Unum Group
Q1 2011 Earnings Call Transcript

Published: 5 May 2011

[Operator:]

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.

[Thomas White:]

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. And now I'll turn the call over to Tom Watjen. Tom?

[Thomas Watjen:]

Thank you, Tom, and good morning. Our first quarter results were 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've seen some volatility in past quarters. Now 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 have continued to report modest earnings per share growth, in part driven by our continued improvement in Unum US earnings as well as we also continue to benefit from our share repurchase programs. 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 operation 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 the sweet spot for Colonial, with pressures 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're taking in the U.K. market, sales were down in the 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 yield. 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 early, 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 businesses 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 and measured approach to the business. Now I'll ask Tom White to provide an overview of our operating results. Tom?

[Thomas White:]

Great. Thanks, Tom. Net income for the first quarter was $225.4 million or $0.72 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, our 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. So 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 and 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. And these items offset favorable Group LTD claim incidents 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 of 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. And 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 debt maturity $225 million of our 7.65% 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 and tax credit partnerships over the past year contributed to a lower income tax rate in the first quarter compared to a year ago. So with that overview of the operating results, I'll turn the call over to Rick McKenney for further analysis of this quarter's results.

[Richard McKenney:]

Great. Thank you, Tom. A few topics on the quarter which continues with our 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 a risk experience for our primary business lines, in Unum US, risk experience remain generally stable again this quarter. Our Group Disability performance remains favorable, with a 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 remains 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 in 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 Supplementary and Voluntary line, 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 in the recently issued Individual Disability line was slightly higher than the level of last year, but risk experience remained relatively stable. And 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 premium from this rate increase will emerge over 2012 and 2013. Moving to our Unum UK results. We are pleased with the stability in 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've 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. And 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 and remains within our expected range of 50% to 52% for this 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 and 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 our 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're seeing greater stability in our premium income line, which declined 1.8% to 104 million pounds in the first quarter. We are pleased with the progress that Jack McGarry and his team are making and implementing several important operational initiatives, including these programs related to renewals of existing in-force business. And 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 lines. This area saw a 2% growth. However, sales were lower this quarter in 2 areas which can be more lumpy and that is the large case commercial market and the public sector market. Our sales through existing accounts showed slight improvement compared to last year driven by favorable results from new sales into existing cases. And importantly, on the recruiting front, our new rep contracts grew by 7% in the quarter. Turning attention to the balance sheet in 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 maturities securities portfolio at $3.3 billion at quarter end and our portfolio watch list 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 marginal impact on the company. Our portfolio yields continue to hold up well, with our aggregate portfolio yield of 6.69%, down only 6 basis points over the past year. The yields on the various investment portfolios back in 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. And looking at our capital, our statutory earnings started 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. And holding company cash and marketable securities totaled $816 million. During the first quarter, we paid up $225 million of 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. And 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% to 12%. Now I'll turn it back to Tom for his closing comments.

[Thomas Watjen:]

Thanks, Rick. As I said in my opening remarks, I'm 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.

[Operator:]

[Operator Instructions] We'll take our first question from Darin Arita, Deutsche Bank.

[Darin Arita:]

I have a question on the U.K.

[Thomas Watjen:]

I'm sorry. We didn't catch the question. [Technical difficulty]

[Operator:]

[Operator Instructions] We'll move to our next question from Mark Finkelstein, Macquarie.

[A. Mark Finkelstein:]

On the U.K., sales were obviously challenged in the quarter. Persistency levels came in a little bit. And I guess what I'm interested in is I understand we want to be disciplined and profitability has gotten hurt over the last few quarters, and we're trying to correct that, which seems like the right answer. But I guess I'm just curious about how do you think about whether we have the right pricing in place. We've overshot a little bit. Just give us thoughts on that, please?

[Thomas Watjen:]

Yes, Mark. That's a great question, and I think as you know, our company actually went through a very similar exercise with Unum US several years ago, So 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, And 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.

[Jack McGarry:]

I mean, 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 And I would remind you that kind of our historic persistency level has been in the high 80s rather than in the low 90s that we saw last year. It was slightly below that as a result of the renewal actions. But more importantly than that, we're getting the right actions we are asking for. We're clearly keeping the better performing cases. The cases that we're losing would tend to be unprofitable cases for us. And 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.

[A. Mark Finkelstein:]

So persistency is as you expected it to be with the rate increases?

[Jack McGarry:]

Yes.

[A. Mark Finkelstein:]

Just on the U.S. Group Long-term Disability, if I look at the only data that we had is what you put in the back of the supplement regarding reserve roll forwards. And this quarter was a really strong quarter for claim recovery patterns. I think it's the highest that you've had, at least according to that chart, as a ratio at the beginning appeared reserves in history, basically with one quarter close. I guess how sustainable is this level of claim recoveries? And I mean, is essentially the claim recoveries just offsetting the higher incidence that we are seeing from the economy. I mean, can we expect this level of recoveries to continue, I guess it's the question?

[Thomas Watjen:]

Kevin, can I ask you to take Mark's question?

[Kevin McCarthy:]

Sure. 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. But this one was particularly strong, I think, both in terms of recovery count and also in the average size of reserves that were on those recoveries. And then and to some extent, that offset was... incidence levels certainly were higher relative to last year's first quarter, but lower relative to last year's third and fourth quarter and the average size of new submits was a little bit lower than we've been experiencing last year. So 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, that's going to change, but it may not necessarily stay at the high level that we have in the first quarter.

[Operator:]

And we'll take our next question from Darin Arita of Deutsche Bank.

[Darin Arita:]

Had one on the U.S. In terms of the voluntary 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.

[Thomas Watjen:]

Kevin, can you grab that one?

[Kevin McCarthy:]

I think it's operating sort of above what we expected to operate right in and around 50% or so. That's a loss ratio. It's been going down, primarily, because our growth rate in Accident and Disability and Critical Illness Voluntary lines have been growing faster than the growth rate in our Life and the Life portfolio is somewhat more mature, therefore, has a higher loss ratio. So it's supposed to be driven by business mix. The other, I think, factor is that we have raised prices slightly in Voluntary over the last several years on our portfolio, and we continue to manage that business, both in terms of participation rates and pricing and size, mix et cetera in line with our strategy.

[Darin Arita:]

And then in terms of this business, we are seeing the premium income growth start to accelerate again. Where do we think the growth can go to here?

[Kevin McCarthy:]

On Voluntary?

[Darin Arita:]

That's right. The Supplementary and Voluntary business.

[Kevin McCarthy:]

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 midteens. I think it's the target level for us in terms of the Voluntary business since the economy recovers.

[Operator:]

And we'll move to our next question from Colin Devine, Citi.

[Colin Devine:]

I was wondering if I could touch on 3 things. First, with respect to Long-term Care, perhaps if you could expand a little bit on the average rate increase 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 that benefit ratio? So the first question there on Long-term Care. Second, with respect to the U.K., maybe I 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. Except I thought both Jack, Tom you referred to. We've been through this in the U.S. We're doing it again. And 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. And then finally, I don't want to leave Randy out, on Colonial with the benefit ratio, early in the fourth quarter, it wasn't 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?

[Thomas Watjen:]

I should ask Kevin to take your first question on Long-term Care.

[Kevin McCarthy:]

Let me just work my way back with it. I think the results of the rate increases will be largely stabilization, in terms of the loss ratio. There would be average size of the rate increases. Our target level was in and around 25%. On the approvals rate we've received so far, it's south of that, primarily driven by the fact that about half of the states have approved the rate increase in the 23%-ish kind of average range and half of them have only approved a partial rate increase in the maybe 10% to 12% range with the idea that we'd have to come back again for a second round. So I think the premium, as Rick said in his remarks, will emerge more in 2012, 2013 and sort of in the range of somewhere around $30 million by the time we're finished all the way through the rate increase actions.

[Thomas Watjen:]

If I could just PS at the U.K. point, actually Colin, let me just be sure I'm clear. We don't feel we have a problem in pricing like for example, when I refer 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. And 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, so it's very -- 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. So Jack is always politely saying to me that don't give me too much grief when we 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 be taken to a higher level. And with that, Jack, maybe just sort of elaborate a little bit on just some of the things that we've been doing. And I think you touched on this a little bit earlier, but maybe just pick up on just one of my comments.

[Jack McGarry:]

Yes. 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. Actually, I 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. 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 are taking. And so we still view this as an extremely high margin, high return attractive market and one that has a huge opportunity for growth as well. So 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.

[Colin Devine:]

Okay, Jack, and just to be clear, so we can all relate as to what happened in the U.S., right, 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?

[Jack McGarry:]

I think we would expect fairly stable persistency, as we move through the block. Hopefully if the marketplace begins to harden somewhat that things will, persistency could drift up in the second half of the year. We expect to be completely through pricing actions over the next 2 years, so we will have been through the entire block from that time, and we would expect persistency to improve over that 2-year cycle.

[Thomas Watjen:]

And Colin, unlike the U.S., as you know, there wasn't a big large case block, for example, like we had to tackle in the U.S. which in effect, there was big chunks of premiums that really had to exit the income statement. That's not the same situation we find in the U.K.

[Jack McGarry:]

Yes, I know. It's more than 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.

[Thomas Watjen:]

And Colin, if we could shift to your last question, we have a sort of 2-part answer. Maybe I'll just ask Rick to speak a little bit to the benefit ratio and then ask Randy just to speak to 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?

[Richard McKenney:]

On 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. So I think as we booked about 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% to 52% range, really driven by mix and our expectations of how we price that book. I would say 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.

[Colin Devine:]

And maybe just one second, Rick. When you mentioned 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 5 or 6 years ago?

[Richard McKenney:]

I would confirm that, yes. It's stabilizing at those levels.

[Randall Horn:]

Yes, I definitely see stability in that 50% to 52% range. I guess just adding to what Rick said, in first quarter last year, I think Rick gave the full year number. We have a very low benefit ratio just north of 47%. So 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 and Sickness. We did see an increase in incidence of disability claims over the course of 2010. And then we reflected that through some reserve adjustments we took in the fourth quarter of last year. But 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 surgeon open life claims, Colin, in March, but that really is just expected volatility. We get in that line from time-to-time. I don't see any kind of adverse trend or pattern there. In fact, we've seen that open claim level settle back down here so far in the second quarter. So long story short, yes, we expect things to stabilize in that 50% to 52% range. We've introduced some new products at the product mix shift that has helped drive us to that level. But we think that will help us on the sales front but still maintain very healthy margins and stable benefit ratios going forward.

[Operator:]

We'll move to our next question from Ed Spehar, BOA Merrill Lynch.

[Edward Spehar:]

I have a question on the U.K., and 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 could be seeing. And I'm wondering is there any concern that this is an indication that the overall return expectation for the Unum UK market is potentially moving more toward the U.S. level? Because as you highlighted, this a very high ROE business.

[Thomas Watjen:]

Let me start and then I'll ask Jack to supplement. I think, Ed, as you know, and 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, and actually, what happened is the market actually not just went to that level, but went below it. And we didn't really exhibit the kind of market leadership we should, actually. And as Jack mentioned, really much of what we're doing right now is acting like a market leader. And 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.

[Jack McGarry:]

Yes, 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 are 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 are going to exert some leadership. We recognize that by us raising rates on our in-force block and having somewhat poorer 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. I mean, we've been at it for a quarter now, really through our 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, if not, in fact we are improving margins as a result of our pricing actions. We are improving returns, and we also, harken back to the huge opportunity that exist in the U.K. with only 1 out of 10 people currently insured for group income protection in a social environment that's really going to be relying more on the private industry to provide protection. So we're very optimistic about the market and our leadership position in it.

[Edward Spehar:]

And my follow-up would be I understand you're exhibiting price leadership. But if the market doesn't follow, why wouldn't you go to the market. Is there something about the risk profile of this business that you deem a 20% plus ROE to be necessary? Because I'm assuming that if you thought the risk profile was similar to the U.S. market, why wouldn't you accept the same level of returns if the market doesn't come to where you are, especially considering that you're highlighting better growth opportunity in the U.K. relative to the U.S.?

[Jack McGarry:]

Well I think a part of it, because the market hasn't demonstrated that we need to go there. I mean we're a 50% market share leader. We're taking a little hit on persistency right now with the rate actions we're taking, but well within our plan. We're improving margins. To drive the market to the U.S. level of profitability, to gain another couple of percent market share doesn't seem like a very good value proposition for us. So 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 don't need to be at the market to sell income protection because of our value proposition. We can sell at a premium. We're going to continue to do that.

[Edward Spehar:]

I guess, I'm not suggesting that you're going to be aggressive to gain 2 points a share. I guess what I'm suggesting is if there's some fundamental shift in this market where if you don't follow everyone else's, 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 Unum UK market versus the U.S. market?

[Jack McGarry:]

Well, first we see no evidence of that fundamental shift in the market. That would -- in fact, we see evidence much to the contrary, in terms of what we're doing right now. But no, there's no risk profile in this market that requires that level of return. It's the fact that the markets were able to achieve that level.

[Thomas Watjen:]

If I could just add to what Jack has 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 as a market leader, we probably made a couple of 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 U.K., the service we have in the U.K. and it was a strategy change, really. Well 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.

[Jack McGarry:]

And in addition to that, we do write at a higher margin than our competitors do.

[Thomas Watjen:]

These customers value that additional value proposition. So I would say we probably erred a couple of years ago on choosing to get away from so-called selling value into selling price, and that's why we're actually backtracking on that with the actions we've talked about here in the last 12 months.

[Operator:]

We'll move to our next question from Jimmy Bhullar, JPMorgan.

[Jamminder Bhullar:]

I had a question, 1 just maybe if you could talk about competitive trends and just your sales outlook in the U.S. disability market. Obviously, this quarter you're up 7% in Long-term Disability. I think the last couple of quarters, you were weak. And then 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. And the other question that I had was just on the base 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 upward? Would you be doing it faster? And just talk about the base of share buybacks.

[Thomas Watjen:]

Let me ask Kevin, but let me speak to your first three questions, which really deal with the competitive dynamic.

[Kevin McCarthy:]

Well, we've heard some companies talk about making price adjustments, and I think we've seen some limited evidence. But at the same time, we see other companies that continue to be quite aggressive and so in general, I would say there's not been a significant shift in the competitive environment. We've been consistent with our value proposition. Our prices actually in the marketplace were slightly higher at this time this year than they were last year, so we're maintaining that kind of discipline and focus. And then we continue to focus on growing in our core marketplace and in the less economically sensitive industry. So in general, we are focused on sort of delivering our value proposition, our ability to market in the core market and packages with Voluntary Benefits, and we are not worrying too much about the price levels right now, and we're not seeing much difference.

[Thomas Watjen:]

Rick, you want to pick up the question on share buybacks?

[Richard McKenney:]

Sure. If you look at the first quarter, the $224 million that we did, if you take the remaining authorization of $921 million, you'd see a similar level on average than 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. So it's for modeling purposes, the average is okay and how it actually comes out, I think it will be quite different depending on market environment.

[Jamminder Bhullar:]

And by that, you're just implying if you get a better price, you'd buy more [indiscernible]?

[Richard McKenney:]

Yes.

[Operator:]

We'll move to our next question from Jeffrey Schuman, KBW.

[Jeffrey Schuman:]

I'm going to ask the U.S. question first and then I'll come back and get in my, I guess, mandatory U.K. question. But 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, I think, 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 a stable margin expectation versus where we sit today?

[Thomas Watjen:]

Kevin, do you want to talk about that as it relates to the Unum US business?

[Kevin McCarthy:]

_ Yes. 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 the sort of NBOC for example, the additional benefits. So overall, profit levels 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 that we're managing through right now.

[Jeffrey Schuman:]

Okay. So it's mostly top line opportunities.

[Kevin McCarthy:]

I would say, absolutely.

[Jeffrey Schuman:]

On the U.K., you made it a point several times that you got aggressive on pricing in 2009, and now you're trying to kind of address that. But when I looked at a much longer picture, particularly to the Disability business, that it seems that there's a much longer trend that's hard not to be concerned about. I mean, if we look at disability sales in the U.K., and assuming available local currency numbers are right, you really only have 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, disability premiums in the U.K. constant currency, I think it's 30% below where they were 3 years ago. So 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?

[Thomas Watjen:]

Let me start and then I'm going to ask Jack to sort of pick up. First, I'm not sure of the numbers you're looking at, Jeff. But actually, I don't believe we've actually lost market share in the last sort of 5 years. Our biggest challenge, frankly, is that the market isn't growing. I think Jack alluded to, and he'll speak to, I think, a little bit more when I pass it 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. So 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, it's roughly a 50% market share. There's little upside for doing that, and that's actually probably one of the things that led to couple of 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 share from market size from where it is today. So if you could 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, with the market -- with the lack of market growth is really the issue that's constrained our growth, and that's where much of the focus is right now.

[Jack McGarry:]

Yes, and 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 in-force and got some of their sales from. And so 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. And the opportunity, we have been working with public policymakers. We are looking on 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, 1 out of 10, we have a group of in-force policy holders that are only insuring 1 out of 7 of their employees. If they were in U.S., they would be insuring 4 out of 7. And so 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.

[Operator:]

We'll go to our next question from Randy Binner, FBR Capital Markets.

[Randy Binner:]

Just following up on some comments Tom White made earlier in the call, and then it's apparent in the financials that, 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 mashed activity. We've seen some other life insurers do that. Just wondering if that's something that could be in your playbook to help for your EPS growth goals.

[Thomas Watjen:]

Rick, you want to take that one?

[Richard McKenney:]

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 where we have done today on a good risk management basis. We'll continue to put in our corporate bond. Today's environment is a little bit tougher, given where the credit spreads in 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 as enhance those levels. We're pretty happy with where our investment income and where our investment team have 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 then in the Build America Bonds and in some tax advantage investments with very high credit quality with some good enhanced yields, but there's not going to be any systematic programs to try and choose our deals with leverage or something like that.

[Thomas Watjen:]

Yes, 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. But by quarter and by product portfolio, it's very hard to predict those. And 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. So I think that's just kind of inherent in having as large a corporate bond portfolio and private placement portfolio that we have. Maybe time and 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 interest margin continues to be very strong.

[Richard McKenney:]

That's really the 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.

[Randy Binner:]

All of that is very helpful. I guess just to follow-up then, I mean there's an EPS guidance range that's percentage growth, and it seems like the benefit ratio of Colonial might be a little bit higher. These are all marginal things maybe a little bit lower persistency in the U.K. this year. If the investment income is just slightly lower than we may have otherwise thought, is it possible for you to kind of quantify if we should think kind of the middle, lower, upper part of that guidance range, and given what we know kind of at quarter end?

[Thomas Watjen:]

No, I'm not going to give you more guidance, just 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 over given some of these tax advantage investments which will come out of the investment income line and moved to the tax line. You would note our tax rate was about 2 percentage points lower than it was a year ago. So a little bit geography going on there as well, Randy.

[Randy Binner:]

No, understood on that. It's just it seems like the asset levels are lower, but the responses are helpful.

[Operator:]

We'll move to our next question from Eric Berg, RBC Capital Markets.

[Eric Berg:]

Given all of the commentary around the success that you are enjoying in the U.K. and sort of writing your business, getting pricing right, pricing leadership, losing, editing the line-up into a leading business that is sorely unprofitable, help you reconcile that with the very significant year-over-year increase in the loss ratio.

[Thomas Watjen:]

Rick, you want to take that one on the loss ratio in the U.K.?

[Richard McKenney:]

Yes. So when you look actually at the year-over-year in the U.K., there are 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. So that's something we talked about earlier, which has driven up that loss ratio. So 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 expectation that we've seen over the last couple of quarters and how we talked about that book of business.

[Eric Berg:]

And 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 incidence stack up relative to your expectations, and in particular, a number of your competitors have reported what they call elevated incidence, which is a term that I interpret to mean "it's just not going in line with their expectations." Or irrespective of the -- putting aside the issue of comparison, incidence versus December quarter, incidence versus the year-ago quarter, how is the incidence stacking up relative to your expectations? And are you facing the same sort of negative surprises in incidence that some of your peers are facing?

[Thomas Watjen:]

Kevin, do you want to tackle that one?

[Kevin McCarthy:]

On an actual-to-expected incidence basis, we're performing right where we expect to be and are very consistent with our pricing assumption. We've seen some volatility over the last year and a half in incidence. Some ups and some downs, but pretty much in a fairly narrow range, this is both on a submitted and a paid incidence basis. So we're not seeing elevated incidence 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 actual-to-expected incidence is performing very well, particularly in the smaller end of our book of business, which is a part of the business that's also growing the fastest in our core group business. And we haven't really seen any volatility in claims by diagnosis or by industry. In fact, incidence has been even slightly improved or basically flat across industry sectors.

[Operator:]

We'll take our next question from Mark Hughes, SunTrust.

[Mark Hughes:]

Could you share a natural growth number for the U.S. business for this quarter?

[Richard McKenney:]

As we've 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, 2 years ago was a negative 3%. Last year was negative 1%. Fourth quarter was pretty flat, and I'd say, we'd probably said the first quarter was pretty flat as well. So we're looking forward to the economy recovering. We haven't seen it actually coming through in some of those metrics that we look at.

[Mark Hughes:]

And then your sales in the Group Long-term Disability up nicely this quarter. Was there anything unusual, any new initiatives in the marketing front or channel front that contributed to that kind of growth? Any reason that wouldn't be sustainable going forward?

[Kevin McCarthy:]

Mark, no new initiatives, at least specific to the quarter. We've been steadily rolling out our Simply Unum platform, the ability to package our products together for more efficiency on the benefit volume side for the employer, stronger employee communication support for the employers and we have more and more brokers in the marketplace selling packages of LTD with Voluntary Benefits. And I think all of those kinds of factors in the investments we've made strategically are paying off. And I think that in general, we should see solid core market growth coupled with strong Voluntary Benefits growth. But I do think you'll see some volatility from quarter-to-quarter sort of within line. I mean, it won't always be LTDs up 7% and Life is up 5% or Life's up 8%. It will bounce around a little bit depending on sort of what's out there in the marketplace in terms of good activity.

[Operator:]

And our next question comes from Chris Giovanni, Goldman Sachs.

[Christopher Giovanni:]

I 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. I just wanted to see if this was still the expectation again this year and does the emphasis on share repurchases that you started last May sort of mute the likelihood of this pace of dividend increase.

[Thomas Watjen:]

Rick, you want to cover that?

[Richard McKenney:]

Certainly. On the dividend, I think you're right. It is the topic of discussion with the board, pretty consistently. But May has 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 2 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 won't necessarily say that one excludes the other.

[Thomas Watjen:]

I would echo that, Chris. I think that we view both dividends and share buybacks as 2 sort of very necessary tools to put that excess capital to work and effectively do one versus another. I think we look at those as both very important creators of value for our shareholders.

[Christopher Giovanni:]

And then next, just in terms of debt maturity. You obviously just did the piece in March, you're tying the $225 million. So now you're looking out to 2015 before the next debt maturity of about $300 million. And with the leverage ratio where you sit today, sort of just below 21%, is there any talk of potentially taking that up here in the near term?

[Thomas Watjen:]

I wouldn't say that given what rate that we're running at that we would take it out 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 deleveraging, which we don't need to have. We are at a very low leverage ratio today, and so you'd probably see us be consistent right around that 20% level, in the wake of not doing something else with debt.

[Operator:]

And our final question comes from John Nadel, Sterne Agee.

[John Nadel:]

Just a couple of 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-à-vis the other, and then 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 had to think about what that does to your tax rate as we look forward, tax equivalent yield, that sort of thing.

[Thomas Watjen:]

Kevin do you want to speak to the renewal season?

[Kevin McCarthy:]

Yes. I think it's been a pretty sort of uneventful kind of renewal season. We went into renewals during the fourth quarter last year looking forward to the first quarter 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 or I think slightly ahead of plan, relative to where we want to be right now. And 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 about our renewal program right now.

[Thomas Watjen:]

Rick, you want to take the tax advantage?

[Richard McKenney:]

Always good to have a tax question be the last. When you look at our tax rate, actually what 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 advantage investments. We saw very good returns. Those returns have come in quite a bit here over the last 6 months with 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 not quite the rich yield that we saw, and you'll see our tax rate to this day kind of fund in slightly higher, but about the level I had said today.

[John Nadel:]

So we're definitely seeing that sustainable at a lower level at least relative to the last couple of years. Got it.

[Thomas Watjen:]

Well, thanks, John, and thank you all for taking time to join us this morning. And this will complete our first quarter 2011 earnings call.

[Operator:]

That concludes our conference for today. We thank you for your attendance.