Unum Group
Q2 2013 Earnings Call Transcript

Published: 6 Aug 2013

[Operator:]

Good day, and welcome to the Unum Group's Second Quarter Earnings Results Conference Call. Today's conference is being recorded. And at this time for opening remarks and introductions, I would like to turn the conference over to the Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead.

[Thomas White:]

Great, thank you. Good morning, everyone, and welcome to the Second Quarter 2013 Earnings Conference Call for Unum. Our remarks today 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 SEC and are also located in sections titled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ending December 31, 2012, and our subsequently filed Form 10-Q. Our SEC filings can be found in the Investors section of our website at unum.com. I'll 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 in the Investors section. So participating in this morning's conference call are Tom Watjen, the President and CEO; Rick McKenney, the Executive Vice President and CFO; and Kevin McCarthy, Executive Vice President and Chief Operating Officer. As well as the CEOs of our core business segments, Mike Simonds for Unum US, Peter O'donnell for Unum UK and Randy Horn for Colonial Life. And I will turn the call over to Tom Watjen. Tom?

[Thomas R. Watjen:]

Thank you, Tom, and good morning, everybody. The second quarter was a strong quarter for the company, with growth in operating earnings per share of 3.8% to $0.82 per share; and book value per share, excluding AOCI, increasing 11.4% to $30.97. And let me highlight a few things before turning things over to Rick and Tom. First, I'm very pleased with the strength of our operating performance for the quarter, with our favorable risk results generating stable to improved benefit ratios across most of our core business lines. As we've discussed in the past, our focus has been on generating not just growth but profitable growth through disciplined pricing, both new business and renewal, through disciplined underwriting and through our commitment to maintaining very high quality service levels, so that we retain our customers and hopefully expand our relationships with them over time. We are clearly benefiting from this strategy. This past quarter, for example, we generated a return on equity in our core operating segments of 14.6%, well above industry averages. The operating return on equity for the entire company, including our Closed Block, was 11.6%, also a very respectable level. Secondly, I'm encouraged by the performance we are seeing in those areas that have been operating below our expectations. The margins in our Unum UK business, for example, improved again this quarter, as we continued to make progress repricing and repositioning the group life block. That, along with our solid results in our group long-term disability line of business, helped us strengthen the profitability in this segment. In addition, our Closed Block segment was generally in line with our expectations this quarter. This segment, particularly the long-term care product line, will continue to be an area of focus for us and I might add the whole industry, and we will continue to devote more resources to this area to ensure that we are effectively managing all the levers we have in this business. Third, it continues to be a challenging environment to profitably grow our business in the U.S. The combination of still weak employment growth, as well as the distraction resulting from the implementation of health care reform, has slowed quote activity and intensified price competition in certain segments. As a result, you will see that sales in Unum US in the quarter declined 19% and in Colonial Life declined about 2%. While sales declined 7% in Unum UK in local currency, that was driven more by the significant pricing actions we are taking in our group life business, more so than the broader market conditions, which certainly was the case here in the U.S. We believe these headwinds in the U.S. are likely to continue, but we are committed to maintain a disciplined approach we have taken in the market, which has allowed us to produce strong margins and returns. Returns, as I mentioned earlier, considerably above industry averages. Turning now to investments. We continued to deliver solid investments results, and the quality of our portfolio remains excellent. The rise in interest rates during the quarter was certainly welcome, and today's new money yields still remain below our overall portfolio yield. The move in rates has not caused us to change our strategy. We will not stretch for yield by lowering our investment quality standards, but instead, continue to raise prices in the products that are most impacted by interest rates. And lastly, our strong operating results have resulted in continued solid statutory earnings, which allows us to maintain a strong capital position, and importantly, financial flexibility. Our risk-based capital level, which was approximately 398% at the end of the second quarter, continues to be at the upper end of our target range for 2013 of 375% to 400%. In addition, our holding company cash position continued to be strong at just under $600 million. We continue to balance this high quality -- this healthy capital position with returning capital to our shareholders. In the second quarter, we repurchased just under $100 million of our shares, in addition to raising the dividend by 11.5% effective with our third quarter payment. So to summarize, before we move to a more detailed discussion of the quarter, we are pleased with the strong operating results we saw in the second quarter. We continue to be cautious in our outlook for the business environment in the second half of the year, which will likely to continue to challenge our ability to profitably grow our business, especially here in the US. However, we are continuing as a company to take the actions necessary to ensure that we maintain our solid margins and financial flexibility and position our businesses for what I continue to believe our excellent long-term growth opportunities. Now I'll turn things over to Tom for a review of our operating results. Tom?

[Thomas White:]

Great. Thanks, Tom. As you can see from our press release yesterday afternoon, we reported net income of $218.6 million for the second quarter 2013 or $0.82 per diluted common share, compared to net income in the year-ago quarter of $216.4 million or $0.76 per diluted common share. Included in net income for the second quarter is an after-tax nonoperating retirement-related loss of $8.5 million and an after-tax net realized investment gain of $8.6 million. Included in the year-ago second quarter was an after-tax nonoperating retirement-related loss of $7.5 million and an after-tax net realized investment loss of $1.4 million. So excluding these items, after-tax operating income was $218.5 million for this quarter or $0.82 per diluted common share, compared to $225.3 million or $0.79 per diluted common share in the year-ago quarter. Moving to an overview of our business segments. Operating income for the Unum US segment increased by 0.6% to $214 million in the second quarter, with premium income increasing by 1.5%. The segment benefit ratio was essentially flat at 72% in the quarter and other expenses were also stable at 22% this quarter. Within the Unum US segment, operating income in the group disability line was $73 million for the second quarter compared to $70.4 million last year. Premium income increased 1.5% over last year, and the benefit ratio improved 83.9% from the year-ago 84.7%. In the group life and AD&D line, operating income was flat at $57.3 million, with premium income increasing by 3.4% and the benefit ratio improving slightly to 71.1% from 71.9% a year ago. In the supplemental and voluntary line, operating income declined slightly to $83.7 million compared to $85 million in the year-ago quarter. Premium income declined by 0.8% to $273.8 million, primarily, reflecting the reinsurance of a small block of individual disability business, which is partially offset by a slight increase in premium income in the voluntary benefits line. Moving to Unum UK Operating income in this segment improved to GBP 21.8 million from GBP 19.1 million in the year-ago quarter. Margins in this business continued their improving trend over the past few quarters, as risk experienced in both the group disability and group life lines of business improved. Wrapping up our core operations, Colonial Life reported an increase in operating income of 5.2% in the second quarter to $71.1 million. Premium income increased by 3.7%, and the benefit ratio improved slightly to 52.1% compared to 52.5% in the year-ago quarter. In the Closed Block segment, operating income totaled $29.6 million for the second quarter compared to income of 24 -- excuse me, $25.7 million in the year-ago quarter, primarily driven by higher net investment income from an increase in assets supporting this segment. Premium income declined by 4% relative to the year-ago quarter, reflecting the expected runoff of the individual disability block. And finally, for the Corporate segment, we reported an operating loss of $37.1 million for the second quarter compared to a loss of $25.9 million in the year-ago quarter. Net investment income was lower due to lower yielding assets and a decrease in investment income attributable to tax credit partnerships. Keep in mind that this negative impact is offset by a lower income tax rate due to the tax benefits recognized as a result of these investments. Interest to debt expense was higher at $35.2 million compared to $32.2 million in the year-ago quarter due to the issuance of $250 million of debt during the third quarter of 2012. And now, I'd like to turn the call over to Rick McKenney for further analysis of the second quarter results.

[Richard P. McKenney:]

Great. Thank you, Tom. Today, I'll cover the profit trends you saw in our business segments in second quarter, provide additional detail on our growth trends and also update you on our investment results and capital position. As we look across the company this quarter, we saw a generally favorable risk trend in all of our lines. First, on operating results in the second quarter, Unum US operating earnings increased slightly with favorable risk experience in the group disability, group life and AD&D lines, offsetting a slightly higher benefit ratio in the supplemental and voluntary lines. Focusing on our group disability business. The benefit ratio continues to perform quite well at 83.9% for the second quarter of 2013, which compares favorably to the 84.7% in the year-ago quarter and 84.3% in the first quarter this year. The underlying experience continues to be favorable with stable to lower overall claim incidents and continued strong claim recovery performance. This also reflects the benefit that we realized in our margins from the pricing discipline we show on new sales and renewals. We continue to be very pleased with the performance of this business line. Group life and AD&D also produced strong results for us this quarter. The benefit ratio improved slightly in the quarter to 71% compared to 72% in the year-ago quarter, reflecting more favorable experience. Earnings in this line was flat at $57.3 million for the quarter, with premium growth of 3.4% being offset by lower net investment income. And finally, in Unum US, the supplemental and voluntary line produced a good recovery from the first quarter when higher terminations in the voluntary benefits line resulted in a higher than normal level of DAC amortization. For the second quarter, earnings were $83.7 million, still lower than the year-ago quarter of $85 million, but much improved compared to the first quarter of $72 million. Persistency was better during the second quarter in the voluntary benefits line, as we anticipated, but it is possible that we will still see some continued volatility. As a result, the accelerated DAC amortization from policy terminations likewise improved in the second quarter from the higher than normal level we experienced in the first quarter. As for the underlying risk trends for the supplementary and voluntary line, the individual disability recently issued product lines saw a generally stable claim experience with the year-ago quarter. The voluntary benefits line saw a good risk results, but were down slightly comparing to the very good results we saw a year ago. All in all, it was a good bounce back in earnings for this line for the second quarter, as voluntary benefit [indiscernible] stabilized. Moving to Unum UK, earnings were GBP 21.8 million, improved from both the year-ago quarter and the first quarter. As Tom highlighted, we're pleased with the margin improvement that is developing in our UK business as the group life repricing and repositioning further develops, and the results in our group long-term disability line remain favorable. From a risk perspective, our group disability results in the second quarter were favorable due to both favorable claim incidents and claim recovery rates. For the group life block, results were favorable due to lower claims in the business that we have retained. We continued to take aggressive rate action in our group life pricing and expect to continue to do so over the next few quarters. As a result, persistency for our group life declined for the first 6 months of 2013 to 74% compared to 83.5% for the first quarter of the year. As we go through repricing this book, this is not expected to see this level of volatility. Colonial Life's results were solid again this quarter at $71.1 million, an increase of just over 5%. The benefit ratio of 52% was slightly better than both the year-ago quarter and previous quarter, but a decreased level of claims in our accident, sickness and disability line and favorable mortality in the life line of business. And finally, overall results in our Closed Block improved to $29.6 million this quarter compared to $25.7 million in the year-ago second quarter. In the individual disability line, the interest adjusted loss ratio was stable on a year-over-year basis at 82.7%, reflecting lower paid claims, offset by a less favorable claim incidents and claim recovery rates. Long-term care earnings were higher on a year-over-year basis, driven mainly by higher net investment income. The interest adjusted loss ratio was 90% for the second quarter, up slightly from the first quarter, and 88% in the year-ago quarter. The increase in the loss ratio on a year-over-year comparison was driven by an increase in the level of new submitted claims and higher group long-term care persistency, driving higher buildup in active life reserves. Now I'd like to move our discussion to sales and growth trends. We saw a challenging quarter on the sales front as market activity slowed. We attribute some of this to the discussion and distraction to our market from health care reform. As a result, we saw a lower numbers of cases coming to market, but we also saw higher persistency in our own book. Therefore, premiums held in rather well. Overall sales in Unum US in the second quarter were lower by 19% compared to the year-ago quarter, group sales were down 20% and the supplemental benefit sales declined by 16%. In addition to a lower number of quotes, the competition for those cases that do come to market can be extremely intensive, and our discipline may keep us out of the running in the short term. As I mentioned, a negative impact to sales is offset somewhat in that persistency has remained at very healthy levels, which is 89% for group LTD and group life for the first half of the year. We continued to see little to no benefits to premium income from marketplace growth. And in total, premium growth was 1.5% in the group disability line and 3.4% in group life and AD&D. To echo Tom's introductory comments, while we would certainly like to see an acceleration of these levels, our priority remains to protect our profit margins. In the UK, sales results again this quarter reflect the actions we are taking to improve the profitability in this business. We were happy to see sales in the group disability line increasing by 5%, while as expected, sales in group life declined by 22%. I would remind you that the premium income was affected in the second quarter, reflecting the 50% quota share reinsurance agreement we have. Without that, the UK would have seen premium growth of above 3%. And finally, Colonial Life sales declined by 2% in the second quarter. While we saw an encouraging trend with higher sales from existing accounts, we continue to see slower sales and activities with new accounts. And specifically, we're seeing very slow activity in the under-50 life market, a trend consistent with our Unum US segment, driven again, we believe, by disruption from health care reform. Persistency showed a slight improvement for the first half of the year, and premium growth remains positive at 3.7% for the second quarter. So let me transition to the balance sheet and the investment portfolio. The credit quality of our investment portfolio remains in very strong shape. The increase in treasury yields and the slight widening in corporate bonds spreads were welcomed development in the second quarter, even though this decreased our net unrealized gain from our portfolio by roughly $2 billion. The higher new money yields helped us to get the cash balances in our product portfolios fully invested during the quarter. This helped to reduce the drag on net investment income we saw in the first quarter from holding higher cash balances, and positions us better as we move into the second half of the year. While interest rates are up from the historic low levels over the past several months, we are still seeing new money yields well below our portfolio yields. So the pressure on yields will continue. In the second quarter, our overall portfolio yield declined by 6 basis points to 6.35%. It is difficult to draw conclusions from the overall portfolio though, and we look at it product by-product basis. We continue to make pricing adjustments with our renewals and new business pricing to reflect these low interest rates. A good example is evidenced in our Unum US LTD business, where we experienced a 1 basis point decline in the interest reserve margin to 91 basis points. This was caused by a 4 basis point decline in the portfolio yield, while the aggregate discount rate declined by 3 basis points. As a result of the adjustments, the new claim discount rate remained in 2011 and 2012. We made no adjustments in new claim discount rate in this quarter. As related to our balance sheet, in June, we announced that we will be freezing our US-defined benefit pension plans effective December 31 of this year and replace it with a defined contribution plans. Because this eliminates all future service accruals for active employees in the plans, we were required to remeasure the benefit obligations to our plans during the second quarter. Combined with the $50 million contribution, this decreased our net pension liability by $327 million. This has a beneficial impact of approximately $0.80 to our reported book value per share, which increased by 6.2% on a year-over-year basis to $31.80. These changes are helpful in managing our retirement benefits in our risk profile going forward, but will not change how much we contribute to our employees on behalf of their overall retirement package. Moving to an update on our capital position. We continue to see very good trends. Statutory net income remained strong at $173 million for the second quarter and $348 million for the first half of the year, which has been higher than our run rate over the last several years. The weighted average risk-based capital ratio for our U.S. life insurance companies was approximately 398%, again, at the top end of our targeted range of 375% to 400%. Holding company cash and marketable securities totaled $579 million at the quarter end and include the impact of $50 million contribution to our U.S. pension plan I mentioned. We also increased our dividend by 11.5% and share repurchase activity totaled $98 million in the second quarter. We continue to have strong financial flexibility as we head into the second half of the year. Finally, we had no change to our 2013 outlook, and continue to anticipate growth and will have operating earnings per share to be within the range of 0% to 6%. I'll turn the call back to Tom for his closing comments. Tom?

[Thomas R. Watjen:]

Thanks, Rick. Before I move to your questions, I want to close by reiterating that we are pleased with our operating results for the second quarter. Driven by strong overall risk results, we again generated solid profitability and returns and positive cash flow of the company. There is no doubt that producing profitable top line growth will be a challenge. However, we are maintaining a disciplined growth strategy that has served us so well in the past. And with that, this completes our prepared comments. And operator, let's move to question-and-answer session.

[Operator:]

[Operator Instructions] And we'll take our first question from Steven Schwartz with Raymond James & Associates.

[Steven D. Schwartz:]

A couple here, if I may. Tom, in your opening remarks, you discussed competition, and you said it was in certain product -- I'm sorry, pockets. Hopefully you can fill that out for us?

[Thomas R. Watjen:]

Yes. Maybe I should ask Kevin to respond to that because I think much of that actually is within our Unum US business actually. Kevin?

[Kevin P. McCarthy:]

Yes. I think the environment, in general competitively has softened a bit over the last 6 to 9 months. I think as both Tom and Rick mentioned, cases coming to market are fewer, activity levels are down, incumbents are defending in-force case as well. That's reflected as well in our own high levels of persistency. And I think a lot of employers, particularly the smaller end of the market are dealing with health care reform and maybe putting off some benefit decision into 2014 perhaps. That said, I think that companies have a couple of choices. They can defend their margins and defend their in-force business, and back off on the aggressive pricing on the new sales side, so they can decide that they want to take share. In our case, our margins, as Tom mentioned, are considerably higher than the industry averages, and we're just unwilling to sacrifice the pricing discipline in margins in pursuit of market share. We'll just let the market settle down. I think Mike Simonds' here with me. Mike, you want to add anything to that?

[Michael Q. Simonds:]

No. I guess, what I want to add is 2 quick things. One is, you probably feel the slowdowns in proposal activity, most acutely as you move down market, the small employers have less resources to deal with important decisions around reporting requirements from client's requirements, essential benefits and so forth. The second piece will be more thinking about the long term. I mean, as it's taking a great deal of time for employers and their advisers to sort through health care reform, as their sorting through it, it's playing out in ways that I think are very advantageous to us. So employers are not moving to drop benefits rapidly. They're keeping them in force. In general, employees probably have a bit more financial exposure that creates gaps for our products. So we think as they're moving through health care reform, it is a short-term distraction. But I think long term bodes real well for us.

[Steven D. Schwartz:]

If I could follow up on the small end, the less than 50, my understanding is that these firms are not going to have to provide insurance. So I guess, I don't quite -- and maybe I'm wrong on that, but I guess I don't quite understand what the decision process is for these guys. If I'm an employer, everything is pretty much status quo. What am I so concerned about?

[Michael Q. Simonds:]

Yes. Great question, Steven. This is Mike. I mean, I'd day, first and foremost, many, if not most, from Unum US standpoint the employers we're doing business with are offering health care benefits today, right? So one of the key positions they have is that public exchanges come online, they've got to decide are they going to continue to provide health insurance or they're going to take advantage of public option. They're going to think about their contribution strategy, whether they're going to stay on DB or go to a more DC strategy under 50 level. It's kind of a great deal to sort through. I think compounding that is, is the brokers and consultants that are serving the market have clients that run up and down the spectrum. And so where their top energy is going to be focused maybe pulled up-market and where they might have been spending more time helping on our lines of business down market, they've got less time to do that.

[Thomas R. Watjen:]

And that's also been reinforced, I think, Randy in Colonials business, too, because I think you've seen the greatest weakness actually is in the very small case start at the end of the market. You may want to speak to that just for a second.

[Randall C. Horn:]

Yes, Tom. In addition to what Mike Simonds mentioned about employers, small employers that do offer health plans today, just having to sort through the requirements of the legislation and make that very basic decision as to whether they should continue to offer a health plan going forward there. For those that do not, I think a lot of those employers are wanting to see what the impact of the public exchange is going to be in terms of costs, payroll impact to their employees, that type of thing. So just a lot of things for them to sort through, we are positioning our agency force to help those small employers deal with those questions and position their plans appropriately. And as Mike said, certainly, some short-term headwinds, but I think some real opportunities for us going forward.

[Operator:]

And we'll take our next question from Robert Glasspiegel with Janney Capital.

[Robert Glasspiegel:]

Just staying on Steven's question on the sales distraction from ACA. Is this a surprise to you, or that this is causing slow decision-making by customers and no new cases coming on? Or was this sort of as you expected?

[Thomas R. Watjen:]

Kevin?

[Kevin P. McCarthy:]

Bob, I would say no. It's not a surprise. I think what's been a little bit different is sort of the delay in implementing health care reform and the sort of the consistency of inconsistency around the administration's -- the way in which administration is dealing with. And so I think it's sort of prolonged the impact. I was noticing in ALM's [ph] reported results that they're consulting revenues from health care reform consulting were up, but their brokerage fees from commissions were down. And I think if you think about that from our standpoint, we're not on that consulting sides. So the consulting side benefits there on [ph], but the brokerage commissions directly are reflective of the sort of what we're experiencing as well. So not a surprise in terms of its effect, but it sort of flowing through at a much slower pace than I think many had originally predicted.

[Thomas R. Watjen:]

Bob, I think Mike's going to answer this, too. I think Randy mentioned it, but it's Mike it's true with your business as well. We actually made a substantial investment in our field infrastructure and help equip them to deal with these health care issues. I'm probably a little surprised, Mike, how much actually we've been a resource to people trying to help them through that process.

[Michael Q. Simonds:]

Yes, it's put us in an interesting position that were a little bit outside of the fray, so we've seen this as an objective source of information. So that's been an add for us. I guess probably, what's been a bit more surprising has been the compounding effect, not just less activity in the market, but when you compound that with, as Kevin alluded to, some softening in prices, that's probably been the amplifier. That's been a bit higher than expected here in the second quarter.

[Robert Glasspiegel:]

Got you. If I could just zoom in on the group life repricing, what did you see that caused the need to do that?

[Thomas R. Watjen:]

You're talking about the UK business?

[Robert Glasspiegel:]

I thought you were talking about repricing the US, but maybe I misunderstood.

[Thomas R. Watjen:]

No, actually most of the emphasis is really on the UK, Bob. So really, I think as you know, we -- that there was a concerted effort, I think, as we learn more about the underlying profitability of that business, that we need to put some rate into the marketplace, and I think you saw the impact of that this quarter, both on sales and persistency. But we're really in a very nice position relative to where we thought we'd be in terms of enhancing the margin.

[Robert Glasspiegel:]

Okay. So that's old news there. You've been talking about that for a while. Appreciate it.

[Thomas R. Watjen:]

Good. Thanks, Bob.

[Operator:]

And we'll take our next question from Suneet Kamath with UBS.

[Suneet L. Kamath:]

A couple of things. First, I guess maybe for Rick, on the capital situation. So year-to-date, the share repurchases are, I guess, $193 million. I think on the first quarter call, you said that you're still pretty comfortable with the $500 million guidance for the full year. So I guess my first question, is that still your expectation?

[Thomas R. Watjen:]

Let me see if I could -- let me just interject a little bit. This is Tom. Just to sort of kind of refresh everyone's memory about our capital strategy, because I do think it's always good to sort of start at that high level, then certainly Rick can speak the specifics of the share buyback. But I think nothing has really changed. I think with the company in terms of our commitment on one hand to focus on generating solid, consistent profitability, which generates very solid cash flow. I think that part of the machine, as you saw with the first quarter results, continues to work very, very well. I think the other [indiscernible] thing you've seen us over the last 5 or 6 years is I think good stewards of that capital. And you think about it from our position, we have a range of things that we think about as we think about how to deploy that capital. It's everything from the business needs, to some corporate needs, like the pension -- the contribution that Rick referred to in his comments, the debt repurchases. Plus obviously share buybacks of which we done about $2.3 billion at an average price of about 85% of book value and dividend increase. And I just give you that piece of backdrop because I think, Rick, it's safe to say, as we think about it, we think about a whole series of different deployment options for that capital, which obviously a lot of the focus in the short term has been on share buybacks. But remind everybody there's a whole host of things I think, Rick, we think about as we think about how to put capital to work.

[Richard P. McKenney:]

Yes -- no, I'd add, Suneet. We’re active capital managers. So as we come into the year, we have a range of options. We've executed on multiple of those options, including share repurchase to the first half of the year. As you look out through the second half of the year, we'll be active capital managers. And I think the most important thing, excuse me, as Tom alluded to, is our capital generation is extremely strong. So if you look at our stat, earnings are some of the best 6-month numbers we've put up in a while for the first half of the year. So it gives us a lot of financial flexibility, and we'll capitalize that in a variety of forms just like we did in the first half.

[Suneet L. Kamath:]

Okay. And then, I guess the other question I have was about the long-term care business. Again, just kind of revisiting history a little bit here. I think when you took your charge in 2011, you talked about maybe 3 to 5 years of cushion before you might have to revisit that was sort of -- the time frame was narrowed to close to 3 years given the drop in interest rates, which I'm guessing would put us into the 2014 kind of time frame. So again, I don't think they moved around a little bit here. I just want to see if that's still kind of how you're thinking about it? And I think in the past, you've also talked about order of magnitude maybe $250 million after-tax. I want to see if that's still in line with your current thinking.

[Thomas R. Watjen:]

Sure. Let me give you a sense of what's happened in the market. In terms of rates coming up in these near-term periods, so we certainly have been happy to see, particularly the longer end. And we think about 30-year treasury rates and credit spreads on that end of the curve over time. Now they have come up recently, but I would take you back when we first communicated out those numbers and those ranges in terms of years and things like that. We actually were in a similar position that we are today. So we saw it moved down. We communicated that our range kind of narrowed or came to the shorter end and now we moved back up somewhere in the middle of that range. So we feel similar to what we disclosed back at that time in terms of how that looks, and we think those ranges probably still hold rolled forward by the amount of time that we've talked about.

[Suneet L. Kamath:]

Right -- well I -- just when you say back at that time, are you talking about back to end of 2011?

[Thomas R. Watjen:]

Correct. It's correct. So back then, we would have said 3 to 5 years given where rates were. Today, our best view -- as rates compressed, we said that time frame probably got shorter. And now as rates have come back up to those similar levels, we'd be back into that range that we talked about originally.

[Suneet L. Kamath:]

Yes. And then the order of magnitude of the charges, is that kind of in line with what you were thinking back then, the $250 million?

[Thomas R. Watjen:]

Yes. When you think about that, that actually on an after-tax basis would have been what we took into account back then, which took us out in that 3- to 5-year range. It might be slightly different than that given hedges and other things that go into the calculus, but I think that somewhere in that range is probably reasonable. It depends on what we're seeing and what the outlook is and what the forward curve looks like in terms of how we'd go through that process. So I don't want to speculate too much in terms of quantum, but I think the -- what we did last time is good indicator of what that might look like.

[Suneet L. Kamath:]

That's great. And then just my last question is just on the Unum US business. The sales, as you noted, were down about double digits, but given your renewals and the price increases, I think your premiums are kind of holding flattish. So based on kind of where you are with those price increases, do you think that if 2014 is another year of pretty challenging sales, we'd still be looking at sort of a flattish premium line or are we going to start to see that premium line come in?

[Kevin P. McCarthy:]

Well, trying to be optimistic here, I think as health care reform goes into implementation in the beginning of 2014, we should start to see some dampening of that negative effect on sales. So that should help us. I think cautiously, we might start to see some of the improvement in employment. We start to see some of that improvement in the U.S. economy this year although most of the employment improvement has been concentrated in sectors that aren't necessarily target markets for us in sectors like construction and retail and recreation and things like that, whereas industry sectors that are more in our wheelhouse like health care haven't seen growth in employment. So when we look into 2014, hopefully, the economy continues to improve. Sales environment starts to improve. I think if the interest rate environment improves, we won't be having to move prices up as much as we've had to in the last couple of years. So all in all, I would say 2014 ought to be a better year than 2013, but that sort of the best I can do at the moment.

[Operator:]

And we'll take our next question from Jimmy Bhullar with JPMorgan.

[Jamminder S. Bhullar:]

So I had -- just with the first question, I just had a follow-up to Suneet's question on buybacks. I still wasn't clear what your answer was. Are you committed to the $500 million or are you not for 2015? I recognize that you've retired some debt and put money into the pension plan, but could you clarify that?

[Thomas R. Watjen:]

Rick, yes, go ahead, Rick.

[Richard P. McKenney:]

Yes. I think when you look at the full year, I think as you look at the back half of the year, we're going to look at the different alternatives that we have looking out there. And so when you say, "Are you committed to that?" We're committed to the active capital managers over the back half of the year and I'd leave it at that. We will have a variety of forms to put it to work in, as Tom alluded to. And if we can keep generating like we do, we have no reason to believe we won't be generating the way we do and we'll be putting that to work.

[Jamminder S. Bhullar:]

Okay. But not necessarily $500 million, like you look at buybacks, but you're just not willing to outline an exact number?

[Richard P. McKenney:]

Yes. And I think, Jimmy, if could add to that, even though it's not the only determinant, I mentioned the series of things that as you know, we think about as we think about the deploying the excess capital. Again, we repurchased 2.3 million shares at an average price of about 85% of book value. Our stock is trading at a much different level to that even though again that's not the only variable as Rick said in the way we think about these things. It has to be something we take into account. So...

[Jamminder S. Bhullar:]

Now, and that makes sense. You're still even if you still do less. It's still a descent amount. I'm just -- I was just not clear on what your answer.

[Thomas R. Watjen:]

[indiscernible] that brings a new piece you're hearing from us a little bit this quarter actually. As you know, many other companies have been saying very much the same thing. We were fortunate -- if I can digress just a moment, we were fortunate enough as you know to have the wherewithal to be buying back stock in incredibly low prices over the last 4 or 5 years. And so we're very conscious of looking at the ROI in those investments. And so again, I want to reiterate, it's not just a price-sensitive decision here because of the series of variables that go into that, but I think Rick, that's embedded in, I think, your comments.

[Jamminder S. Bhullar:]

And then on the U.K. business, you've had stable results for the past couple of quarters. Should we assume that if they're stable for the second half of the year that you would not renew your reinsurance contracts or what are you thinking there?

[Thomas R. Watjen:]

Kevin?

[Kevin P. McCarthy:]

Yes. I would -- I expect the result to be stable and improving going through the second half of this year and into 2014. But I think the reinsurance program has served us well. I think there is still a lag in reporting of group life claims that makes the existence of the reinsurance program valuable to us. And I think our intent would probably be to continue it. Although, we're not yet at that decision point.

[Jamminder S. Bhullar:]

Okay. And then just lastly on the disruption because of health care reform, any reason to believe that, that would dissipate as you get to the end of the year or will that continue because there's still no clarity on how the exchanges are going to be set up and what the various states are going to be doing?

[Thomas R. Watjen:]

Yes. I think it would -- I mean, people are approaching the January 1, 2014 execution deadline. Exchanges are supposed to be up and running by then, although I have my doubts as to whether that's going to be the end result. So I would expect a slow dissipation into 2014.

[Operator:]

And we'll take our next question from Erik Bass with Citi.

[Erik James Bass:]

So I guess going back to Kevin for a little more detail here maybe, but we've seen reported job growth in the U.S. now for a number of months. But it sounds like you're yet to see any benefit in terms of the natural growth factors. Is this because of a lag effect or is it really more because the job growth that we're seeing is in sectors where Unum is less of a presence?

[Kevin P. McCarthy:]

I think it's both things. I think there's some lag effect. You wouldn't see it start to show up in the benefits-related payrolls for several quarters after, so you get that growth. Most employers have some sort of waiting period before you get your employee benefits, especially those paid for by the company. I want to make sure that you're locked in and embedded in the job. And then I think, as you've said and as I said earlier, the growth has been much more in the construction, retail, recreation, lower-cost service end of the -- in industries in the United States as opposed to sort of maybe the more highly paid financial sector or the health care sector. Health care, actually, I think it might have seen sort of a slight decline in the second quarter.

[Erik James Bass:]

Okay. And then on, I guess, also on the rise in interest rates, how does that impact your thinking about needing to potentially make any further reductions to the discount rate?

[Thomas R. Watjen:]

Rick?

[Richard P. McKenney:]

And certainly, with the rising rates that we've seen, it certainly takes off some of the pressure around that. As you've seen over the last several years, we managed our discount rate over a period of time, taking a forward look to that in terms of how it plays out. But certainly, this rise in rate has been helpful so I don't want to take it off the table, but certainly a much better environment in terms of matching up. As I had in my prepared remarks, our margins, particularly in our long-term disability line, remained very healthy at just over 90 basis points, so it gives us a lot of flexibility around that.

[Operator:]

And we'll take our next question from Seth Weiss with Bank of America Merrill Lynch.

[Seth Weiss:]

And maybe just a follow-up on Erik's question on the rising interest rates and going back to the December Investor Day. When thinking about that 6% to 8% headwind facing from lower rates, I realized we're still in the low rate environment today, but it's pretty different than the 1.6% 10-year rate we had at that December time. Maybe you could just help us think about kind of that headwind as it relates to 100 basis points movement in the general environment?

[Thomas R. Watjen:]

Rick?

[Richard P. McKenney:]

Certainly, if I could take you through, I think when you think about the charts we laid out, which were the downward pressure we have on our earnings from an interest rate environment, and then how we're offsetting that with the price increases, so we're certainly still out there on a price increase front. In terms of how that downward pressure plays through, it doesn't snap back. So it's going to play out over a period of time as we put cash flows to work in the investing side, as we think about how our discount rates work over time. And so we'll certainly give a better look at that as we get out towards the end of the year, but I won't expect a material change certainly as you look in 2013 from that snapback in rates. But we'd echo what many others have said out there, which is this rise in rate is certainly helpful, but it's something that we still are in a low rate environment and something we're going to have to work through as a company.

[Seth Weiss:]

Okay. And then just a one quick follow-up on that. When thinking about that pressure, it's obviously relative to a more normal rate environment. Maybe you can help us think about when you set that out in December, kind of what 10-year rate that would be sort of in reference against?

[Thomas R. Watjen:]

I think back then, it was probably $190 million, something like -- wherever the spot rate was at the time is what we're referencing and so you'd have to look at it. It wasn't as quite as low as the lows we've seen here in the first half of the year, but it was somewhere in that range. I just have to give that back to you exactly what that was.

[Seth Weiss:]

Right. I'm sorry, I mean, the $160 million or $190 million relative to what, in terms of where that goes this year?

[Thomas R. Watjen:]

That would've been -- yes, all of that analysis was year-over-year, so it would've been to the prior year.

[Operator:]

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

[Christopher Giovanni:]

Just wanted to follow up just on the capital. I mean, obviously, you have been one of the better capital return stories within the group and a lot of that has been attributed to what you guys have talked about in terms of the strong free cash flow that you generated. So, I guess, as that continues to kind of build here and maybe the pace of share repurchases moderates, you could have an issue where you have maybe more capital than what you want, and I think you've been pointing to that here for the past number of years. So can you -- maybe as we think about the competing sources, can you talk about size of deals, if that something you would consider? Is there anything in the pipeline? And then maybe where you'd potentially look to take your dividend to?

[Thomas R. Watjen:]

Yes, Chris, let me introduce it, but then maybe have Rick really more to speak to it. But you're right, again, I think we have many different potential uses of capital. I think one of the messages we're trying to get across here is beyond just share buybacks. There are other things that we have in our quiver, so to speak, to think about deploying that capital. I think we've made some good decisions in the past. M&A is certainly one of them. Rick and I said that we'll continue to look at things, but I think this group knows we've been very, very cautious about being sure that we don't get our -- get extended into things that we don't know well and don't have the financial characteristics that we work so hard to protect. But anyone who speak, too, about the M&A environment?

[Richard P. McKenney:]

I think what I'd add to that is something we've said in previous calls as well is that when our shares are trading at a steep discount that they were, it was a very, very high hurdle to have any deal clear to that. So we chose to buy back our stock. As our stock prices moved up, I think that the other things come into play. Particularly to the M&A markets, we've been active throughout this period of time so even as we've been buying back shares, we have been on the look in terms of different pieces that we have out there, capabilities out there, things that are in our space, and so things that are definitely on strategy is what we've been looking at, and we continue on that front. I certainly don't have anything to announce. The flow externally is particular to what we look at. It's still, I'd say, medium to slower, but it's certainly something we'll be active on.

[Christopher Giovanni:]

Okay. And then if we think about the move up in rates, curious if you're seeing any potential opportunities to reduce your exposure to the closed block? And could you potentially use some capital to shore up further pieces of the closed block to make it more enticing for a potential buyer or reinsurance solution?

[Thomas R. Watjen:]

Let me start and again ask Rick to speak. But I think as you -- you've heard, I think, Chris in my comments at the front end of the call, we are putting more resources behind our closed block in terms of moving additional individuals and people over there to be sure that again, we're actively managing every lever that we have in that particular part of the business. And I think you're right, there's one element that this is capital-related, but I think Rick, it's not at the exclusion of other things. We're certainly working rate increases through the process . We're doing a number other things operationally to continue to improve the performance to that block. But again, I think the key message is we are actively managing that business and using all the levers, I think, we have. I'm not sure we're prepared to talk about doing something in terms of like we did with the disability block of business. I don't think the environment is not necessarily right for that, but if and when those things change, we're certainly going to be looking at those different kind of choices.

[Christopher Giovanni:]

And then just one last quick one on LTC specifically around the charge in 2011. We've talked a little bit about the interest rate environment, but from a sort of policyholder behavior experience, recognizing it's just 1.5 years out, but anything that's mainly deviated meaningfully from the assumptions that you guys made at that time?

[Thomas R. Watjen:]

Yes. So we've seen inter-quarter volatility on different elements. We've reported that and talked to you about them. As we've seen, incidents have been -- tend a little bit higher than we expected early on, but I think the most important thing that you laid out is it's still very early in this block of business. Reserves are based on very long term assumptions around that so inter-quarter volatility that we see out there really doesn't influence that in a material way. It's more trends that we see out there, and we continue to watch all of those as does the rest of the industry.

[Operator:]

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

[Thomas G. Gallagher:]

I wanted to come back to long-term care. Can you just remind us the 90% in interest adjusted loss ratio. Just remind us where you would need to get to before you'd be out of harm's way? I know 90% is too high, but is it 85% or -- I just want to get a better handle for what the goal is and where you need to get to. And then I guess a related question, how much -- at a 90% interest adjusted loss ratio, how much margin would you have right now in the block?

[Thomas R. Watjen:]

Rick?

[Richard P. McKenney:]

Sure. I think the 90% really relates to my last question, which is that's a fairly short-term measure around what it's running at. So we've said previously that we'd like to see ranges below that over time and -- but it is over a long period of time, and rate increases come into play in that and how that influences that, and so I think that, that's something we'll actively manage and actively communicate to you where we've seen. So I think that 90% is probably okay for the time being, but certainly, it's something we'd like to work down with price increases, et cetera, over a very long-term period of time.

[Thomas G. Gallagher:]

You're asking a question about margin relative to that, so that's a multifaceted type discussion around how it is. We talked a little bit about the interest rate environment in that. The business is still -- the business line is still generating money. You would've seen closed block results, which were quite good in the quarter at about $30 million, and that was driven by pretty good results in long-term care. So we're still clipping along on that front.

[Thomas G. Gallagher:]

But where do you need to get to from -- in interest rate adjusted loss ratio longer-term to be at a comfortable level? Is it mid-80s, low 80s? I just want to get a better handle on that.

[Thomas R. Watjen:]

Yes, I think I'd probably keep it more near term in terms of where we can run and look at it. It's going to be right in that 90% range, so where we like it to be lower and we're talking about multiple years and time frames around which we like to see that trend down, but we're comfortable with where we are right now.

[Thomas G. Gallagher:]

And Tom, that gets us to really the back. But again, we are using every lever we possibly have to improve the operational performance of that block. And I guess, it's been a while maybe since we've given Kevin an update on just some of the rate actions that we're putting in place. But people shouldn't assume that we're not doing we shouldn't-- permit and I think we're doing all the things we can on that front. Maybe a quick update there might be helpful.

[Kevin P. McCarthy:]

Back in when we took the charge in sort of fourth quarter 2011 and put the block into closed block status and established gross premium valuation reserves, we anticipated and planned for the execution of rate increases in the upwards 25% and above on the block of business. We've been going through the approval process with all the states over the last year. We're basically through that approval process now. I think we've only got 2 states outstanding still, Florida and New York. I think it's Florida and New York. They're still outstanding. And we're exceeding our expectations in terms of the rate increases approved. That said, as we said in the past, it's going to be an interim[ph] process and we'll be going through that a number of times. We've started implementing those rate increases. That cash flow will start to flow in primarily in 2014 more than in 2013. We'll have to see what policyholder behaviors as a result to that, whether that take -- except the rate increases, they could buy down their benefits instead of the rate increase or they could lapse all of those. We've got assumptions about all of those things built in and right now, I'd say we're running better than expectations, which over time should, as Rick alluded to, should move the loss ratio down, but it'll take time for that to occur.

[Thomas G. Gallagher:]

And Kevin, just to help us understand what the whole dynamic of re-rates would mean. Is that likely -- is that something that's already factored into reserves or is that going to be a benefit as we think about it going forward in terms of that flowing through?

[Kevin P. McCarthy:]

A significant amount of the rate increase was factored into the original assumptions. What we've achieved so far is slightly above what we factored into those assumptions. But also, as Rick said, those assumptions include assumptions about interest rates. They include assumptions about incident rates, mortality, all of those things over the life of a long-term care block that's going to build 20, 30, 40, 50 years. Those assumptions are going to move around with changes in medical technology, with changes in interest rates, et cetera, so that's why the rate increase process has to be an interim [ph] one.

[Thomas G. Gallagher:]

Got it. And then my last question, I guess, for Rick, the Unum Provident International Limited had a modest loss on a stat accounting basis this quarter. Was this being driven by long-term care and what would the outlook be there?

[Richard P. McKenney:]

No, we don't get into that, we don't actually talk too much about our detailed entities because it really can get lost in the details of volatility you might see in any one entity. We did have a loss and it's actually in our supplement around UPIL, which is our Bermuda subsidiary. On the quarter but actually we made money in the last quarter so you're going to see inter-quarter volatility and I really don't want to get into drivers and attributes by each one of our legal entities.

[Thomas G. Gallagher:]

Okay. And sorry one last one if I could sneak in just for Tom Watjen. So Tom, I just want to get a better handle for broad capital management, the way you're thinking about it. I totally hear what you're saying about considering where the stock is in valuation as it relates to buyback, but I want to get a better sense for, are you guys now thinking a bit more defensively with capital management, considering what could go wrong? Or is it more still pretty offensive-minded in terms of, if you're not buying back shares, then you'd be doing something more offensive-oriented?

[Thomas R. Watjen:]

Maybe, Tom, the word I prefer to use is balanced. I think we've always had a balance approach. As I mentioned, there were a number of different things we thought about as a potential use of capital that we've both created, as well as the excess we've had on our balance sheet. And I don't think that balance point has actually changed at all. As I said, we want to continue to do the right things. We've proven as a -- I think as a management team, we've done the right things in terms of allocating that excess capital across the different set of dimensions here. And I think those areas that we can potentially invest in that are no different today than they were 2 years ago or 5 years ago, frankly. The relative attractiveness of those can actually change as we said based on market conditions and strategic considerations and those kind of things. But I don't think anything has changed, Rick, as it relates to how we've gone about this in a very, very balanced way, in a very disciplined way. And if we end up accumulating more capital in a period of time -- periods of time like this, that's not a bad place to be either, if we don't find a good way to deploy it. So I think that's where I actually tend to -- I'd like you to think, Tom, about the approach. It's still remains very, very balanced, and we continue to have that full menu in front of us.

[Operator:]

And we'll take our next question from Jay Gelb with Barclays.

[Jay Gelb:]

I wanted to touch base about the earnings outlook for 2013. Operating EPS was up 6% for the first half of this year. You're still guiding to 0% to 6%. Does that sort of imply flat operating EPS for the back half of this year?

[Thomas R. Watjen:]

Rick?

[Richard P. McKenney:]

Yes. I think that when you look at it, Jay, when we think about our 0% to 6% we went into the year, we're not going to adjust that range until we see something material that takes us either one way of the range or outside of the other. So we still see ourselves relatively in that. We're not intoning anything by leaving it where it is today. We still feel comfortable in that range, and we'll continue to execute through the second half of the year. So I wouldn't read anything into the fact that we didn't change it.

[Jay Gelb:]

Okay. On a separate issue, given the decline in year-over-year sales in the U.S., probably greater than a lot of people's expectations, can you talk to us about how things are going so far in 3Q?

[Thomas R. Watjen:]

Yes. Rick?

[Richard P. McKenney:]

I guess, my answer to that will be we won't talk about 3Q already. So we're early into it and so we'll take the long term and we'll talk to you in next earnings call about that.

[Jay Gelb:]

Okay. Last issue on the improvement in the U.K. earnings. Should we anticipate that, that trend continues, not just on a year-over-year basis, but quarter-over-quarter?

[Richard P. McKenney:]

Yes. Certainly, when you look at our U.K. results, we were actually quite pleased with where they are today. I don't we've gotten to the point. It's still pretty early in our repricing process. The reinsurance that we talked about and all those different pieces, so I think we're optimistic about where that trend line lands. But I think that we'll wait and see a couple of more quarters into that process before we declare a victory. So I'd say we're happy for now and we'll watch third and fourth quarter, how it plays out, but the teams are doing great job there.

[Operator:]

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

[Jeffrey R. Schuman:]

I wanted to go a little bit of detail maybe on the investment portfolio. I think the portfolio yield is about 6.35% now. Can you give us a little perspective on new money rates, and also what kind of coupons are rolling off the portfolio at this point?

[Richard P. McKenney:]

It's a good question, Jeff. And I think when we look at it, we really don't spend a lot of time analyzing our portfolio at the macro level. It's a product line by product line thing. When we invest, it's really to back up our liabilities and how we look at it. So when we manage line-by-line, we actually see the portfolio runoffs being reasonable over their time frame, and so if you see that overall yield come down, which in a macro level, I would expect you would, we're taking offsetting impacts and pricing that we've talked about in the past on the other side of that equation. So it's good discussion, good analysis, but the new money rates that we're seeing today, whether it's the 30-year, which we back up on our LTC business are closer to the 10 with our disability business, we're happy to see those moved up, but we'd still like to see a little bit more of an increase here over time and going through that. So it's a good discussion, certainly, happy where we are today. And I'd reiterate that the credit quality of that portfolio is in extremely good shape.

[Jeffrey R. Schuman:]

Okay. And then on the U.K., obviously, you're taking the pricing actions that you've needed to take and have a lot of discipline there. I guess, the hope would be at some point that the market firms along with you. I guess, still based on what we're seeing with persistency, so far, it doesn't appear that maybe there's a lot of market firming. Is there any reason to hope that maybe the market is turning yet or not?

[Thomas R. Watjen:]

Jess, maybe I'll ask Peter O'Donnell to talk about that. And actually, one of the things, you look at headline result, you look at the declining sales position, there's a piece in there, Peter, we should talk about, which is that's really largely of group life. The LTD business actually has some good growth. And actually, most encouraging, we also assume soft -- wonderful growth trends among first time buyers. But maybe, Peter, just maybe embellish a little bit on that.

[Peter G. O'donnell:]

Thanks, Tom. Thanks very much for the question, Jeff. So if I start with the LTD line, our sales year-on-year are up 5%. And we do see price competition also in the LTD line. Our customers and brokers really value Unum's expertise and our focus. However, some of our competitors aren't as disciplined. And we do see a lot of competition at the large case. The big strategic change for us is through the last 12 months to 2 years, we've been looking at a new to market and getting new employee classes, and almost 50% of our sales in the second quarter are actually came from either first time buyers or people deepening penetration, bringing new class of employees. And that gives us momentum to be able to sort of get momentum behind the sales and not be so dependent on price in the switch business. On the group life side, where we are there is there's a bit of portfolio cleansing going on there, I would say, Jeff. So there are some schemes that we didn't like to look at. We were putting some large price increases through our group life book, double-digit plus. We expect that to continue for the next 6 to 12 months really and really some of our competitors, as you know, people get around and they chase volumes. They're not as interested in margin. And I think they'll experience some pain on that so we would expect that market to sort of move to a more rational level over that 2014 period, really.

[Operator:]

And we'll take our next question from Yaron Kinar with Deutsche Bank.

[Yaron Kinar:]

Just wanted to dig in yet again into the U.S. sales. And if I understand correctly, the 3 main drivers for the decline were ACA, the economy and increased competition. If I look sequentially, really, things like this quarter was the first quarter where you really saw a very significant drop, where I'm thinking ACA, that was kind of a headwind for the last 2 quarters as well. The economy has certainly been headwind for several quarters. So is it really competition that's changed so much?

[Thomas R. Watjen:]

And Mike, maybe you should take that because especially though when you do have fewer at-bats how much that can change people's competitive spirit.

[Michael Q. Simonds:]

Yes, thanks, absolutely. So yes, you actually have seen that with your clients in the market that are actively looking to evaluate different benefits providers. You see many more competitors that are more aggressive competition, and we're going to hold the line there. I think as you talked sequentially quarter-over-quarter, one thing that we've talked to, Kevin has spoken to, is the fact that in the large end of the market, we're actually towards -- or better suited to be able to sort through health care and move some things on the ancillary side. We've got a couple of good quarters and that's an opportunistic segment for us. So for the last few quarters, we've -- through our partnership with UnitedHealthcare, through our focus on a couple of targeted segments, we've had some good wins there that we've been able to bring clients on board at acceptable pricing levels. So that's covered on the disability side, where we've seen a little bit of a downward trend over the last couple of quarters. And when you see that, it's primarily ACA and economy-related. As we look forward, again, as Kevin said, I think as employers push through and get health care changes sorted, we're cautiously optimistic that we'll start to see improvements in our sales results.

[Yaron Kinar:]

Okay. And about that cautious optimism, so given the increased competition that we see in certainly almost any management team that we talked to these days is focused on U.S. group or voluntary supplemental. What gives you the confidence, I guess, that, that headwind of increased competition will not overcome the offsetting tailwind of -- at the release of ACA demand?

[Michael Q. Simonds:]

Yes, I mean that's a couple of things. One is I think the long-term trends are very positive for our business. I think we see strong need and actually increasing need for the products we've got. U.S. workers, 60% of which live paycheck to paycheck. We see increased exposure appearing as gaps, appearing health care plans as employers settle kind of DC-type approaches. I think health care is getting more standardized. As the Federal Government defined health care, more and more employers are picking standards of design. So if you want to differentiate with a perspective and current employees on the benefits front, increasingly, it's our lines of business that are going to make a difference. So I think those are long-term, very positive trends. And in fact, we've been focused on consumer-driven benefits here for the last 4, 5 years. It enabled us to get ahead of the curve whether that's offering design or whether it's 40-plus technology partners that are now forming the backbones of private exchanges, we feel like we've got a pretty good head start that as sort of the temporary distraction, we'll work through that as the economy begins to pick up a bit. I think that bodes quite well for us.

[Thomas R. Watjen:]

And if I could add, I think we feel very good about the quality of our operating and our stickiness of the -- our offering in the marketplace. We see repeatedly, I think, whether it's Mike's business, Peter's business or Randy's business, the things we really do are very competitive in the marketplace. You see that with persistency. You see that, as Peter said, with sales to knowing new customers. The one thing we, unfortunately, can't address is the fact that some competitors are still willing to price business at substantially below their cost of capital and we've all talked about returns throughout the discussion today. Our returns for our core businesses are in some cases, 2x, in some cases, 3x times the industry average actually. And we're not prepared to compromise those pieces. So again, the good news is, I think, our operating throughout all our businesses are very competitive. But again, as people compared to buy business, I think you've seen us as a management team unwilling to do that. And I think that's proven to be the right thing over the long term.

[Kevin P. McCarthy:]

Well I think Tom that was the last question, and I think let me just thank you, all, for taking the time to join us this morning, and this completes the second quarter of 2013 earnings call. Thank you very much.

[Operator:]

And that does conclude our conference. Thank you for your participation.