Unum Group
Q2 2011 Earnings Call Transcript

Published: 4 Aug 2011

[Operator:]

Good day, and welcome to the Unum Group Second Quarter 2011 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead.

[Thomas White:]

Great, thank you, Tim. Good morning, everyone, and welcome to the second quarter 2011 analyst and investor call for Unum Group. Our remarks this morning will include forward-looking statements which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the 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, and in our subsequently filed Form 10-Q. Our SEC filings can be found in the Investors section of our website at www.unum.com. I remind you that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on our website also in the Investors section. Participating in this morning's conference call are Tom Watjen, President and CEO; and Rick McKenney, Executive Vice President and CFO; and also our business segment presidents, Kevin McCarthy for Unum U.S; Randy Horn for Colonial Life; and Jack McGarry for Unum U.K. And now I'll turn the call over to Tom Watjen.

[Thomas Watjen:]

Thank you, Tom, and good morning. The second quarter was another good quarter for Unum. And before I turn things back over to Rick and Tom to cover more extensive remarks, let me touch on just a few highlights I think I took -- I ask you to take away from the quarter. First driven by slightly higher operating earnings in our core operating segment and a lower share count, as a result of our share repurchase program, we reported a 9% growth in our operating earnings per share for the quarter, which I think is a very good result in this environment. Second, we continue to see modest growth in most of our target markets. With, as expected, the majority of that coming from our U.S. businesses. Unum U.S. posted 9% growth in new sales this quarter including 19% growth in group LTD sales and 12% growth in our Group Life and AD&D sales. While Unum U.S. Voluntary Benefit sales declined by 14% this quarter, we were up against a very tough comparison from the same quarter last year. At Colonial, new sales grew approximately 2% this past quarter following a slight decline in the first quarter. The primary driver was stronger sales in the public sector which had been lagging a bit this year. Not surprisingly, sales in Unum U.K. declined by 34% in local currency this quarter due to our pricing actions in that market. We did, however, see an increase in sales to existing customers which is certainly a very good sign to our continued grip in that marketplace. And as usual Kevin, Randy and Jack are here to answer any questions you may have about their operations, but also the market conditions in each of their markets in the Q&A session. Third, despite the low-interest rate environment and the global economic concerns, our investment portfolio remains in excellent shape, with strong credit quality, minimal realized investment losses and generally stable portfolio yields that serve to protect our reserve position. While we would certainly like to see interest rates rise, we are well-positioned if this trend continues. Fourth is a result of our strong financial results and investment performance. We continue to maintain a very solid capital position. Our weighted-average risk-based capital ratio has 394% at quarter end, and our holding company's cash and marketable securities position is over $925 million, providing the company, as you can imagine, enormous financial flexibility. And finally, we continued our stock buyback activity with a total of $146 million of stock repurchase this quarter. Over the past 5 quarters, we have repurchased $726 million of stock and reduced our share count by 9% while this [ph] earlier also maintaining a very solid balance sheet. In summary, over the past several years, we have built our business plan around a focus on discipline in all that we do

[Thomas Watjen:]

Great, thank you, Tom. Net income for the second quarter, as you see, was $229.8 million or $0.75 per diluted common share. This compares to net income of $209.7 million or $0.63 per diluted common share last year. Included in the results for the second quarter of 2011, our net realized after-tax investment losses of $2.2 million or less than $0.01 per diluted common share compared to net realized after-tax investment losses of $18.9 million or $0.06 per diluted common share in the second quarter of 2010. Net realized after-tax investment losses for the second quarter 2011 included an after-tax loss of $3.1 million resulting from changes in the fair value of an embedded derivative in a modified co-insurance contract compared to an after-tax loss of $15.3 million in the second quarter of 2010. So excluding these items, after-tax operating income was $232 million for the quarter or $0.75 per diluted common share compared to $228.6 million or $0.69 per diluted common share in the year-ago quarter. Turning to the operating segments, Unum U.S. operating income increased 1% to $218.1 million in the second quarter. Within Unum U.S., the Group Disability line reported another solid quarter from a risk perspective, as Rick will describe. So operating income declined 6.7% to $78.5 million as net investment income declined due primarily to a decrease in the level of assets supporting this line of business, and also premium income declined by 2.6%. Within the Group Life and AD&D line, operating income increased 3.3% to $53.2 million in the second quarter, benefiting from slightly higher revenue and a stable benefit ratio. In the supplemental and voluntary line, our second quarter income increased 7.5% to $86.4 million. The year-over-year improvement was driven primarily by strong results in the Voluntary Benefits business line, as well as solid growth in the recently issued Individual Disability line, the effects of which were more offset by a slight decline in income in the Long-term Care business. Moving to Unum U.K., operating income in this segment decreased 3.4% to $54.7 million in the second quarter. Operating income declined 5.6% in local currency. While premium income and local currency was up 5.2% in the second quarter, the benefit ratio was higher at 69.8% compared to 66%, reflecting the impact of higher inflation on claim reserves associated with policies containing an inflation linked benefit increase feature and a lower level of claim resolutions in Group LTD, partially offset by favorable claim incidents also in Group LTD. Concluding our core operations, Colonial Life experienced a 1.8% increase in operating income compared to the year-ago quarter. As premium income growth of 5.3%, an unusually strong net investment income were partly offset by a higher benefit ratio. The Individual Disability closed block operating income was $10.4 million in the second quarter 2011 compared to $12.4 million in the year-ago quarter. This was driven primarily by lower premium income, which declined 7.6% due to the expected runoff of the closed block. Net investment income declined 3.7% due to a lower level of bond call premiums and a decrease in the level of assets. The interest adjusted loss ratio was slightly lower at 84.3% this quarter compared to 85.4% in the year-ago quarter, reflecting more favorable claim recovery trends this quarter. And finally, the Corporate and Other segment reported an operating loss of $16.8 million compared to a loss of $17.6 million in the year-ago quarter. The improvement was driven by lower operating expenses, including a decline in litigation expense, partially offset by higher debt interest expense. Interest expense increased to $32.3 million this quarter compared to $30.8 million in the second quarter of 2010. In addition, net investment income in the Corporate and Other segment was lower, driven primarily by lower short-term interest rates and our investment in low income housing tax credit partnerships. Our increased level of investment in tax credit partnerships over the past year contributed to the lower income tax rate for the second quarter compared to a year ago. So with that brief overview on our operating results, I'll turn the call over to Rick McKenney for further analysis of this quarter's results.

[Richard McKenney:]

Thank you, Tom. The key theme for this quarter is going to be the consistency of our results. I'll highlight this through the key profitability drivers for our business lines, provide a snapshot of our investment portfolio and give you an update on our capital strategy. I'll start with our risk experience for our primary lines of business, beginning with Unum U.S. Once again, this quarter, risk experience was generally stable. Our group disability performance remained strong with the benefit ratio and a narrow band with the second quarter at 84.4% compared to 84.6% in the year-ago quarter, 83.9% in the first quarter and 84.4% in the full year 2010. Group Long-term Disability new claim incidents continues to show some volatility and was slightly higher in the second quarter compared to the first quarter, but was slightly lower than what we experienced in the second half of 2010. As with previous quarters, our claim recovery experience remain solid. We've not changed our expectations, although we're carefully monitoring it, and we expect the benefit ratio to remain within the range of results we've experienced over the past several quarters. For the Group Life and AD&D line, results also remain generally stable with the benefit ratio at 70.3% for the second quarter, flat with the year ago quarter and consistent with the 70% benefit ratio the first quarter. Looking through the supplemental and voluntary lines, voluntary benefits earnings remain quite strong again in the second quarter, with favorable risk experience continuing in the lifeline of business. The loss ratio in the recently issued Individual Disability line was lower relative to last year's second quarter and generally stable with the first quarter results. And finally long-term care loss ratios were up year-over-year and slightly higher compared to the first quarter, driven by the continued buildup of active life reserves and a slight up tick in new claim incidents. We continue to make good progress on the individual long-term care rate increases that we began to file in the fourth quarter of last year. We have completed our filings of 47 states in the District of Columbia. So far, we've received rate increases approvals in 30 states. As well, we have achieved 84% of the requested rate increase in those states that have reached a decision and we continue to work with the remaining states. The additional premium from this rate increase will emerge over 2012 and '13. In the U.K., we continue to see greater stability on our risk results. While the benefit ratio is higher this quarter relative to a year ago, it is generally stable with the levels over the previous 2 quarters of just under 70%. The impact of higher inflation in the U.K. has caused much of the increase in the benefit ratio on a year-over-year basis, and in isolating on claims experience for Group Long-term Disability we have seen favorable claim incidents trends, but some deterioration claim resolution experience. Jack and his team are implementing many of the claims management processes that have served us well in the U.S., and we believe that these practices will benefit our performance in the U.K. over the long-term. And finally on Colonial Life, the benefit ratio for the second quarter remained within our expected range of 50% to 52%. At 51.2% the benefit ratio is higher than a year ago but generally consistent with the experience of the past 2 quarters. The accident, sickness and disability line of business, which produced adverse claim trends in the fourth quarter 2010, is stabilized over the first half of the year. Turning to the top line, new sales in Unum U.S. continued to show some good momentum, increasing 8.6% for the second quarter and 9.3% for the first half of the year. Group LTD sales grew at 19% this quarter, with better sales results coming from the core market where pricing appears to be firming somewhat, as well as the healthy mix between core market and large case business. Group Life and AD&D also had solid results with sales up 11.8% driven by good growth trends in this core market. Our sales in voluntary benefits declined 13.5% this quarter, but I'll note that last year's second quarter was especially strong with heavier than normal large case activity pushing last year's growth rate over 50%. Premium income in the voluntary benefits grew by 8% this quarter as we continue to see solid growth in this line. We remain pleased with the underlying sales trends in our voluntary benefits business and the pipeline of activity we are seeing. Overall, however, economic uncertainties in the U.S. continue to dampen our top line growth trends, and we continue to see essentially no benefit to our premium line from the natural lift to our business from a growing employment base. At Unum U.K., our emphasis remains on firming rates in the group risk market, and as a result new sales remain challenging. But we're pleased the persistency is holding up well relative to our expectations. Additionally, we're seeing good up-sell trends as existing customers add to their coverage. Premium income was encouraging this quarter at GBP 107.8 million, an increase from both a year-ago and prior quarters. Jack and his team continue to make good progress in implementing several important operational initiatives for a business that is already producing a 20% plus ROE. Finally, sales in Colonial Life regained some positive momentum after a soft first quarter. Second quarter sales increased by 2.1%, primarily driven by higher sales activity in the public sector. Our commercial market sales were down slightly this quarter on a difficult comparison with a 13% increase last year and our withdrawal from the market of a limited benefit medical product. Recruiting trends at Colonial Life remain positive, with new rep contract growth of 5% this quarter and up 6% year-to-date. Moving on to the investment portfolio, we continue to be very pleased with the results we're producing. The credit profile of our investment portfolio remains in excellent shape, with the net unrealized gain position in our fixed maturity securities portfolio of $3.9 billion at the quarter end and our portfolio watch list declining even further this quarter. Miscellaneous net investment income which results primarily from bond call premiums was a slight net positive to our results this quarter compared to the year-ago quarter, and was slightly higher than our historical quarterly run rate. The Colonial Life and Unum U.K. segments were beneficiaries of this source of net investment income this quarter relative to a year ago quarter, while miscellaneous net investment income in Unum U.S. in the closed log [ph] was slightly lower than we saw a year ago. Putting money to work at good rates is extremely challenging right now, but it continues to only have marginal impact on the company. As we laid out in our last Investor Day, we benefit from a low level of new cash flow to invest relative to the size of our existing portfolios and the hedges we have in place on our long-duration LTC portfolio. Our portfolio yields continue to hold up well with our aggregate portfolio yield of 6.68% down a basis point from the first quarter. The yields on the investment portfolios backing our various product lines also showed similar stability. The yield net of our discount rate for Unum U.S. Group LTD business is in very good shape at 96 basis points as of June 30. Given these strong ongoing financial results, book value per share continues to grow, increasing 10.4% from June 30, 2010 to $29.94 at June 30, 2011. Moving on to the balance sheet and our capital position, statutory earnings remain strong in the second quarter at $171 million. This level of statutory earnings continues to drive strong growth in our capital position. The weighted average risk-based capital ratio for our traditional U.S. life insurance companies was approximately 394% at quarter-end toward the upper end of our target range of 375% to 400%. Holding company cash and marketable securities totaled $927 million. We remain active repurchasing our shares with the second quarter totaling $146 million and for the first half of the year was $370 million. Our leverage ratio remained at just under 21% for the second quarter. An item to note, which is on our earnings release and our soon to be filed 10-Q, is that we're providing our current estimate to the future adoption of the accounting standards update, which clarifies which costs qualify as deferred acquisition costs. As you're aware beginning in 2012, only the incremental direct cost associated with successful acquisition of new or renewal insurance contracts can be capitalized. We currently estimate that our retrospective adoption will result in a cumulative effect adjustment to the opening balance sheet of between $400 million and $600 million in the year of adoption. This is for U.S. GAAP accounting only and therefore is non-cash and does not impact our statutory capital, our RBC or our holding company liquidity. We also currently estimate that the adoption of this update will have resulted in an immaterial decrease in net income in 2012 and in the years preceding to which the retrospective adoption will be applied. It also doesn't impact any of our plans in the coming years. Finally, as we look forward to the second half of 2011 and given a very solid first half of the year, we're confirming our previous outlook for 2011 which calls for operating earnings per share growth of 6% to 12%. Now I'll turn the call back to Tom for his closing comments.

[Thomas Watjen:]

Thanks, Rick. In closing, I'm generally pleased with our results this quarter. The economy and today's employment trends continue to make top line growth a challenge, but our ongoing focus on consistent profitable growth has positioned us very well. Our strong capital position and financial flexibility are valuable assets and, I believe, will continue to provide us with opportunities to properly [ph] grow our business and continue to follow the capital management strategy of dividend increases and share buybacks that have served our shareholders well. This completes our formal comments. And operator, let's move to the question-and-answer session.

[Operator:]

[Operator Instructions] And we'll take our first question from Jammi Bhullar with JP Morgan.

[Jamminder Bhullar:]

First, maybe if you could discuss just market conditions in the disability market just in terms of pricing, claims incidents, recoveries. Obviously, your margins have been stable for the last several quarters but other companies have seen deterioration. And then on the U.K. business, your ROE was high to begin with. You're raising prices and, I think, the thought was that competitors are following your margins and go even higher and that doesn't seem to have happened. So I was just wondering if you could discuss what -- if your sales remain weak, would you lower prices or are you seeing evidence that competitors might follow suit down the road?

[Thomas Watjen:]

Jammi, let me just ask Kevin actually just talks [ph] the U.S. market and the pricing themes, then Jack, obviously, can touch on just an update on what's happening in the U.K. Kevin?

[Kevin McCarthy:]

First, on the competitive side, I think I characterize the marketplace as fairly stable. There seems to be some firming up of pricing stability in the small and mid-market. On the other hand incumbent carriers continue to defend vigorously their enforced [ph] business. And I would say that from a competitive environment standpoint, those factors plus the movement, the steady movement of brokers toward more voluntary benefits, all of that speaks well to sort of our strategy. On the risk side of disability, as you know, our loss ratio is operating in pretty -- as Rick said, a pretty normal range. We take a look at incidents on a regular basis. We see some volatility but in no particular segments or cohort. Mostly we experience sort of a normal level of noise, I guess, I would call it sort of in the middle part of the year, just this year in the same way that we did in 2009, 2010. We're continuing to monitor the economy. We constantly adjust our pricing to fit what's going on in the economy. We adjust our target markets, we stay pretty disciplined around our core market focus. We continue to develop our renewal program the same way we've done in the past. And so I'd say, in general, we feel like we're on top of the risk situation in disability, and we think market conditions bode well for growth for us.

[Thomas Watjen:]

Jack, you want to pick up on Jammi's question around the U.K. and just some of the competitive dynamics there?

[Jack McGarry:]

Sure, Jammi. I would say relative to the competitive dynamics in the U.K., it's early yet. We are trying to harden rates in the market. I think there's a consensus across the market, both among brokers as well as competitors, that rates need to harden in the market. The big sales months in the U.K. are January and April, and so there has really only been 4 or 5 months of us hardening rates for the competition to react. We didn't really expect them to react early in the year. We're hoping that as they see their sales come due, they'll begin to react later in the year. There are some signs as well on the U.K. of softening earnings outlooks. I know LNG reported recently and had some negative results in their group risk line. So we're sticking the course, we're encouraged by our persistency. We're encouraged by chip [ph] sales being stronger than Group Life sales. We're encouraged by our expanded coverage in our existing cases which were very strong sales growth. So I think we're going to stay the course and clearly see if things get better in the second half of the year. And there are some signs, but it wouldn't say we've seen concrete evidence of the market hardening as yet.

[Jamminder Bhullar:]

Okay, and then maybe if I could ask another one from Rick. Just on your buyback plan, you obviously still have a plan outstanding, the stock is pretty cheap. What's the rationale for not doing an accelerated growth program given where the stock is trading?

[Richard McKenney:]

I think that when look over the course of the quarter, stock has gotten cheaper lately. So our quarter ended on June 30. If you look back at the second quarter, we bought back almost $150 million of stock. We're really on pace to the authorization we talked about. And as I said last quarter, consistently, when the prices are high, we'll buy less and as they get low, we'll buy more. And so I think we're probably in one of those points in time where price is lower. And we'll have to see where it goes from here, but we haven't changed our view towards share repurchase. I think, as we mention, our capital highlight and, Tom mentioned, we have an awful lot of flexibility and that's currently a lever that we'll pull.

[Operator:]

And we'll take our next question from Chris Giovanni with Goldman Sachs.

[Christopher Giovanni:]

Rick, can you maybe provide an update in terms of the preliminary DAC charge, I guess in terms of the amount related to the expenses that are no longer DAC-able versus maybe not related to unsuccessful sales, and then any further commentary would be appreciated.

[Richard McKenney:]

Sure, I think when you look at that one, and note that it's still early in the process. We put the range out there. We thought we had a good estimate around where we were, so we wanted to take that out to our investors. And I would say we're not finished. When you look at the overall impact, we probably layout about 2/3 if it's going to be costs that are not deferrable anymore, and about 1/3 is successful sales impacts. And when you think about those 2 categories, think about the not deferrable anymore, it does not have direct line of sight to the sale. You could think about rent at a sales office, where before, we would've said that was directly attributable to sales. Now without that direct line of sight, we won't be differing those costs anymore. If you think about the unsuccessful sales, think about underwriting and things like that where we think they were built on the acquisition and they won't be anymore. So that gives you a sense of the types of things, as I said, we are early in the process and I wouldn't extrapolate or generalize too much because it is a very detailed roll up that you need to go through to understand where you are. Hope that gives you a little bit of insight and, obviously, we'll bring more to you line of business and that type of view as we get closer to Investor Day and outlooks for 2012.

[Christopher Giovanni:]

Okay, that's helpful. And then maybe for Kevin, regarding the long-term care book business, can you give us an update in terms of where you are with the filing of rate increases. And then we think about the interest adjusted benefit ratio, where you think that kind of settles in as we have seen increase in active life reserves with hopefully an offset from higher premiums?

[Kevin McCarthy:]

Well, as Rick said in his early remarks, we're well on pace to achieve, so far, what looks to be about 84% of our desired price increases. We'll continue to push that through. We've gotten some optimistic signs even from some states that we thought might be more difficult. So I'm feeling pretty optimistic that we're going to achieve our price increase goal and, as Rick said, that'll flow through in 2012 and 2013 into top line and bottom line. In terms of interest adjusted loss ratio, I think, we're making all these moves right now in terms of building up active life reserves and placing rate increases in order to get that loss ratio stabilized probably somewhere in the mid-80s.

[Operator:]

And we'll take our next question from Colin Devine with Citi.

[Colin Devine:]

I've got 3. First, with respect to the pace of buybacks, they're a little slower this quarter than the first. Tom, I think, you've been quoted in the media talking a little bit more about M&A lately. Is there anything we should be reading into that, is the first question. Second, with respect to the change in DAC, Rick, I assume most of the adjustments coming on the supplemental and voluntary line, perhaps if you could just give us some idea, because it does represent, I guess, about 25%, roughly, of your outstanding DAC that you're going to adjust downward or about $2 a share. And then for Kevin, looking at persistency trends this quarter, should we start to infer perhaps somewhat slower momentum heading into next year? And I guess tied to that, obviously there was some fairly flat premium growth this year.

[Thomas Watjen:]

Let me start and, as I said, we'll move to Rick and Kevin for his 2 pieces, but I -- you're right, we have been sort of talking a bit more about M&A, but I must say, we really haven't changed direction in terms of the fact -- the primary focus is running our operations. Secondarily is putting our capital back in the hands of shareholders through dividend actions and share buybacks. And oh by the way, if we can find an M&A transactions that fit on to our strategic plan and financial foundation, we'll do it, and we certainly are looking at some things. But I wouldn't want you or anyone to think that we're holding back on capital in anticipation of M&A. Our view, I think, frankly has always been if we saw the right thing that fits strategically and financially, we'll find the capital to support it. So let's not hold back too much capital in anticipation of something that actually may never happen because, as you know, we're incredibly disciplined about the things we look at. But we are trying to be active. Just as a general matter, there's not a lot out there. But again I don't think that we're warehousing for that because as I said, I have a strong belief that if the right thing comes along strategically and financially, we'll find the capital to support that. So I think Rick, you were talking about the pace of buybacks, I think, we're not going to change that [ph] on that score. You want to pick up, Rick, the debt question? It's about general...

[Richard McKenney:]

Yes, just on debt bonds -- to give you some general, it's across the board, quite frankly. In terms of where it is. I think the percentages talk about the write off would represent probably the write off you'd see on a pro rata basis across the board. Like I said, we'll have to give more details out there. There may be a bit higher percentages in some of our group lines. But those that will carry lower DAC balances and all that is in back of the sub [ph] , but the statistical supplement...

[Colin Devine:]

Will this drive any change to how you're going to operating Colonial with the career force?

[Richard McKenney:]

No, it won't. And when you look at it in terms of where we are and the variable cost base that we have in Colonial Life today, I think we'll continue to operate it very much the same way. Try to make that -- I don't actually see us actually changing operating practices around the horn at all as a result of this.

[Thomas Watjen:]

Kevin you want to pick up the persistency question?

[Kevin McCarthy:]

Sure. I think persistency is pretty stable. I think it was virtually stable in every single line of business. There was a little bit of that downtick in Group Life, I think, primarily driven by a couple of expected sort of large case terminations. Otherwise, very stable. I think that's a reflection, to some extent, of our customer relationship metrics which are all extremely sound on the satisfaction side. I think it's also a reflection of a little bit of market inertia. I think out to bid [ph] seem to be at a lower level over the last year or so, than they had been in prior years. Probably, it's a reflection a little bit of more stable pricing in the marketplace, and so there's less opportunity to go to bid and get a better deal maybe. So I expect persistency to sort of hold up and stay about where it is. And then I think on the flat premium side of the question, I think that's more a reflection of lack of employment growth and the lack of wage inflation and that's really sort of all about the economy. Also as you remember, last year and the year before, we were lagging on, what we call MBOC sales to existing customers, primarily driven, I think, by customers tightening up a little bit and sitting tight on their benefits. We did see some uptick 2 out of the last 3 quarters now in terms of MBOC sales, and that would have a positive impact on 2012, 2013 premium if that continued.

[Colin Devine:]

Okay. Just, I guess, sort of extending that a little bit, you're now heading into the renewal season. I assume that the pencil is sharpened up, perhaps [indiscernible] what sort of premium increase do you think we're going to see this year, rate increase?

[Kevin McCarthy:]

I think we'll probably be in the low single-digits going forward. I think some of it will be a reflection of sort of the natural aging of the block, a little bit of a reflection of our normal triage process, where we identify where we need to get those rate increases. The increase this year has been about 2%, although the asked increase on cases that terminated was at 8%. So I'd expect to see sort of in that thing kind of range and we'll also monitor some of the activity that's going on with the Social Security administration around their approval rates and that kind of thing into the extent that we think that Social Security offsets could be under pressure, then we'd be moving rates up there as well. So, I'd be -- in the low single digits.

[Operator:]

And we'll take our next question from Stephen Schwartz with Raymond James & Associates.

[Steven Schwartz:]

I did want to ask about Social Security, so I think you just handled that. I think what you're telling me or telling us is that if that Social Security comes under pressure that, that would affect you negatively and that you would have to take actions?

[Kevin McCarthy:]

Yes. Basically, if Social Security just sort of changed it's approval practices and we started to see fewer approvals if you will, then we'd have to price for that. But I think we're well prepared for that. We have a very robust and well structured renewal program that's been very successful for us over the last 5 years. We will just start to build that into pricing over time.

[Steven Schwartz:]

I was thinking more along the lines of, say, whatever Congress comes into commission, vis-à-vis potential cuts to Social Security.

[Kevin McCarthy:]

In terms of Social Security benefit design? It's very hard to prognosticate about that. There's so much politics involved in that particular question to what what's real and what's not real. I'll be very surprised if Social Security disability benefits, in terms of benefit design, are cut. I think what's more likely is they might tighten up their claim management practices a little, given the economic pressures that they're under and that's really what I'm referring to.

[Thomas Watjen:]

And just as the background points [ph], it's worth noting too that a very small percentage of those who actually have disability benefits actually have private disability insurance, so it's a very, very small piece of the puzzle actually.

[Kevin McCarthy:]

Absolutely right. I mean, I think it's more likely that Social Security will be looking at -- a large majority of the claims that they'll be looking at wouldn't necessarily be people that are covered by us.

[Steven Schwartz:]

And then if I could, I think, Rick, you said that the overall effect of interest rate or the yield on the overall portfolio was 6.68%. Was that correct?

[Richard McKenney:]

Correct.

[Steven Schwartz:]

Could you give us a sense of what you're investing that new money at.

[Richard McKenney:]

Much lower than that. And I try to reflect the remarks. It's tight today. We would have seen this environment last year, if you go back to August of last year where rates came down for different reasons, credit spreads were a little bit wider then. They're actually quite tight right now. The good news is, and you have to take it back to our company, we're not putting a lot of cash to work. So we are able to wait, sit on our hands until the deal comes along that hit the targets we're looking at. But it is a very tough environment for our investment team right now.

[Steven Schwartz:]

Okay. So no number for us?

[Richard McKenney:]

In terms of where new money is, you have to go across the curve. But I mean you can do as well as I, take the 10-year treasury and add 200 basis points on top of it. Last year, we would've had the opportunity to go into some different asset classes which would give us some different yield. Tom mentioned that in his comments around tax-advantaged investments, we had Build America Bonds, and things that fit very nice in our portfolio some of those don't exist this year or we've been priced out of the market on that front. So it is quite difficult.

[Kevin McCarthy:]

Just a reminder though too, maybe Tom or Rick, I mean, the amount of cash we have to put out that is unhedged actually over the next couple of quarters is pretty unlimited.

[Thomas White:]

Yes, I mean if you look -- I'll take you back to the, this is Tom White, the information from Investor Day back in November, we've got about $2.5 billion of new money to invest on a $40 billion to $43 billion investment portfolio. And as you kind of break that out by line of business, there's little's bit more proportionally in long-term care. And there, we've got about 30% of that money hedged. So as Rick said, it's a challenging environment. This past quarter, new money yield was a little less than 6%. We benefit from the hedge on lines that occurred and they'll continue to occur over the next couple of years.

[Operator:]

And we'll take our next question from Mark Hughes with SunTrust.

[Mark Hughes:]

The Colonial sales force, how was recruiting activity in the quarter? How do you see that going forward?

[Thomas Watjen:]

Randy, you want to touch on that.

[Randall Horn:]

Sure, Tom. Yes, the recruiting was up a little above 5% for the quarter and that was on top of a very strong second quarter last year and we still feel like we have a very strong recruiting system. We have all the right alignment, Mark, that we need within our field leadership structure. And it's a key area of focus for us. So we still have a positive outlook in terms of ongoing growth in new rep recruiting.

[Mark Hughes:]

Then how about on the voluntary side, you had obviously a tough comp this quarter. Have you seen the dynamic there change at all or is it still good increasing demand?

[Thomas Watjen:]

Maybe Mark, we're talking both sides. Randy, while you got the mic, why don't you speak to just what you're seeing in the voluntary sales in Colonial, then Kevin, if you could, because I think the talk about the tough comp was more the issue with Unum US [ph].

[Randall Horn:]

Yes, Mark. On our side of it, we're still seeing a good opportunity out there in the market. I think Rick and Tom mentioned earlier the success we had specifically in the public sector. Part of the market in the second quarter, very strong new account sales there. And although there certainly are continuing economic headwinds, we're all very aware of that, I think the general trend towards more employee responsibility for their benefits serves us well and is going to continue to create opportunities for us.

[Thomas Watjen:]

Kevin, you want to speak, because again, you had the tougher sort of comparison.

[Kevin McCarthy:]

In terms of voluntary trends, we're very bullish on voluntary. I think, the tough comparison is driven by, we had 2 very large takeover cases last year, existing voluntary plans that moved from another company to us and that was worth about $8 million to $10 million. So voluntary sales would've been up in this quarter other than that comparison. We see more brokers everyday getting in to the voluntary business. Our voluntary core market sales are growing, our voluntary case sales have been steadily growing and our smaller [ph] case in the marketplace are simply in a platform. Our voluntary sales associated with group grew 23%. So I think all in all, we're looking pretty good. The pipeline is feeling pretty good as well.

[Operator:]

And we'll take our next question from Bob Glasspiegel from Langen McAlenney.

[Robert Glasspiegel:]

Rick, you said that the accounting change doesn't change any of your components of your plan. But my math calculation, it does boost ROE by 60 basis points. So since this is a non-economic, non-cash event, is it fair to say that you would increase your ROE by 60 bps for your plan and how the board sort of is assessing the performance, et cetera?

[Richard McKenney:]

Yes, I mean that's accurate. It will have that impact on our ROE. When I talked about our plans, it was more operational plans that I was referring to and we're going to fund [ph] the business the same way. But you will see impact, you will see the ROE go up roughly half a point. You will see book value per share come down somewhere in the middle of that range, it would be probably in the $1.5 range. But net, I was talking about operational plans. We're going to run the company the same way.

[Robert Glasspiegel:]

But you're paid more on book value growth -- I mean, but you're paid more on ROE than book value growth. Or am I wrong on that sort of assumption as far as the plan?

[Richard McKenney:]

Yes, we are, but that will be a 2012 item, we'll talk about on a recasted basis with our board when we get to setting plan targets.

[Robert Glasspiegel:]

On a macro basis, and we talked a little bit about this, but what I hear from you is 260 10-year risk of a double dip and a sloppier economic growth. Doesn't really move the needle as far as any of your plan, any of your strategy? From here you just assume this is sort of short-term rather than something structural that needs to result in a significant business plan adjustment.

[Thomas Watjen:]

Bob, I'll start with that. Maybe I'll ask others to pitch in, but, yes, I don't think anything that we're seeing now is changing our strategic direction or our focus in the marketplace. It's not changing how we've sort of organized ourselves operationally to think about supporting the marketplace and so it really hasn't changed, as Rick said, really the material aspects of our financial outlook. So obviously, we could use a better economic environment as measured by employment growth. We could use a better environment in terms of interest rate. But I think we've proven even over the last couple of years during the financial crisis and the economic sort of headwinds we had to face, that our plan hangs in there quite well actually, even in those tougher times. Now we're continuing to reinvent ourselves. We're continuing to do things to make our products and services even more competitive. So don't get me wrong, we're certainly not complacent. But it's not as if this environment is causing us to do a dramatic change in direction.

[Richard McKenney:]

And the 260 10-year doesn't say, we got to increase our rate increases, because you went through this a year ago and you just sort of think this is short-term blip and rates will go higher.

[Thomas Watjen:]

Yes. I think as Rick always said, we monitor things carefully. We have a very close connection between market interest rates, our pricing assumptions, how we think about discount rates on new claims. So all those pieces of the decision process are very tightly tethered. And I think just as we've always said in the past, we don't move quickly to short-term movement.

[Richard McKenney:]

I think that's the key, our pricing. One of our hallmarks in the market is stability of pricing that we've taken out there. So we may move there on a gradual basis and they reflect a longer-term view of where things have been and where they're going and I think that we'll continue to run the business that way.

[Robert Glasspiegel:]

It seems like long-term care is probably the most sensitive to sustain long-term, low-interest rate environment. Is that true?

[Richard McKenney:]

I probably wouldn't use the word sensitive, but it's certainly something you have to watch the most in terms of where it goes over time. And Tom mentioned our hedges that we have in place, that's where I'm watching the 30-year not the 10-year which has come down equally as quickly. And then you look at the credit spreads along them [ph]. So we've been fortunate to get some long assets behind that and some pretty good rates over the course of last year. When you throw the hedges on top of that we've been fine. Right now, it's tough to put 30-year money out there at a reasonable rate.

[Operator:]

And we'll take our next question from John Nadel with Sterne Agee.

[John Nadel:]

I have a couple for you. A couple of data points. In the U.K. business, I know the inflation linked Group Life business is having an impact on this benefit ratio. Is it possible for you guys to give us an adjusted benefit ratio that removes that impact so we can get a sense for the trend underlying?

[Richard McKenney:]

When we look at that, actually, it's something we're looking at how we will take that out in the future, given the volatility of the interest -- I should say the inflation moves in the U.K. are so great. So it's certainly something were thinking about and we'll work on breaking that out. I think it's more of a general trending item that we've talked about this quarter with inflation moving. So that's something we're considering and we'll certainly have more discussion on that.

[John Nadel:]

During the quarter did you take any dividends up from the operating subs to the holding company?

[Richard McKenney:]

We do. We took about $140 million out of the operating subs in the U.S. We also have dividends flowing from the U.K. up as well.

[John Nadel:]

How much was that from the U.K?

[Richard McKenney:]

U.K. was in pounds, somewhere between GBP 35 million and GBP 40 million. I would highlight those are very consistent dividend levels and that's what we're looking at. It's consistent streams of dividends up from operating companies to holding company to putting it back to work.

[John Nadel:]

If I could follow-up on the DAC accounting change, as we look forward and if I assume you guys make no changes to your sales-oriented expenses, about how much of the cost that you now defer will no longer be deferred?

[Richard McKenney:]

It will be about that same ratio of the...

[John Nadel:]

So it's about 25% to 35%? Okay. So at the end of the day, the results here on forward earnings is really no meaningful impact? Just to confirm.

[Richard McKenney:]

That's correct.

[John Nadel:]

And then finally, Kevin, it wouldn't be a quarterly call if I didn't try to give you -- get a sense a little bit more detail on pricing shifts in the market. Maybe to be a bit more specific, this may be difficult, but if I held all the variables constant for you, wages, employee numbers, benefit plans, attachment points, et cetera, can you characterize for us in the small, mid and large case market, how much pricing in Group Disability and Group Life is up today versus maybe a year or 2 ago?

[Kevin McCarthy:]

The market prices for LTD are fairly flat, when you' look in total. When we talk about soft pricing in the marketplace, it has more to do with sort of the number of competitors that are pricing low as opposed to sort of overall pricing levels. Overall pricing levels have been fairly flat. We've been moving rates up as you know over the last 5 years. But now we're sort of in the low single-digit rate adjustment every year which is mostly driven just by the aging of the block. I think the industry -- the question going forward, is that the industry margins have been shrinking steadily over the last 4 years. I think you can take a look at the January JHA data. And our margins, of course, have been increasing during that same period of time. And I think that our discipline has worked out really, really well for us on that side of the page and I think, maybe that's what we'll start to see in the marketplace with some competitors starting to firm it, recognizing the deterioration in their margins. I think if you look at STD business, I think it's the same kind of story. Margins have been deteriorating. I think if you look in the January studies STD, as an entire industry was slightly south of breakeven. Last year the ASL business was even further south of breakeven. So I think there might see some hardening on the STD side as well. Group Life, I think, is very, very stable in the small and mid-markets. That doesn't move very much. Mortality has been very stable. I think in a large case marketplace, it's a different story. As you know, we don't sell for the most part large stand-alone Group Life, and the reason that we don't is that, that tends to be a significant commodity play, price shopping play, price negotiation play, and that marketplace I think is extremely volatile.

[Operator:]

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

[Thomas Gallagher:]

First, I had a question for Rick. Just following up on Stephen Schwartz's question about difference between new money and portfolio yield. So the numbers would be, let's say new money is 4.5 to 5. Portfolio yield, 6.68%. But that 6.68% is duration weighted book yield. If I look at your nominal portfolio yield, which is how we all model earnings, that number's a lot lower. It's actually 5.4%. So using the numbers that matter from an earnings standpoint for you and the difference wouldn't appear to be that great. So I guess my question to you is which ratio -- which statistics matters more to you? Like how is 6.68% relevant to you because your comments indicated that there was a very big gap between the 2. But from an absolute earnings standpoint, the gap doesn't appear as wide. Anyway, can you comment in terms of how you would view that?

[Richard McKenney:]

That's why I caution, it's really across the curve and it's not any good aggregate measure to look at. What I think about is more given the duration weight which talks much more about the longer assets we have as opposed to the reported yield that we have today,at the 6.68%, I look at the 30-year and then I use the credit spreads off of that. So you have a very fair point when you look at that duration weighted, it's a lot higher. And actually rates, even with the low levels that they're at today, you'd have to take the 3.90 [ph] or more roughly 4% around 30-year and then take credit spread off of that, which gets you much closer to that portfolio rate. You really have to disaggregate it portfolio by portfolio, that's actually how I think about it. It's no aggregate levels. We manage this portfolio by portfolio. And we've done very well even in a fairly low interest rate environment over the last year to hit our bogies along the way. I'd say it's tough, but we're not letting up on our investment team to find the jewels out there as we continue to go through this to hit our targets.

[Thomas Watjen:]

I think it safe to say too, believe it or not, actually our results were pretty close to plan, actually, as it relates to some of the investment activity we intended. So that's the other element here, which is what we expected.

[Richard McKenney:]

I'm giving you more a sense of that it's hard out there, which I don't is a surprise to you as opposed to how we've been able to operate and work our way through the low interest environment to date and really how we expect our team to operate through this low-interest rate environment going forward.

[Thomas Gallagher:]

And just a follow-up, as I think about the potential headwind of rates, to me, the difference that we're seeing today would only be 100 basis points just using nominal yield. It wouldn't be 200 base points. Because if you're using 200 basis points and somehow, that is the real economic difference, I think, it's a bigger headwind. So I guess the follow-up is, as you think about your business, is there some offset that I'm not thinking about from a liability standpoint, that economically, the kind of disparity or difference is really more 200 basis points, or is it just the nominal 100 basis point spread is the more accurate way to think about the forward earnings impact?

[Richard McKenney:]

Yes. I'd probably much more in that 100 range from a spot perspective. It's going to be dependent on the deal and you have to disaggregate. So when I'm talking about 10-year money, I'm thinking more about our Group Long-term Disability line. When I'm thinking about our Long-term Care, I'm thinking about our 30-year money. So we're lower than the portfolio rates there today but over the last year, in a very tough -- what I would say, last year was also a tough investment environment, we've actually been able to hit our bogies along the way. So as I look forward it's going to be tough. But I wouldn't see our portfolio creeping down or moving down very quickly. I think we've highlighted that the portfolio yield and aggregate over last year has barely moved and rates have not been very high. So it's something we worry about, we work on. But there's no near-term pressure that I'm feeling as a result.

[Thomas Gallagher:]

Okay. And then just a question on Long-term Care, that interest adjusted benefit ratio is creeping up. Can you comment on how much margin do you have left there? I know you haven't separately disclosed or broken out what the GAAP margins are there, but I think in prior quarters when that benefit ratio was lower, you had mentioned there was a little bit of room not a lot. So as that creeps up, are we in jeopardy of having that turn to a negative margin for the block?

[Richard McKenney:]

Yes. I don't think we ever said there was a little bit of margin, if you go back to what we said. There's margin on the block. I mean, I you take back to the dynamics [ph] which is exactly what Kevin said. Yes, you adjust the loss ratio as you're going up. That's an expectation of that block given the very high persistency we've got and we're taking pricing actions to combat that. The pricing actions will take a little bit longer to come in, so we're not surprised that interest adjusted loss ratio is still going up until those pricing actions take effect. But to be clear, it's a tough business and the long tail nature of it, we're taking the actions necessary to manage the block.

[Thomas Gallagher:]

And then last question, just on the disability underwriting results and how those who have held in so well, so if I understand it correctly, over the last several quarters, you've had very good claim recovery results that have offset slight pickup in incidents. On the claim recovery side, is there any -- can you give us a little bit more in terms of what's going on underneath the covers there? Is there any diminishing return benefit that's going to go away, or is that a sustainable trend where you think you can continue to see good claim recoveries even if the employment we're picturing [ph] sort of remains where it is today?

[Kevin McCarthy:]

It's Kevin. I'm very confident in the consistency of performance in our claims management operation. I think they're very much on top of managing their inventory, they're very much on top of quality control and quality assurance reviews. I think they pay close attention to what's going on with Social Security. I think they are very careful about managing the claims practices right to the contract. I think we've improved steadily over the last 5 years in terms of relationship management with claimants and with claimants employers, and between our doctors and claimants doctors. And I don't see any reason we won't be able to sustain that claim recovery performance.

[Thomas Watjen:]

And I think operator, we just have time -- we're a little sensitive to time, one more question.

[Operator:]

And we'll take our last question from Eric Berg with RBC Capital Markets.

[Eric Berg:]

Just a few quick ones. First, I want to follow-up on Tom Gallagher's question, which I thought was a very interesting one, an excellent question. If the duration weighted book yield is in fact capturing the true economics of your portfolio, what's going on considering the length of time that those bonds are outstanding as opposed to a nominal yield which I gather would just treat all bonds identically and is not an economic view of your yield, why isn't the book yield the right -- pardon me, why isn't the duration weighted book yield the right number to be looking at when comparing the yield on the portfolio to new money? That's my first question.

[Richard McKenney:]

To answer your question, the reason we focused on the duration weighted is because we think that is the right answer. When you look at it. And so that's where I think you're absolutely right, Eric. Looking at the duration weighted, it's important. When we look at our liabilities and our assets, that's really what we're matching up to. So I think that you're right on the money there.

[Eric Berg:]

Okay. Thanks for clarifying. I had a misunderstanding. Second question of 3 relates to -- is really for Kevin. In thinking about pricing, you are latest disability executive. Yesterday, someone I met was talking about pricing firming. My question is -- and he was talking about large case, you, today, we're talking about small and mid-sized. My question is why is why is it firming, especially in the context of a weak economy? I would think it would be difficult for suppliers of any product of service or a good to push through price increases and to get firming prices. Why are we seeing a firming of pricing and how is this happening in the context of a weak economy?

[Jack McGarry:]

I think, Eric, we're talking about orders of magnitude here. I think pricing had been, as I said, in disability in particular, sort of very flat some volatility by market segment, particularly in the mid and large. I think over the last couple of years, especially the last 12 months, a number of companies have had deterioration of result. Our competitors have deterioration of results. I think several companies have pointed out that they intend to increase prices. I can think of at least 3 that have mentioned that, if not more. And I think that's what's firming up the pricing. And I think that it's not sort of an order of magnitude that's having a big impact on an employer. You think about disability, we're talking about a premium for Life that's in the $250 to $300 per year per person kind of range. So I think firming up a price just is, I think, maybe shoring up everyone's persistency and may be helping to shore up eventually, industry profitability.

[Eric Berg:]

Last question, also for you Kevin, relates to the voluntary business. While I certainly understand the long-term case for growth in the voluntary area, the reasons for it are apparent. I can't help wondering in a difficult economic environment, while employers may be more willing, more interested than ever in having their employees pay because voluntary coverage, as I understand, typically involves some contribution, if not a significant or total contribution by the employee, what about what the employees are thinking? In other words, I would think that in a difficult employment environment, employees offered benefits might say not now, maybe when I feel more comfortable. How does all that work?

[Kevin McCarthy:]

I think regardless of what's going on in the defined benefit -- to defined contribution shift from employer to employee, the fact remains that employees still need financial protection. And the financial protections that we provide in our product lines, particularly our voluntary product lines, are extremely affordable and cover significant risks. I mean whether it's a critical illness risk, a short-term disability risk, an accident risk or a life risk, I think in every one of those cases, employees and their families need that level of protection and it's a very affordable level of protection for a very high level of potential risk. And I think that's what's driving it and if you look back at the last couple of years of deterioration in our economy, we have not seen persistency in voluntary move at all, and we haven't really seen participation rates move down either. I think going forward over time, as more and more brokers are involved in voluntary, as we get out there and increase public awareness around the protection and safety net that you get from our products, I think, if anything, you'll see participation rates go up.

[Thomas Watjen:]

Operator, I think we are going to thank everyone for joining us this morning. I think at this point, operator, we'll conclude our second quarter 2010 earnings call. Thank you.

[Operator:]

That concludes today's conference call. We appreciate your participation.