to the pension plan in the second quarter, which should bring the funded status into about the mid-70% range. I think we finished the year at about 71% on the plan. It would take probably a little bit more than $200 million currently to fully fund the plan, if we were just to dump a wad of money into it at this point in time. Obviously, investment performance has been relatively decent this year, a little bit over 4% for the first part of the year. So we're hoping that some of that unfunded status actually comes back as the investment portfolio comes back and we're seeing that in the general marketplace. But if we were just to throw some money at the plan right now, it would take about $200 million.

[Colin Devine:]

Is that an option for redeploying capital then if stock buy backs are going to sort of rattle the rating agencies a little bit? This seems to be one that would boost earnings, address this issue and kind of be a win-win for everybody.

[Bob Greving:]

It definitely is an option. Buying back or not financing outside debt, share repurchase and pension plan contributions are all kind of the candidates for use of capital. So it definitely is an option to examine.

[Tom Watjen:]

Susan, the question on the market, especially the developments around AEGON?

[Susan Ring:]

I actually had you ask three questions in one regarding AEGON. So I'll try and pick as of in turn. First of all, you asked why did AEGON withdrew from the group risk market. And I understand and also their publicly stated reason for doing that was due to capital reasons. So I think that that's very much the reason for doing that. In terms of whether it can help us that much given our concentration issues; we actually made some changes back in May prior to AEGON's withdrawal as part of our overall review of our group life publication in any event. So, where we are close to hot spot locations, we have actually sought additional reinsurance and as a result we've been able to open right up to all hot spot locations. So we actually don't have any restrictions from a hot spot or an accumulation of risk anymore. So the changes we were making to our group life portfolio therefore have obviously positioned us well with regard to the AEGON block. And we have, in fact, written 22 million pounds worth of the AEGON business so far, the majority of which isn't included in our numbers yet. So I think we included about 1.3 to 1.4 million pounds worth of those sales in our second quarter numbers. So the majority of that is still to come through. And with regard to the third question about regulators and are they concerned about us; obviously with regard to the way in which [we've] approached AEGON, it's not an acquisition. So we're just effectively bidding in the open market. If that business comes up, great, (inaudible) advance of that business coming to the market, so we're not precluded from doing that by our regulators and so there's no restriction in taking that approach as it stands. So that's not a problem for us at all. So hopefully that answers your questions regarding AEGON.

[Operator:]

We'll take our next question today from Darin Arita at Deutsche Bank.

[Darin Arita:]

In looking at the U.S. group disability benefit ratio that continues to improve nicely. Can you give us a sense of what the benefit ratio looks like on your core versus your non-core business?

[Tom Watjen:]

Kevin, you want to speak to in a general sense because we don't break it out.

[Kevin McCarthy:]

We don't typically break that out. In the general sense, first of all, no matter who you are, no matter what company you are, your core business loss ratio would be lower than your large case business loss ratio because acquisition costs are higher, policy administration costs are higher, commission levels as a percentage of premiums are higher, so the loss ratios would be generally lower. That said, the margins, I think, the easiest way to answer the question is the margins are better in small cases than they are in large cases. Incidence levels are generally lower in small cases rather than large cases and those gains more than offset the increased expense ratios in the small case business, but we don't break out the loss ratio specifically.

[Darin Arita:]

And then I guess sticking with the U.S. business given the challenges to generate new business, can you talk about pricing trends and also what steps Unum is taking to retain its existing book?

[Kevin McCarthy:]

Yeah. Pricing trends for us are pretty stable. Our renewal program this year is a very modest, I think, 1% to 2% kind of adjustment in in-force pricing. New business pricing is very stable year over year. And I think year-to-date in the marketplace pricing, I think it has been fairly stable. I'd expect pricing maybe to be a little bit more challenging in the second half of the year. A lot of our competitors are probably facing sales challenges given the first half of the year, so I'd expect the competitive environment to be a little tough in the second half of the year. And the second part of your question, Darin we have a pretty robust customer contact management program to stay in touch with those clients. Also over the last four years, our renewal program, because it has been so robust, is much smaller. It puts a lot less of that business at risk, plus our service quality standards are much higher and delivery of service is much higher. We have a regular method of staying in touch with customers, making sure that we're serving them properly. We survey them, we make sure that we're on top of what their service needs are. So I think in general that reflects itself in continuing high persistency levels.

[Operator:]

And we'll take our next question today from Tom Gallagher at Credit Suisse.

[Tom Gallagher:]

I guess first just sort of big picture just to see if I'm thinking about the way things will progress here directionally right. So it seems to me just based on the environment that we're looking at sort of flattish overall revenue trends for the next year or so, but we'll probably continue to see improvement in the margin, but the delta or I guess the degree of the improvement in the margin probably narrowing a bit. Do you think that's a fair representation of the way you see things playing out over the next 12 months or so? That's question number one. And I guess related to that, it gets to the margin question, is how should we be thinking about the spread between overall portfolio yield and discount rate, I guess, which would be particularly important on your group disability business and the IDI? And at some point is it possible we're going to start to see reserve releases as a result of that margin getting to some level that you think is over and above of what you think is an adequate cushion? Those are my first two questions.

[Tom White:]

Okay. Tom, it's Tom White. I'll start on these anyway. To your first question, I think generally speaking you're right. Now, just looking within Unum U.S., if we were to split out our premiums by core business and large case business, we're actually seeing a little bit of a year-over-year increase in the core business. It's growing 1% to 2% a year and then when you layer in the voluntary benefits business, which we certainly view as a growth business for us, probably 3% or so type year-over-year growth. So where the drag is coming from is continues to be more on the large case business, which is fine. We want to grow that at some point, but we need to grow it the right way but in our results to date we continue to see a little bit of a decline on a year-over-year basis in the large case business. I think your point on margins is generally correct. As the business mix continues to move in the direction of more core market business by itself that will lead to an improvement in margins. It will be gradual over time, but we think it's something that will continue over time because it will continue to be a strategy for us to grow that core end of the business. Now, moving to the spread and the discount rate, this was a quarter where we actually added to the margin there and, again, I'll define the margin as the difference between the portfolio yield and the aggregate discount rate. I think for our group disability business, it widened by about 3 basis points and it's at about 87 basis points. We target something in the 50 to 60 basis point range. Now, I wouldn't expect reserve releases from that. What that does is it just positions us very, very nicely because if you look at what' going on in the credit markets a couple of quarters ago, we could invest new money at 8% and it's getting to be a little bit of a struggle to get 6 to 6.25%. So the market has changed quite a bit and this is probably the time that some of that margin will be eaten into very gradually over time just because the opportunities to expand that margin really don't exist given the current spreads that we're seeing in the bond market. So don't expect a reserve relief, but, however, you'll probably see that margin drift down a little bit over a fairly extended period of time.

[Tom Gallagher:]

And I guess just a follow-up, Tom, for either you or Bob. So there's no imposed ceiling or limit in terms of how wide that margin can get, that's fairly discretionary in terms of just your overall stance on conservatism with regard to the way you allow reserves to develop? Is that fair to say or is there any bright line that we -- is it 100 basis points? I just want to get a sense for …

[Bob Greving:]

Tom, this is Bob. There really isn't a bright line. If you really think about it, we hold our reserves at a conservative best estimate level and we feel that by the current portfolio rate as Tom indicated over time is not going to sustain itself. As you know, we also manage that spread with the discount rate on new claims and so as we see that spread growing, that gives us an opportunity to maybe modify the discount rate on our new claims as they occur. As you recall, we did reduce our discount rate on new claims back in the fourth quarter, I think, of 2008. We continually monitor that and we do some projections, we work with our investment people to do some projections over time to see where that new money rate looks like it's going and we'll establish our reserves that way. There is no bright line on that, but there is a practical level of conservatism that has to get built in, but we see that as being modified more on new claims than on some kind of a major adjustment to existing claim reserves.

[Tom Gallagher:]

And then just one last follow-up. So with all of that said in terms of the growth trajectory and what's happening with margins since you're not growing premium levels very much, is it fair to say that most of your stat earnings or if not all of your stat earnings should be available for free cash flow up to the holding company? And I'm just thinking of it from the perspective of how much capital do you really need to retain if you're not growing the in-force too much?

[Bob Greving:]

Tom, I think you can kind of monitor that by watching our risk-based capital levels. As you see that RBC level at 340% for our traditional U.S. companies, clearly above where we need to be as far as our target RBC ratios are concerned. That does produce opportunity for additional dividends to the parent company. And so as the statutory earnings continue to be generated at the subsidiary companies, that does give us that expanded opportunity.

[Tom White:]

You just have to put a couple of numbers around that, Tom. The holding company cash uses, which would be interest expense and paying the common stock dividend run us about $230 million a year, you'll need $50 million to $100 million to kind of fund growth in a more normal growth environment for us and you can contrast that with stat earnings on our U.S. business that are in the $600 million to $700 million range. And then you also need to take into account the expected capital that gets generated over our U.K. business, which is probably in the $100 million to $150 million range per year. So, bottom line is it's a nice position to be in and we're generating a nice amount of excess capital.

[Operator:]

(Operator Instructions) We'll take our next question from Steven Schwartz at Raymond James & Associates.

[Steven Schwartz:]

I'd like to go back and revisit with Susan some of what she was talking about. But first, just so I'm clear on this, the DIG B adjustment, basically what this is reflecting is credit spreads coming in on whoever it is you're doing reinsurance with?

[Bob Greving:]

This is Bob. I'll take that one. We have an assumed reinsurance agreement with New York Life where we bought the individual disability business a number of years ago. The assets actually stay on New York life's business, which under accounting rules creates an embedded derivative and what that DIG B adjustment or the embedded derivative adjustment is, it's supposed to reflect the value of that agreement in an unlined situation. In other words, if the companies were required to unwind it, what kind of value would be traded between the companies in that situation. We consider that adjustment while it's interesting from an accounting standpoint, we consider it generally uneconomic because there really is no unwind provision in that agreement. That was a purchase of a block of business using an indemnity reinsurance approach, and there is no escape for either company except under the most dire circumstances of insolvency, which we don't see for either us or New York Life. So I think that adjustment is an interesting accounting one, but we do not consider to be an economic impact type of adjustment.

[Tom White:]

What you'll see and what you've seen over the last several years that we've accounted for this is that in periods of time when corporate bond spreads tighten, we're going to see gains on there and when bond spreads widen out, you're going to see an unrealized loss and we try to split that out because again we don't view it as economic and we try to split that out so you can see what's actually going on within the investment portfolio.

[Steven Schwartz:]

I understand. I was just trying to figure out what was the driver of the change. Susan, if you could, story from the U.K. has basically been its very competitive. We expect our benefit ratios, our loss ratios to go up over time. Now we find out that AEGON has left at least some part of that market, the benefit ratios don't seem to be moving much, wondering if you can give us an update kind of on what's going on over there.

[Susan Ring:]

I would say from a competitive perspective, we're still seeing that the market is extremely competitive and obviously we have had some movement in terms of competitors with AEGON withdrawing in June and obviously we had Zurich come into the market as a new entrant back in April. But with regard to the core competitors that we've been competing against, that hasn't really changed and so it has been aggressive, it's still intense. So what we've been really doing ourselves is making sure that obviously retain our pricing discipline, but that we're really focused on growth both from a sales and also particularly from a persistency perspective to ensure that we hold on to the business we've got. With regards to benefit ratios, our projection is still that they will trend gradually upwards into sort of the early '60s and we have seen in the first half of this year as you're aware lower inceptions although in the second quarter whilst so it's still favorable, at the end of the quarter we did start to see those trends slightly upwards. So we are expecting inception rates to normalize over time. We haven't seen any significant impact with regard to our recovery levels, so we're still expecting those to remain strong, but we do expect that the benefit ratio will trend back up after our inception rates normalize and we cease to see the favorable impact that we have seen within the first half, and there are some signs that that is starting to happen. So we would expect to see the benefit ratio turned up slightly.

[Steven Schwartz:]

Okay. If I may, just quickly, Susan, maybe you can say those numbers again that you've written 20.7 million pounds of group life out of AEGON, but you've only recognized something like 1.8, can you give us those numbers again?

[Susan Ring:]

Yes, certainly. With regard to the AEGON block that we've moved since they withdrew from the market, we have written 22 million pounds worth of sales, that includes both group income protection but also group life. The majority of it is group life and with regard to the sales that we've credited so far within our results in the second quarter we put through about 1.3 to 1.4 million pounds worth of sales.

[Steven Schwartz:]

So we're going to see a nice up in the third quarter?

[Susan Ring:]

So we will start to see that come through in the third and fourth quarter and we are hoping that obviously it will be written and transferred across by the end of the year. But it will impact third and fourth.

[Tom Watjen:]

Steven, just to clarify that, the reason that you've got a differential there is that latter part, the 18 million pounds to 20 million pounds it has not been recognized yet. It is not effective yet. And so when those cases actually go effective that's when we would report that as effective sales.

[Operator:]

And we'll take our next question from Randy Binner at FBR Capital Markets.

[Randy Binner:]

Just a quick question looking to the sectors, the business sectors you write group long-term disability and health care education public sector, those areas together are maybe more in the third of the book. And I think historically you've seen lower claim incidence there and just curious about if incidence in those areas has changed at all as they become, I guess, a little less defensive given public finances at the state level, and then also if you're seeing any pressure on sales there or increased competition?

[Tom White:]

Kevin, you want to take a first stab at that.

[Kevin McCarthy:]

Yeah, good morning, Randy. No, we haven't really seen any change at all in incidence by industry sector. Not only was incidence very stable on the line of business this quarter, but it was pretty stable across all industry sectors and we always get competitive volatility sector by sector depending on what type at the moment, I wouldn't say that is anything significant. I think there is no discernible changes I think in the marketplace around health care or education or anything like that.

[Tom Watjen:]

Randy do you want to add to that, too, because you still have a big public sector block?

[Randy Horn:]

Yes, really very, very constant on our side as well, Randy, not seeing any upticks in claim incidence and our persistency has always been very strong in our public sector blocks and with our educator business specifically we're not seeing any changes in that either. So far so good there.

[Operator:]

And we'll take our next question from Jeff Schuman at KBW.

[Jeff Schuman:]

Just wondering if you could help us what seemed to be maybe some conflicting currents in the U.S. market. Susan, of course, talked about AEGON withdrawing from the U.K. based on capital concerns. Obviously, in the U.S. we have companies that are still capital constrained although pressure on the industry has eased a bit, but we've also seen just terrible growth numbers and I think Kevin talked about maybe expecting companies to compete pretty strongly for growth in the second half, so how does this sort out? Which is more geared at this point, growth or capital? And how does the competitive bottom line sort of shake out of that?

[Tom Watjen:]

I'll comment and maybe ask Kevin and Randy to add to it. I think what you're maybe getting at, Jeff, is if there's some excess of the marketplace in the U.K., why aren't we seeing the same issue here in the U.S.? I think maybe that's the root of your --

[Jeff Schuman:]

I think that's part of it and also, once again, if companies are constrained, even if they stay in the market, they might compete less aggressively rather than more aggressively, I guess.

[Tom Watjen:]

On the first point, I think we get down to what's our view of consolidation. I think we always view that this business we're in tends to be one that ultimately consolidates and I don't want to predict too precisely, but I do think that we will see some consolidation in our business as people go through the exercise of deciding where their capital should be, where their returns are going to be the best and where their key franchises are they have to protect in this environment. But I would say that since people have raised a lot of capital in our sector here the first half of the year, my guess is most people in our industry are kind of absorbing all of that and may be we will think strategically about this question maybe a little further down the road. So I guess none of us are expecting big amounts of consolidation probably between now and the end of the year. What might likely may happen though, as Kevin alluded to in his comments is people may find themselves behind plans, may find themselves having to push and be a little more aggressive. That happens by the way all the time. It just happens maybe with a little more intensity in an economic environment like this, but I think, Kevin, that's really what you're referring to is when people get a little behind, this product line actually is probably performing a little better than other product lines some people have in their portfolio of business. And, therefore, may push a little harder in this business.

[Kevin McCarthy:]

Absolutely. I think if you look at our competitors, a lot of them are just pure plays. They're complicated multi-line companies and they need to protect their customer relationships, their broker relationships, they have to make sure they continue to finance the quality and depth of their sales force. And as Tom mentioned, some of these products lines that may be lagging in sales, they still generate reasonable margins for those companies, so ramping up sales in order to protect all those relationships and still generate a return, it wouldn't be surprising if I think for companies to be more aggressive in the second half given the shortfalls in the first half.

[Operator:]

And it appears we have no further questions at this time. I'd like to turn the conference back over to Mr. Watjen for any additional closing remarks.

[Tom Watjen:]

Let me thank all of you for taking the time for joining us this morning. We certainly appreciate your questions. We all continue to be available if there are any follow-on questions that you have to this call, and this will complete our second quarter earnings call.