Unum Group (UNM) Q1 2013 Earnings Report, Transcript and Summary

Thomas White Thomas R. Watjen - Chief Executive Officer, President and Director Richard P. McKenney - Chief Financial Officer, Executive Vice President and Principal Accounting Officer Kevin P. McCarthy - Chief Operating Officer, Executive Vice President, Chief Executive Officer of Unum US and President of Unum US Randall C. Horn - Chief Executive Officer of Colonial Life, President of Colonial Life and Executive Vice President of Colonial Life

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division Suneet L. Kamath - UBS Investment Bank, Research Division Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division Christopher Giovanni - Goldman Sachs Group Inc., Research Division Erik James Bass - Citigroup Inc, Research Division John M. Nadel - Sterne Agee & Leach Inc., Research Division A. Mark Finkelstein - Evercore Partners Inc., Research Division Eric N. Berg - RBC Capital Markets, LLC, Research Division Yaron Kinar - Deutsche Bank AG, Research Division

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

Great. Thank you, Divonna. Good morning, everyone, and welcome to the First Quarter 2013 Earnings Conference Call for Unum. 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, 2012. Our SEC filings can be found on the Investors section of our website at unum.com. I'll remind you that 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. Participating in this morning's conference call are Tom Watjen, President and CEO; and Rick McKenney, Executive Vice President and CFO; and also, Kevin McCarthy, speaking for Unum US and Unum UK; and Randy Horn for Colonial Life. So now I'd like to turn the call over to Tom Watjen. Tom?

Thank you, Tom, and good morning, everybody. Our first quarter results were off to a good start to 2013. With year-over-year operating earnings per share growth of 9.6% and book value per share, excluding AOCI, increasing 11.9%. Let me touch on a few of my observations for the quarter. First, our operating performance again remains quite strong. We continue to generate solid underwriting results across most of our businesses resulting in a stable to lower benefit ratios for each of our major business segments. As a result, we again delivered strong profit margins across most of our business segments and an operating return on equity of 11.7% for the company and 14.1% for our ongoing operating businesses. Second, as it relates to revenue growth, it remains a difficult environment. And you saw that in our company-wide sales, which were down 5.2% for the quarter. Not to make excuses, but when you look more carefully at the results, you'll see that the decline is driven by 2 things, a significant year-over-year decline in U.K. group life sales and pressure on our small case U.S.-based business. The U.K. group life sales results should be no surprise as we have taken significant pricing actions in this product area. In the U.S., the general environment remains challenging, which has been compounded by the fact that many brokers and agents and employers are focused on the implementation of health care reform, thus, delaying the implementation of new workplace benefit programs. This headwind may be with us for much of 2003 -- 2013, but is no cause for us to change our disciplined growth strategy. We continue to feel that we are very well positioned in our markets. The third thing I'd point out is that we have continued to deliver very solid investment results and…

Great, thanks. As you can see from our press release yesterday afternoon, we reported net income of $212.6 million for the first quarter of 2013 or $0.79 per diluted common share compared to net income in the year-ago quarter of $213.9 million or $0.73 per diluted common share. Included in net income for the first quarter of 2013 are after-tax nonoperating retirement-related losses of $9.7 million and after-tax net realized gains of $6.7 million. Included in the first quarter of 2012 were after-tax nonoperating retirement-related losses of $7.6 million and after-tax net realized investment gains of $8.3 million. So excluding these items, after-tax operating income was $215.6 million for the quarter or $0.80 per diluted common share compared to $213.2 million or $0.73 per diluted common share in the year-ago quarter. Moving to an overview of our business segments. Operating income for Unum US segment increased 1.1% to $208.1 million in the first quarter with premium income increasing by 2.5%; a lower benefit ratio, 70.9% in the quarter, compared to 72.5% in the year-ago quarter; and a lower expense ratio, were off somewhat by higher amortization of deferred acquisition costs in the supplemental and voluntary business line due to higher level of policy terminations. Within the Unum US segment, operating income in the group disability line was $77.9 million compared to $74.7 million last year. Premium income increased 2% over last year due to sales growth and the impact of rate increases. The benefit ratio for this line was 84.3%, down from a year ago of 84.9%. This line includes a before tax gain of $4 million from the purchase and retirement of the debt associated with the Tailwind securitization. In the group life and AD&D line, operating income increased 10.5% to $57.9 million in the first quarter, benefiting from…

Thank you, Tom. This morning, I'll spend a moment on profit trends we saw in our business segments this quarter, including detail on our growth trends. Then we'll comment on the investor results and our capital position. First on operating results in the first quarter, Unum US operating earnings increased just over 1% with favorable risk experience across each of our major product lines. Focusing on risk results first and beginning with our group disability business, the benefit ratio continues to perform well at 84.3% for the first quarter of 2013, which compares favorably to the 84.9% in the year-ago quarter and 84.5% in the fourth quarter of 2012. The underlying experience this quarter was favorable, with stable overall claim incidents, continued strong claim recoveries and the ongoing benefit that we realized from the pricing discipline we show on new sales and renewals. Also recall that we reduced the new claim discount rate for Group Long-term Disability in the third quarter of 2012. This line of business continues to perform very well as we seek to balance growth but maintaining strong profit margins. The group life and AD&D line had a very strong first quarter as well. The benefit ratio improved in the quarter to 78.6% compared to 72% in the year-ago quarter, which led to earnings growth of over 10%. The improved risk results were driven by a favorable average claim size while claim incidence was slightly higher. And finally in Unum US, the Supplemental and Voluntary line produced $72 million, which is lower than the run rate we have seen. We saw a higher level of policy terminations in the voluntary benefits line than we have seen historically. This causes more DAC amortization, which was partially offset by reserve releases as these cases leave. As for the underlying…

Thanks, Rick. As we move to your questions, I'll close by reiterating my opening comment. We're pleased with our financial and operating results for the first quarter. As a result of our strong risk results, we again generated solid profitability and returns and positive cash flow at the company. While generating profitable top line growth remains challenging in today's environment, we are maintaining our disciplined growth strategy which has served us well in the past. Importantly, too, our balance sheet and capital position remain strong, which enables us to continue to supplement our operating performance with consistently returning capital to our shareholders through share repurchases and dividend increases. This completes our prepared remarks. And operator, let's move to the question-and-answer session.

[Operator Instructions] And we'll go first to Jeff Schuman with KBW. Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division: I wanted to drill in a little bit on some of the market dynamics, I guess, in the U.K. and the U.S.. In the U.K., I think you said the group life sales is down 75%, but persistency sort of hung in. So I guess, that might suggest maybe that the rate increases are maybe sticking up some of the renewals but things are pretty challenging, I guess, on the sales front. So I guess, the sales down 75%, very good to see you're disciplined but is there any -- do we see any hope that the market is going to start following you at some point?

Kevin, you want to touch on that?

Yes. I think the persistency does reflect that rate increases, so far at least, are sticking to a reasonable degree. I think that the decline in sales is primarily driven by 2 things. One, we discontinued sales of certain products within our group life portfolio that we deem to be just too unprofitable for us to continue to pursue. And we significantly ramped down our large case group life sales, where we saw significant profit deterioration during 2012. That's primarily what's driving down the sales comparison. Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. So you weren't necessarily losing head-to-head, you just weren't competing for as much business essentially.

Right. I think we're very competitive still even though we're moving rates up in the core market but I think we've, much like we did in the United States, backed away from the more volatile and more difficult profit picture of the large case market. Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division: But then once again, kind of get back to the key points, so you do see there's some hardening of the life rate across the market?

Yes, to some degree. I mean, we're certainly moving them up and other competitors are moving them up to some degree as well, although not to the rate or the extent that we are. Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, that's helpful. And then in the U.S., I was interested, I think the group sales being limited, I think you attributed to the uncertainty around reform and I guess the idea maybe is that business maybe isn't churning as much. But then, I guess, if that's true, I would have thought maybe that would have been a kind of a help to persistency. I think persistency was a little bit off there. So is there actually less market churn or what's going on there?

Persistency is off but not by very much. And when you take into account that is driven by the fact that we're moving rates up in the sort of mid- to upper-single digit range, I think we sort of expected that. Last year's persistency also was sort of incredibly high. I mean, maybe historically high over the last 7 or 8 years. So I think it's operating pretty much in the 88% to 89% kind of range or 87.5% to 89% range that we expected to operate at. And I think we're feeling quite good about our ability to place rate increases. But then in the marketplace, in terms of health care reform, most of the pressure, I think, is in the smaller end of the market and that shows up in our sales results. Our small case sales were down 19% but our mid-market sales were up 6% and our large case sales were up 18%, primarily driven by the vast majority of new sales to existing large case customers. And so I think -- and I think that the dynamics that we're talking about are reflected in other competitors' results as well. Small case market, I think, is a little bit sort of under the gun in terms of what are we going to do by January 2014 around health care reform, how are we going to work with exchanges. And I think that's driving activity levels down. And that's probably increasing some inertia in terms of movement of sales. Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division: This is pretty much a 2013 phenomenon that kind of has to get sorted out by the end of the year, is kind of what you think about it?

Yes, I would think about it that way, yes.

And we'll go next to Suneet Kamath with UBS.

So I wanted to start with the benefit ratios across your segments. I mean, if I just look year-over-year, it looks like pretty much everything is moving in the right direction. And we've had a couple of other companies report last night and I would say that things have been much more mixed on the underwriting side at some of those names. So I guess I'm trying to understand if what you're seeing is sustainable or did you just have a really good quarter and maybe things just start to revert a little bit as we move through the year.

Kevin, why don't you start with that one.

Yes. I think it's a mixed -- in answer to your question, Suneet. I think on group disability income, that was a particularly good quarter, sort of everything went well, submitted incidence are slightly down, paid incidence remained flat, actuals expected incidence was better than pricing assumptions, STD incidence was moving its way down. Hopefully that continues. But I think the loss ratio, we've always said, would be sort of in the 84% to 85% kind of range. And there might be little movements here and there inside of that range, but we're pretty happy with the quarter, that's for sure. In group life, we had favorable mortality and favorable severity and that helped us out and moved that loss ratio down a bit. But again, that loss ratio tends to be in that 70% to 72% range. And it's sort of at the lower end of the range but above we expect it to be. And then in voluntary, the loss ratio was lower than we would normally expect. We'd expect it to be closer to the 50% to 52% range, but that was primarily driven by the, I think, the life reserve releases as result of the large case terminations of voluntary.

Okay. And then are you expecting, on the voluntary, I mean, as you peer in the second quarter, this issue around large terminations, I mean, is that going to persist, do you think?

I think we'll get some of that throughout the year. We're trying to be more disciplined in our underwriting, particularly around large accounts that have high employee turnover rates and low re-enrollment rates, and where profitability starts to decline and we can't get it back sort of on the volume side, we can't get it back on the repricing side either, so we're just not interested in continuing to pursue those accounts. The majority of that, I think, would be more focused in the first quarter in terms of renewal activity than throughout the rest of the year. But you'll see some continued effect of that throughout the year, I think, in voluntary as we work our way through that. And I also think, on the voluntary sales side, the voluntary market is going to experience some of that same health care reform pressure as companies -- I mean, employers and voluntary carriers try to figure out what exactly is the nature of the voluntary wrap-around sales is going to work with a yet undefined health insurance exchange program. So I think in both cases, you're going to see that kind of pressure.

Maybe, Kevin, I could add to -- I think if you look at both our Unum US performance, as well as the Colonial performance from a persistency point of view, I think, historically, we've always had a much higher persistency than the marketplace. And I don't think we see any changes in that as we look forward.

Right. I would suspect that the persistency will eventually revert back to the median, close to the 79%, 80% range as the year goes forward.

Got it. And then a question for Rick on the long-term care Closed Block. So good to see that interest-adjusted loss ratio kind of came -- stayed below 90%. I think it's in line with what you guys built into your reserve build at the end of 2011. I guess my question is are we yet seeing the benefit in terms of the price increases in the denominator of that calculation? I know in the past, Kevin's talked about being x percent of the ways through the price increases but I think there's also been this commentary around it's going to take a while for that premium to actually emerge through the income statement. So I just want to get a sense of where we are on that.

Good. I think you characterized it well. I think we are tracking that process to our expectations and working with our regulators to go through that process. So to date, that's working reasonably well. But you're right, it does take some time for that to come through the premium line, through implementation and the different things that have to happen there. So we haven't really felt that impact yet. And in fact, some of the benefit we see is from previous price increases going back several years. So this is a longer-term trajectory that we have to work through, but I think that, in terms of actions that we can take, we're doing reasonably well and tracking to our expectations.

We'll go next to Mark Hughes with SunTrust.

In Colonial Life, what is the outlook for recruiting and the overall size of the sales force in 2013?

Randy, you want to touch on that? And maybe even, as you do, to maybe talk about just some of the strategy adjustments we're making I think in terms of how to position the sales force.

You bet, I'll do that. We have ratcheted down our recruiting, Mark, here in the first quarter, that was intentional. We were dropping it from roughly around 1,500 agents recruited in the first quarter a year ago down to -- it was in the 900 to 1,000 range. We think that's a much better balance of quantity and quality. We're very focused on training these new reps effectively and getting the best possible return out of that effort. So I really see the size of our sales force stabilizing in that probably 11,000 to 12,000 range by year-end. Don't see any dramatic decreases but won't see it significantly increasing either. But I think, well, really our strategy is around getting better return, higher levels of productivity per rep. And I think that's going to serve us well over time.

Okay. How about on the U.S. Group business, you said there's some delay-related health care reform. How about competition? You've obviously taken some pricing actions? Do you think you're ahead of the market now in that and it may take some time for the market to catch up with you?

Kevin?

Yes. Mark, I mean, I think we've been consistent over the last several years in moving prices up. I think a number of competitors, in the recent 12 to 18 months, have started to move prices up as well in response to some of their deteriorating loss ratios. But I think we were certainly ahead of the game. And I think when you look at industry pricing statistics, we still tend to be sort of priced somewhat higher than the majority of our competitors in the core market. I think every carrier is faced with the same low interest rate environment and ought to be moving their rates up to some degree. Everyone's, I think, faced some deterioration in loss ratio, except for us pretty much, and so ought to be taking that kind of action. And everyone's got the same sort of effect of an aging population with the expectation at least of claims sort of following the aging of the population and if you can continue to price for that, then you can stabilize your loss ratios and continue to generate your proved return. So competitively, I think, the market is, I think, a little bit harder than it was maybe 2 years ago, well, but I still think we're ahead of the market on that.

And, Mark, if I could add to that, too. I think, as you know, you have to think about every carrier has a different starting point as they think about repricing. And I think, Kevin, in Unum US, we have about a 13% ROE for the group disability line of business. So therefore, when we talk about price adjustments, they're really to reflect primarily the increase, or the lower discount rates that we have and the lower interest rate environment. I'm not sure if every carrier is finding -- find themselves in that same situation as they talk about repricing strategy.

Right. I think if you looked at the industry margins, they're considerably lower than the margins that we're throwing off.

We'll go next to Jimmy Bhullar with JPMorgan. Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division: So first, a question on buybacks. I think you did $95 million this quarter. That's lower than what you've done in the last few quarters. So is there any reason for that? And how do you expect buybacks to ramp-up as the year goes on? And then on the sales, you discussed this a little bit in the past few questions, but how much of the sales weakness is because of just a disruption on health care reform or is part of it that, there are still competitors out there that are somewhat aggressive on pricing?

Rich, you want to take the first one?

Sure. When you look at our buybacks of $95 million in the first quarter, one, we're very happy with that. We think relative to our market cap, we still continue to return a significant amount of capital to our shareholders. When you look at our trend line, what we've done in various quarters, we've been in and out of the market and so I wouldn't read anything into a $95 million a quarter other than that how we get into the market. But the bottom line is we still look at $500 million for the year. We think that's consistent with our capital generation model. And that, in conjunction with dividends, we think is a very effective way to return capital to our shareholders.

Kevin, want to pick up on the sales question?

Jimmy, it's hard to quantify how much of it is from health care reform. I expect... Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division: Just not -- just in general terms, is that more or is it that you're like in some parts of the market, you're losing share or losing cases to other companies?

Yes, activity's down about 10% year-over-year. So you'd expect that, the stable closing ratios to sort of translate in that similar kind of pressure on your sales. There certainly are some aggressive competitors out there. I don't think we're winning or losing much more than we have been in the past. But always in this marketplace, regardless of how many carriers are acting some of the prices up, there are always several carriers that are acting to take advantage of that and trying to drive their sales up. And you just got to look at sales numbers to see that. Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division: And then in the U.K. business, what was the benefit? And then what would the results have looked like had you not had the reinsurance contract in place? And what are your intentions as to potentially renew this for next year?

Okay. Certainly, when you look at the reinsurance contract, in the first quarter, I'd say it's kind of a wash so the underlying results in the quarter were actually pretty good in our group life line, so all else being equal, I think we may have a lost a little bit by having that reinsurance but I think we still are very happy that we're in that structure going throughout the year. As we mentioned, we did have a little bit of carryover from previous year claims that came through that weren't covered, so it elevated the loss ratio a little bit. But that's the structure that we like relative to our business and the size of our business and the volatility that we want to see. So I wouldn't speculate in terms of how we take that out over time, but certainly still happy it's in place here in the first quarter.

And we'll go next to Chris Giovanni with Goldman Sachs.

So I just wanted to touch on the UK and see how we should be thinking about earnings once we sort of get through the pricing changes. So -- and the reason I asked is the reinsurance transactions appear to be doing what you've really targeted, which is reduce some of that earnings volatility we've been seeing the past couple of years. But presumably, it's going to give up some of the upside so when profitability improves. So versus sort of the low $30-million-or-so you're trending versus maybe what we saw a couple of years ago, which was consistently in the $50-million-or-so of quarterly range there. I mean, I guess, where should we kind of end up here once you get through all your pricing actions?

It's difficult to talk about in terms of where we end up much longer term when we talk about this year or maybe as we get out into next year. This year, we expect the business to be flat relative to year-ago period. So as we take through price, as we take through driving stability, and as Kevin mentioned, these lines that we are not continuing to write in that business, we'll see 2014 -- or '13 to be relatively flat. As we get past that period of time, and I'm not sure exactly where that inflection point will be, we'll start to see those price increases come through in the overall profitability of the business. So as we get out to 2014, we expect to see that trend line starting to increase but I don't want to leave the expectation that we'll get back to those levels that we were at several years ago. It will be one that's slowly increasing beyond 2013 as prices take hold and growth takes hold in that marketplace.

Okay. And then your guidance, I guess the operating earnings piece you kind of pointed to down 2% to 5%. And then that would be offset by 6% to 8% of accretion from buybacks. So just trying to think how we should be thinking about the guidance given, I guess, the more measured pace of buybacks in 1Q. But then less, I guess, accretion and reduction of share counts based on the 30% increase in the share price here year-to-date. So should we be thinking about towards the lower end of that range, just given less accretion from buybacks, or am I missing something in terms of the moving parts?

Rick?

I think those are all the right moving parts when you look at it, Chris. But I think when we take all those different pieces together, I think we still expect to be squarely in that range. So as we buy back over the course of the year, and as I mentioned, a little lighter this quarter but we expect to catch up on a reasonably quick pace, we still expect the benefits coming through on that front. And we will buy back a little bit less shares. The share price sits at these levels but nothing that will materially alter what we see over the course of 2013.

Okay. And if I can just sneak one more quick one and just in terms of the sales mix for Kevin. Obviously, you'd wanted to see -- you'd want the mix to be better on the core piece but, obviously, you've pointed to a number of the competitive dynamics there. But I just want to try and get arms around how we get comfortable that the larger end of the market that you have -- what -- how do you basically assess the business that you're putting on to make sure we don't see loss pressures down the road from maybe greater share within a more volatile segment of your group business?

Yes. As we've always talked about our large case business, we're pretty disciplined about how we go at it. We're opportunistic when we see the chance to get the price we want. And we tend to have off quarters when we can't get the prices we want. This quarter particularly was driven largely by new coverages added to existing accounts. So we're already familiar with the profitability of those accounts and we're pricing the new lines of coverage consistent with what we already got on the books. And so to the extent that they were already profitable customers, we're adding lines of business. If they weren't already profitable customers, we probably wouldn't be adding those lines of business unless we're adding them at a higher pricing than we'd have in the existing lines. So actually I'd view the quarter as quite an opportunistic and successful quarter in that regard.

And we'll go next to Erik Bass with Citigroup.

Just one on kind of the health care reform. I'm assuming that, that is also a pressure for Colonial. But could you talk about maybe what you see as the potential impact on sales and demand for voluntary products once health care reform is implemented? And do you see this as a potential catalyst or, vice versa, a challenge for sales?

Actually, Randy, why don't you get started on that because again, I think, you've, as Eric mentioned, you have a window into that with your business as well. And then I'll maybe ask Kevin to pick up from that.

Yes, absolutely. Yes, certainly, some choppiness, as Tom and Rick and others, Kevin, have talked about in the current timeframe. But we're doing a lot of work in terms of training our field force who are providing guidance for employers regarding the overview of the health care reform requirements, we're providing recommendations on how employers need to prepare and respond, doing a lot of benefit counselor, certification type training in terms of public exchange requirements in their respective states. So you pull all that together, once we get through this implementation period, help employers get over the hurdle of just understanding the legislation or what the requirements are, we really see a very robust opportunity in terms of product solutions, benefit communication needs, that type of things. So yes, some challenges in the short-term but a lot of opportunity, a lot of need for what we provide and just a lot of opportunity for the BB market in the post health care reform world.

Kevin, you want to add to that, too, especially, again I think we have some company-wide initiatives that we should -- we actually developed a strategy which I think is a little different than some other companies around making sure we can connect with some of those new emerging distribution channels within health care reform.

All right. Randy covered it really well. I would say that I agree with Randy, I think the opportunity -- the situation right now is sort of choppy because of a little bit of confusion and the need for education and the need to understand how exchanges are going to work and there is not going to be just one size, there's going to be many sizes and differences in exchanges depending on federal versus state versus private. In that context, I think there's a real opportunity to design wraparound products that fit with those exchanges. We're going to be introducing a new group of hospital indemnity product during the course of 2013, for example. I think there's a real opportunity, as Randy said, for new enrollment support and benefit communication support. And Unum US, in working with Colonial, we're now in the process of connecting on a plug-and-play basis to over 40 different platforms out there for benefit administration and health exchange administration and enrollment management. So I'm really optimistic about the future for voluntary given health care reform.

Got you. And is it right to think about you see the opportunity primarily in sort of supplemental products and kind of gap fillers that supplement what major medical would do?

Yes. I would say the greater opportunity will be there. I think I don't see much disruption effect longer-term on the traditional group insurance marketplace. I think that will continue to sort of operate the way it has. Although you'll see I think a steady shift of employer-paid to employee-paid products over time, much as what we've already experienced. But the big growth opportunity I think is in voluntary.

Okay. And just one quick follow-up on voluntary as well. Are you seeing any changes in the number of people that are electing voluntary benefits that, I mean, you could possibly attribute to the economy? Or, I guess, just generally, has there been any change you've seen in election rates over the past few years?

I'll answer for -- maybe Randy can supplement but participation rates have been very steady for us during the course of 2011, 2012. And actually in the fourth quarter of 2012, we had quite high participation rates in our voluntary enrollment, so we haven't seen any deterioration in that at all.

Yes. And, Eric, on our side of it, the same story. We've seen very steady participation rates. In the first quarter, saw a little bit of pressure in terms of the sales premium per application. I think there was some pressure there just with the general economy. The payroll tax increase had a little bit of an impact on things. But in terms of overall participation, very, very stable. It's even up a little bit.

We'll go next to John Nadel with Sterne Agee. John M. Nadel - Sterne Agee & Leach Inc., Research Division: Two maybe different -- I think we've sort of beat sales and that sort of stuff to death at this point. I'm interested in the pace of the Closed Block disability premiums declining? That pace of decline has really slowed down versus what we've seen in prior years. And probably, at least I think it's slowed down versus what you guys were expecting to see. Any explanation there? Is that something that's just an anomaly here?

Rick, you want to touch on that?

Yes, certainly. I'll give it a try here, John. In terms of closed disability block slowdown, what you're going to see at that time, and we're talking about a pretty long timeframe, so nothing you'd see in any particular quarter, is as people go through that process and stay on claim for a longer term, you will see a little bit of slowing but I'd have to go back and look. I wouldn't expect you to see anything dramatic here over the last several years. I believe you will see it slow down as you look out over the course of 5 years to a decade. So we'll have to go back and look at that, John, and get back to you on at the same point. There shouldn't be anything particular that will cause any quick deterioration in the runoff. We'd expect them to be pretty steady.

So Rick, if I can add to that. I think as everyone knows, the Closed Block includes the IDI business, as well as the long term care, and each different characteristics from a premium point of view. The IDI business was continuing to, and has continued to decline. At the same time, the long term care business is actually continuing to grow. So you've got 2 sort of offsetting activities actually within that block. John M. Nadel - Sterne Agee & Leach Inc., Research Division: Okay. And maybe that's just what I'm missing is focusing on one versus the other. The other question I have for you is just, a lot of moving parts, right? I mean -- and rates and new money rates are lower now than they were, let's say, most of last year. You're getting some pricing approvals on the long term care Closed Block business. I'm wondering if you can give us a sense for, with all the variable inputs here, how we ought to think about the risk of some sort of reserve strengthening later this year? I know your 10-K indicated that there was potential for as much as about a 7% reserve strengthening based on a lot of different factors. As we get through 3 or 4 roughly months of this year, how is the combination of all those factors trending?

Surely. John, if I were to take that and talk about where the reserves are relative, they really hasn't changed from what we've been talking about over the course of the last year. The pressure that we're seeing on interest rates is one that will take place over a period of time. We talked just over a year ago about a 3 to 5 year time horizon. And I think we've consistently said we're probably on the shorter end of that given where rates have gone, back to that initial look. But that still take us out a couple of years from now. With regards to other things that we're seeing and the morbidity, we've talked about our range of loss ratios in the 85% to 90% range. And as you've seen this quarter and last quarter, we're in that range. So its a dynamic business but I wouldn't give you anymore there that would say that there's something imminent in the course of 2013 different than anything we've been talking to you about over the course of the last year.

And we'll go next to Mark Finkelstein with Evercore Partners.

Sorry to do this. Back to health care reform and the impact on small case. We haven't really seen any impact, at least noticeably, on persistency. Do you have a view on whether there should be any persistency impacts?

Kevin?

I think so far, it's probably positive generally speaking in the sense that activity levels are down and therefore, take over account possibilities are down. And I think that's probably even a help maybe to persistency in general as brokers and employers focused their attention on health care. They're not necessarily focusing on moving their ancillary lines of coverage. So it's probably been a marginal benefit. Down the road, it's hard to tell, I think you might see, as I said earlier, some shift down the road as health care reform gets put in place from employer-paid products to employee-paid products and that may move lines of coverage from what we call our group lines to our voluntary lines even though we're retaining the customers so you may see some voluntary growth offset a little bit by some group persistency pressure in the industry in general. But right now, I'd say it's probably a net positive.

Okay, interesting. And then I guess just on the sales side, does it get worse before it gets better?

No, I don't think so. I mean, I think it probably sort of stays as it is at the moment. It depends a little bit of course on competitive pricing dynamics too. And it depends on how much emerges. There's going to be a lot of activities during the second quarter from HHS and all those around health insurance exchange regulations getting sorted out. And as that happens, the pressure on brokers to communicate will increase. Hopefully, by the time we get into the third and fourth quarter, brokers will be starting to pay attention to understanding what's going to happen with their client base and what kind of health insurance coverage they're going to put in place and what exchange. And then they'll start to take a look at what they want to do with the group coverages. So I'd expect that this phenomenon might last for the second and into the third quarter, but hopefully, hopefully reverse itself in the fourth quarter.

Okay. And then just on the voluntary side, if you've already addressed this, but what is the follow-on effect beyond the first quarter of the surrenders? And is there a way of framing out kind of an earnings impact normalizing for all the kind of the one-timers, just kind of an ongoing impact?

Rick, you want to touch on that?

Yes. The ongoing impact that you'd see, Mark, of that is most -- basically like any other premium loss. I think it was just a little bit accelerated in the quarter and that's why you'd see that onetime noise coming through as you wrote off the deck and as you wrote off that. So we'll use the margin on those cases that are left, and we'll replenish it with the new 2 cases that we bring on. So I don't think there's anything special going on there between -- except for just general block migration that you'll see.

Okay. And then just, I guess, continuation beyond this quarter on that activity?

I probably wouldn't look at that activity relative to I'd look at the overall premium size and the good margins that we see coming through on that. So, yes, there will be a little bit less margin that we would have anticipated but we want to replenish that with new sales and good margins as well.

And we'll go next to Eric Berg with RBC Capital Markets.

So on the voluntary area, what is causing this attrition of business? Can we start there? Was it, again, was it a pricing and competitiveness issue? Or what exactly happened that led to this large loss of premium?

Kevin, why don't you start on the strategy side a bit because I think that's really where we're...

I mean, just basically for the most part comes down to being disciplined about where we want to play in the voluntary market. And we had several large accounts that we were -- that had high employee turnover rates and if we weren't going to get the necessary re-enrollment premium to bring the cases back to profitability. So it's not very different than the process that we've gone through on the group business. We're just -- we're focused on managing our in-force business effectively and making sure that we're focusing our in-force management and our sales management toward where we think we can get the best participation level, the longest sustainable relationship with the client and the most lines of coverage to deepen that relationship with the client. So strategically, that's where we're focused on.

And, again, Kevin, I think when you start with the fact that this reporting segment had a 12%, 13% ROE. We're not -- when you talk about going through some of those initiatives, they're not really designed to deal with the real fundamental issue. This is more strategic about positioning in the marketplace and with certain customers.

And basically making sure that we can maintain and even grow those margins by having the right mix of business.

Absolutely.

My second question relates to long term care. And I think you've touched on this in detail so I'm just looking for modestly more perspective. My question is this. When you originally, I think it was end of 2011, decided to exit to the individual long term care business and took your large reserve increase, you cited the fact, I believe, that your data were not statistically credible because of the small number of individuals on the claims. And you referenced a Society of Actuaries study that came out the prior summer that it provided a basis for the reserve charge that you took. Where do things stand now? And by that, I mean, what percentage of your policyholders are on claim? And in particular, would it still be the case that the data is not statistically credible, Unum's data alone is not statistically credible?

Yes, Eric, I think the short answer to that is that it's still the same. The statistical credibility of our data is quite small. We're a small piece of the market and I think even the market is still working into statistical reliability so that has not changed at all. And that won't change for many, many years into the future, so we will look to the overall industry, Society of Actuaries, to give us some guidance in terms of how the world is shaping up on that front but don't expect that, that will take days for us in the near term or even in the medium to long term.

I think out of respect to the fact, we know there's another call coming up beyond this, we'll just -- we'll limit it to one more question please.

We'll go next to Yaron Kinar with Deutsche Bank.

Maybe to follow up on Chris's question earlier about the growth in the large case business. If I understand correctly, the growth is also, and even in the core business, it's in the larger case businesses. So should we expect some additional volatility going forward through that in underwriting results?

Yaron, no, I don't think so. I mean, the large case business, the national client group business as they said a vast, vast majority of that was sales of new lines of coverage and expansions of benefit coverages to existing clients. So I wouldn't expect any volatility, in fact, from that. The growth that we're seeing in the mid-market, which I'll characterize as sort of the 100 to 2,000 life or so kind of marketplace, that's strategic for us. We want to focus our sales authorization where we can get the best sort of productivity return for the sales ever given the margins that we have in our business. And so we tend to try to focus our efforts more in that sort of over 100 life marketplace. And I wouldn't expect that to have any negative effect on the risk side of the equation.

Okay. And maybe one more. Listening to the call today and your answers especially around health care reform, sounds like if everything else holds kind of the status quo holds employment levels, interest rate levels and so on but health care reform goes through and there's this release of pent-up demand, sounds like there should be potential for both revenue growth and earnings growth next year from that alone. Is that a fair way of thinking of it?

Kevin, why don't you think about it from the sales point of view, and just the market acceptance point of view?

As I said earlier, I do think that when health care reform gets sorted out, the relationships that we are building with exchanges and benefit administrators, the products that we're designing to wrap around health care reform ought to generate upward trend, I think, in the growth curve for our voluntary lines of business. And I think that's -- I mean, the marketplace is confused right now. And in a state of confusion, it's sort of disrupted and there's lots of scrambling around and there's a lot of inertia. I think once health care reform gets put in place, I think there'll be brokers that will move more aggressively into voluntary. I think companies like ours that are well positioned on the enrollment communications and product portfolio side will be well positioned for growth.

And I think many have heard me talk about this before but I think there remains a significant need for the things that we sell actually. And that very basic need for that protection hasn't changed with health care reform. I think what we're seeing at both with Unum US and with Colonial is it's obviously distracting brokers, agents and those that are involved in making the buying decisions. But that very basic need still exists. And I think it's becoming more clear to the market to public policymakers and others to that effect. And so that's why I think if you could sense some optimism beyond some of the disruption we're going through, it's because the basic need is still very much there. Well, thank you, all. We know it's certainly -- as I said before, there's been a number of companies that have recently reported which creates challenges for all of you. So we thank all of you for taking the time to join us this morning. And this will complete our first quarter 2013 earnings call.

That does conclude today's conference. Thank you for your participation.