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Executives

Thomas White

Thomas R. Watjen - Chief Executive Officer, President and Director

Richard P. McKenney - Chief Financial Officer, Executive Vice President and Principal Accounting Officer

John F. McGarry - Executive Vice President, Chief Executive Officer of Unum UK and President of Unum UK

Randall C. Horn - Executive Vice President, President and Chief Executive Officer of Colonial Life and Colonial life & Accident Insurance Company

Kevin P. McCarthy - Chief Operating Officer, Executive Vice President, President of Unum Us and Chief Executive Officer of Unum Us

Analysts

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

Suneet L. Kamath - UBS Investment Bank, Research Division

Edward A. Spehar - BofA Merrill Lynch, Research Division

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Ryan Krueger - Dowling & Partners Securities, LLC

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Unum Group (UNM) Q2 2012 Earnings Call August 2, 2012 10:00 AM ET

Operator

Good day and welcome to the Unum Group's Second Quarter 2012 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead, sir.

Thomas White

Great. Thank you, operator. Good morning, everyone, and welcome to the Second Quarter 2012 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 the results to differ appears in our filings with the SEC and are also located in the section titled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors on our annual report on Form 10-K for the fiscal year ended December 31, 2011, as well as our subsequently filed Form 10-Q. Our SEC filings can be found in the Investors section of our website at www.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 also in the Investors section. Participating in this morning's conference call are Tom Watjen, our President and CEO; and Rick McKenney, Executive Vice President and CFO; and also the presidents of our 3 business segments, Kevin McCarthy for Unum US; Randy Horn for Colonial Life; and Jack McGarry for Unum UK.

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

Thomas R. Watjen

Thank you, Tom, and good morning. As you saw from our announcement last evening, operating earnings per share grew by 3.9% this quarter and despite the headwinds, I'm pleased with the performance of most of our businesses.

Let me highlight a few points. First, Unum US and Colonial continued to generate solid results, striking a good balance between growing the businesses while maintaining strong, predictable profitability. The Unum US premium grew 4% as we continued to see strong sales growth, especially in our core markets and voluntary benefit lines and persistency was solid across most of our product lines. When combined with a stable benefit ratio, this business continues to generate a consistent ROE of between 13% and 14%. At Colonial, premium grew at about 5% this quarter. And while sales were relatively flat year-over-year, the margins in this business continue to hold up quite well, and the result is that this businesses continues to generate a consistent return on equity of between 16% and 17%. You'll see that the earnings for this business are down slightly year-over-year and this is due to extraordinary high investment income last year and not a weakening the underlying business.

Next, with all that said I am generally pleased with our operating performance but more exceptionally with our Unum UK business. While it remains solidly profitable and generated a return on equity around 12% this quarter, the level of profitability and the volatility of our results in this business are below our expectations. While this is our smallest business, it is a business and marketplace we like a great deal and I am confident that we can, over time, improve the performance of this business through pricing actions, rebalancing our mix of business and more consistent operating performance, and Rick will touch on that further in his remarks.

We you'll also -- you will see too the results for the quarter in our Closed Block segment improve somewhat over our first quarter results. That was the case for both our Individual Disability business as well as our Long-term Care business which, as you may recall, was added to our Closed Block segment in the fourth quarter of last year. New claim incidence in Long-term Care returned to more normal levels this quarter from the spike we saw in the first quarter. We said at the time that it would take a few quarters for the Long-term Care block to settle down and that seems to have been the case. That block will continue to be a challenge though, and Tom and Rick will both touch on this further in their remarks.

Now turning to our investment results. This past quarter was another strong quarter despite what obviously remains a very challenging investment environment. Today's extremely low rates will continue to pressure our investment income results, but we are working to mitigate this impact by implementing rate increases on new sales and renewals. While interest rate pressure will likely persist for some time, our credit quality remains strong and we are not going to deviate from the disciplined investment strategy which has served us so well through these difficult financial and economic times. We will sacrifice yield as need be to maintain a solid high-quality investment portfolio.

And lastly our capital position remains in very good shape with our risk-based capital level at 404%, above our target range of 375% to 400% that for the year, and all-in company cash was at $564 million. We continue to buy back stock repurchasing around $125 million this quarter, which brings our total repurchases over the past year to $550 million. You saw that our board approved a new share repurchase authorization and Rick will touch on that in his comments. I might add that in addition to repurchasing stock, dividend actions remain a part of our playbook as evidenced by the 24% dividend increase we announced in May, the fourth consecutive year in which we have increased our dividend.

So in summary, I continue to feel good about our position. Our overall operating trends are solid; our business unit returns are well above industry averages; our investment portfolio remains in excellent shape; and our capital position exceeds our long-term targets, providing us with significant financial flexibility. And looking ahead we expect cash flow to remain healthy allowing us to continue to return capital to our shareholders through share repurchases and dividend increases, something I continue to believe has great value in these unsettling times. Given the weakness we have seen primarily in our U.K. business, we are adjusting the outlook we provided last year at the Investor Day meeting. We now believe that it will be slightly below the target range of 6% to 12% growth in operating earnings per share and Rick will touch on that more in just a moment.

Now I'll turn things back over to Tom for an overview of our operating results. Tom?

Thomas White

Great. Thank you, Tom. As you can see from our press release yesterday, we reported net income of $216.4 million for the second quarter of 2012 or $0.76 per diluted common share compared to net income in the year-ago quarter of $227.6 million or $0.74 per diluted common share. Included in net income for the second quarter of 2012 are after-tax, nonoperating, retirement-related losses of $7.5 million and a net realized investment loss of $1.4 million. Included in last year's second quarter are nonoperating, retirement-related losses of $5.2 million and a realized investment loss of $2.2 million. So excluding these items, after-tax operating income was $225.3 million this quarter, or $0.79 per diluted common share compared to $235 million, or $0.76 per diluted common share in the year-ago quarter.

Turning to business segments, operating income for Unum US segment increased 3.5% to $212.7 million in the second quarter, with premium income increasing by 4.2% and both the expense ratio and benefit ratio showing improvements relative to the year-ago quarter. Operating income in the Unum US Group Disability line was $70.4 million dollars in the second quarter compared to $78.7 million last year. While premium income increased 1.7% over last year due to favorable sales and persistency trends, total revenue did decline fractionally or by 0.2% as net investment income declined 7.5% due to a lower level of miscellaneous investment income, lower assets allocated to this line and a slight drop in the investment yield. The benefit ratio was 84.7% in the second quarter, up slightly from the year ago 84.4%, but down slightly from the first quarter of 84.9%.

In the Group Life and AD&D line, operating income increased 10.2% to $57.3 million in the second quarter benefiting from an increase of 7.2% in premium income and higher net investment income due to a higher level of miscellaneous net investment income. And this offset an increase in the benefit ratio to 71.9% from 70.3% in the year-ago quarter. In the Supplemental and Voluntary line, second quarter income increased 13.5% to $85 million. The year-over-year improvement was primarily driven by solid growth in premium income which increased 5.7%, as well as favorable risk experience.

Moving to Unum U.K., operating income in this segment declined to GBP 19.1 million from GBP 34 million in the year-ago quarter. The benefit ratio increased to 85.4% in the second quarter from 69.8% in the year-ago quarter, while premium income in local currency increased 1.5%. Results in both the Group Disability and Group Life's business lines were below year-ago levels.

Concluding our core operations, Colonial Life reported a decline in operating income up 6% this quarter to 67.6 million. Premium income increased by 5.3%, which is generally consistent with the rate of premium growth we've seen at Colonial Life over the last several quarters. In addition, the benefit ratio of 52.5% is in line with our expectations for this business segment.

The results of the Closed Block segment showed a decline in operating income to $25.7 million from $30.4 million in the year-ago quarter with a strong improvement from the first quarter operating income of $15.4 million. Premium income declined by 1.4% due to the ongoing wind down of the Individual Disability Block. For the Corporate segment, we reported an operating loss of $25.9 million in the second quarter compared to a loss of $17 million in the second quarter last year. Net investment income is lower due to lower asset levels, a lower portion of assets invested at long-term interest rates and a decrease in investment income attributable to tax credit partnerships. The interest in debt expense was stable at $32.2 million in the second quarter compared to $32.3 million in the year-ago quarter. And finally, the tax rate in the second quarter is lower this quarter due primarily to the release of an $11 million tax liability related to unrecognized tax benefits.

So now, I'll turn the call over to Rick McKenney for further analysis. Rick?

Richard P. McKenney

Great, thank you, Tom. This morning I'll cover the margin trends we experienced in our business segments this quarter, a view on our growth trends and we'll also provide an update on our investment results and capital position and outlook for the second half of the year.

First, on our operating results in the second quarter, I'll start with Unum US. It was another very good quarter for the Unum US segment, with operating earnings growth of 3.5% and generally solid risk experience. Sales growth and persistency continued their positive trends as well. Starting on risk results for Group Disability, the benefit ratio was in line with the average of the past 2 years at 84.7% in second quarter. This quarter compares to the first quarter ratio of 84.9% and 84.4% in the year-ago quarter. Submitted new claim incidence trends for long-term disability were slightly higher, but with an average smaller claim size and higher claim recoveries, the financial impact was neutralized.

These favorable trends in LTD continue to be offset by somewhat weaker results in our short-term disability claim experience. We again saw higher paid incidence rates and higher average weekly indemnities. We believe the actions we are taking with pricing will firm up these results in STD over time. Importantly, we have not seen these trends in short-term disability claims trending through to our long-term disability results.

On the investment side, the interest reserve margin for this line declined 91 basis points -- 90 to 91 basis points this quarter from 97 basis points in the previous quarter. And we expect this margin to continue to gradually decline over the next several quarters given today's extremely low new money yields. Given the environment, it's also likely that we will work in reductions to our new claim discount rate like we did in the third quarter of last year. We'll balance this against a very healthy margin that we built up over the past several years on our inforce block and our ability to adjust pricing as business renews. Overall, we remain very pleased with our Unum US Group Disability results and the strong, consistent profitability that this business line continues to generate.

The Group Life and AD&D line was a very strong earnings contributor this quarter at $57.3 million, up 10%. Premium income increased by 7% and net investment income benefited somewhat from a higher miscellaneous net investment income this quarter, which together produced revenue growth of almost 8%. The benefit ratio was 72% in the second quarter, consistent with the first quarter, but up from a year ago level of 70%. Due to higher average claim size, which was somewhat offset by lower submitted claim incidence. The Supplemental and Voluntary line within Unum US produced its highest quarterly earnings this quarter with earnings of $85 million, an increase of 13.5% from last year's second quarter. Premium growth this quarter was 5.7% driven by almost 9% growth in the voluntary benefits line.

Risk experience was also very good with a benefit ratio of 49%. In the Individual Disability recently issued line, we saw a stable risk experience with lower paid claim incidence rates and higher claim recoveries. In the voluntary benefits line, we experienced lower claims and a lower average claim size for the voluntary disability line. The Supplemental and Voluntary line remains an attractive growth opportunity for our company, as well as a significant source of earnings.

Turning to the U.K., our results were weaker than we expected with operating earnings declining to GBP 19 million with unfavorable risk experience in both the Group Disability and Group Life lines. For Group Disability, the unfavorable risk experience was driven by a combination of higher average claim size and a lower average size of claims recovered -- claim recoveries. New claim incidence trends were generally flat but we did experience a lower level of declines. Group Life experience was driven by both higher volumes and average size of claims. Clearly these results are well below what we believe this business segment can generate and what it has historically generated. Again in this quarter, we saw different types of volatility which added to the challenge. But there are underlying pricing challenges we have seen in recent years that we need to address. We've talked about our pricing on the Group Disability side in last year and we continue to take price to return to profitability to the levels we've seen. The Group Life business has been more challenged in most recent quarters. It can inherently be more volatile given the size of the policies we write. But to restore the baseline profitability, we have come to expect it comes back to raising prices.

Overall, our outlook for the U.K. remains positive, but we do have work to do over the next several quarters and years to restore ROEs back to the 20% level from our current level of 12%. In the near-term, we expect quarterly earnings targeting a range of GBP 20 million to GBP 25 million, but we may continue to see volatility outside those bounds as we work to improve performance and contain this volatility.

Moving to Colonial Life, this segment produced another solid quarter. Results were lower than last year which benefited from unusually high miscellaneous and investment income but in line with our expectations. The loss ratio was slightly elevated in this year's second quarter, but they also are in the range of expectations. This is a very solid result that produced a 16.5% ROE for this quarter. Concluding my comments on margins, we're pleased to see the results of the Closed Block Long-term Care line of business improve from the result of the first quarter.

New LTC claims return to a more normal level this quarter after the spike we saw in the first quarter and the interest adjusted benefit ratio declined to 87.8% in the quarter from 91.2% in the first quarter. The contribution from our Long-term Care line remained below what we feel this line can generate over the longer term, but this quarter's performance was a strong improvement from the first quarter and indicative of what we expect from the Closed Block in total over the near-term.

Moving on to our sales trends, we remain very pleased with the trends we're seeing across our business line. Unum US continued the strong trend we have seen for the past few quarters with total sales for the second quarter increasing 9%. For the Group Disability and Group Life and AD&D combined, sales were also up 9%. With sales in the under 2,000 life core market increasing 11% and comprising about 3/4 of the sales mix. Voluntary benefit sales were also good at increasing 8% for the quarter.

Persistency was also very high for Unum US at 91.7% for Group Long-term Disability and 91.6% for Group Life for the first half of the year. Given these strong trends, we produced 4% premium growth for the Unum US segment again in the second quarter with minimal help from the external environment or natural growth in the marketplace.

In the U.K., we continue to see somewhat better pricing trends in the market and with that, we are seeing better sales results particularly in the Group Disability line. Group Disability sales increased by 10% in local currency with positive trends in both the core and large case markets. You'll note that our Group Life sales were flat this quarter as we firm our pricing in this line as part of our strategy to improve the profitability in this segment.

And finally, premium increased 5.3% in Colonial Life this quarter consistent with the growth trends we've seen in recent quarters. New sales in total were essentially flat and we are slightly more encouraged with the core commercial market sales increase by 2%. The sales trend this quarter were consistent with the trends we've seen in the recent quarters. Sales to existing accounts remain generally strong while sales to new accounts are more of a challenge.

Moving on to the balance sheet and the investment portfolio, we continue to be pleased with the excellent credit quality of our portfolio. The net unrealized gain position for our fixed maturity securities stands at $6.4 billion at the quarter end and our watch list of potential problem credits remains very low. Net realized after-tax investment, gains and losses on our portfolio was essentially breakeven on the quarter. Currently in the investing world, the challenge continues to be the low interest rate environment, there is no question it's difficult to put money to work at attractive yields. We continue to be selective in our asset purchases and as a result, the overall portfolio yield continues to hold up relatively well. The portfolio yield now stands at 6.59% compared to 6.67% at year end.

Similar to the first quarter, we continued to maintain higher-than-normal cash balances for our product portfolios as we search for the best possible investments. We think that is the right decision, but it does create a drag on our net investment income relative to our expectations coming into the year. We would like to catch up and be fully invested in the second half of the year, but we will remain selective and be opportunistic as possible. As such, net investment income for the balances of 2012 is likely to run below our initial outlook coming into the year.

With regard to the balance sheet, our capital position continues to be very healthy. Statutory net income was $158 million for our traditional U.S. life insurance company this quarter. Our run rate remains very solid and continues to support our capital model that generates about $500 million of free cash flow for the year. So weighted average risk-based capital ratio for our traditional U.S. life insurance companies is approximately 404% above our 2012 target range of 375% to 400%. Holding company cash and marketable securities totaled $564 million in quarter end in line in the first quarter level of $575 million. During the second quarter, we repurchased $125 million of our stock. So for the first half of the year we have completed $300 million of our $500 million plan.

We also announced yesterday that our board has authorized a $750 million share repurchase program. Our previous repurchase authorization is due to expire on August 2, today, and this new authorization will cover our expected repurchases for the balance of 2012 and give us flexibility as we develop our capital management plans for 2013.

And closing with a comment on our outlook, as we included in our earnings release and Tom mentioned earlier, we now believe that growth in operating earnings per share for 2012 will be below the range of 6% to 12% we originally discussed at our Investor Meeting last November. The primary driver for the lower outlook is the underperformance of that Unum UK segment that has emerged in 2012 and likely will continue for the balance of the year. Our outlook for Unum US and Colonial Life has not changed. Now I'll turn the call back to Tom for his closing comments.

Thomas R. Watjen

Thanks, Rick. In closing and before we take your questions, as I said earlier, I'm generally pleased with our results this past quarter. We have continued to generate strong profitability and growth in Unum US and Colonial Life and have maintained a solid investment portfolio and capital position and continue to generate good cash flow that we can continue to return to our shareholders with dividends and additional share repurchases. There is no question that we work to do to improve our Unum UK performance. But I'm confident that our team has the solid plan in place that will lead to gradual improvement in the performance of this business.

Operator, this completes our prepared remarks, let us move to the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jamminder Bhullar with JPMorgan.

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

I had a couple of questions. First, on the U.K. business, you've been expecting a recovery on the business but the margins have actually progressively declined. So what gives you the comfort that results have bottomed and if you just talk about how long it will take you to reprice the book and if you're seeing competitors repricing as well as you're doing it? And then secondly on Long-term Care, just talk about your comfort with Long-term Care reserves. Part of the reason you took the charge was low interest rates have declined further since the last time you took the charge. So just your overall comfort level with Long-term Care reserves?

Thomas R. Watjen

Let me start to answer the first and then ask Jack to certainly pick up. But it think it is important to -- as you're alluding to put the U.K. business in context because there have been some questions raised in the past. And I think that there's no doubt we have a lot of confidence in that business, in that market over the long term and again even in a quarter when, frankly, it didn't meet our expectations. We still generated 12% ROE in that particular business. But I'll come to that in a second, we certainly have some work to do and Jack will talk further about that. But I think this past quarter has caused a few of us just to step back and look at the performance actually of that business over a little longer-term, for example, the last 6 quarters. If you look over the last 6 quarters what you see actually in our BTA, and you probably know this, is unfortunately a fair amount of volatility in our performance, where it ranges -- a high BTA of about $34 million all the way down to a low of $19 million that we saw this past quarter and frankly that will level the volatility in BTA is very inconsistent with what we've seen in other parts of our business and so again that's why if we step back a little bit, just a look at that business again, each quarter, each issue is explainable, as Rick mentioned in his comments. Sometimes it's around incidence, sometimes it's around recovery, sometimes it's around one product versus another. But again that level of BTE volatility in my opinion isn't consistent with what we want to do on the rest of the company. So again we've actually taken a hard look at a few actions that we can take in that market, which Jack can expound on in just a second. Some of those actions relate around pricing increases, some of those actions relate around rebalancing our business in terms of the product selection, the segmentation of the market, the capital allocation we have to put in those products. So we will have some room to improve in terms of just adding more consistency in our operating performance. And so we think we got a good game plan to address those performance issues. Again, is not just about this quarter but it's about looking at this as a trend that we've seen here which, again, on one hand for us is a 12% ROE at a low point. On the other hand, it's got more volatility than we'd like to see in over the long term. I'd also put this business in context as well. Again, very important strategic is us, we see growth opportunities. But if you look at just this past quarter, the BTA in the U.K. is about half of what we produced in Colonial. It's actually less than any one of the 3 operating lines within Unum US, so again to give a sense of context. So with that, Jack, maybe just talk a little bit more about just some of the things that we're doing and why we have confidence in our ability to turn the ship and create less volatility in this business.

John F. McGarry

Great, we are confident in the business. We are already implementing significant price increases in the business. The U.K. business renews, generally has a 2-year rate guarantee, so it takes 2 years to go through the block of business. We started renewals in the Group Life block in the first quarter and ramped them up. In the second quarter, we'll continue to ramp them up through the remainder of the year. We're targeting double-digit rate increases in the block. Through the first half of the year, we've achieved a 9.5% rate increase and that has improved quarter-over-quarter. The market is taking very similar actions to us. They've seen the same increase in underlying mortality that we have. Double-digit, 10% rate increases in the life market are common. We're being successful in implementing them. So we're very positive about that, the competition is reacting similarly, they have reacted similarly by the way on the way down as prices went down and admitted commitment, I believe, to restore prices. We're also looking at other things to control volatility, looking at our business mix, the relationship between income protection and Group Life, the size cases that we write, retention limits upon cases that we keep. So we're going to continue to implement actions to improve both the overall results with rates, the volatility that we see and try to lessen that and the effectiveness of our operations to implement actions to correct it.

Thomas R. Watjen

Rick, if I could turn to you on the Long-term Care.

Richard P. McKenney

First, I think it's important, Jimmy, to talk about the context of the interest rate environment in the broader business. As you heard from Jack and I mentioned in my comments, we do have the ability to reprice much of our business to reflect the very challenging interest rate environment that we're seeing. We're taking very aggressive action across all of our product lines to reflect the environment that we see ourselves in today. More specifically to your LTC question around reserves, I'll take you back to year-end in terms of the process that we went through. At year-end when we look at the business, and we will talk about at the time we saw the adjustments that we were making reflecting the interest rate environment and the go-forward of that will take us kind of about 3 to 5 years. In terms of that, I'd tell you, in the current environment, although the first half we did a pretty good job on that front as we sit here today. And the real challenges is that it probably takes you to the shorter end of that range but I think we're still out there in that type of time horizon how interest rate impact as is in the our GAAP reserves and Long-term Care.

Operator

Our next question comes from Suneet Kamath with UBS.

Suneet L. Kamath - UBS Investment Bank, Research Division

Question for Rick, if I could, on the discount rate. I just kind of want to understand how you're thinking about that because I think you said, on the one hand, you have a pretty healthy margin. I guess it ticked down a little bit this quarter but it's still above your target. But then you also suggested in your comments given the sort of the challenge in terms of new money rates, you might be looking at a discount rate reduction at some point later this year. So I was just hoping if you could maybe frame that up a little bit in terms of order of magnitude and then update us on any guidance in terms of what a 25-basis point change in the discount rate would do to sort of, I guess, annualized earnings or EPS.

Richard P. McKenney

Sure. Let me put a little more color on the commentary I gave. I think we're working with a couple of different items here. One, is the challenging investment environment we have. And we want to, in the market, reflect that challenging environment in our pricing on a pretty rapid basis. We're balancing that with over -- over different times, we actually let that margin build up quite a bit. So we're balancing those 2 items. But as we did last year, I'd point you back to third quarter of last year, we were early in that process to actually reduce our discount rate. We did it by 25 basis points and those were the kind of things we were looking at as we get in towards the end of this year because we have seen, the all-in invested rate has come down pretty precipitously, not just treasury yields but our investment yields at the kind of credit quality that we like to invest in. So we're looking at that with no prediction as to exactly what the timeframe would be. But I'm just pointing back to third quarter in terms of the type of actions we've taken, the type of size and looking into the future on that. And by the way, we referenced 25 basis points as it was last year, is about a $3 million impact to the overall company.

Suneet L. Kamath - UBS Investment Bank, Research Division

Got it. And I think you told us your portfolio yield was -- I think I wrote down 6.59%. Can you just tell where you're investing new money, what rate today and I don't know if you mentioned which actual asset classes you're investing in. If you could do that as well, that would be terrific.

Richard P. McKenney

Sure. When you look at that portfolio, that does reflect a fair bit of what we've been able to do over time. In the longer end of the curve it certainly support of that. Putting money to work today is quite difficult especially on the short end of the curve as you look at spreads of the 10-year treasure rate, we think A, BBB type investment. You're looking right around 3%, 3.25% maybe. Where we've been putting money to work today where we can most effectively has been in other asset classes such as commercial mortgage loans and private placements. And so we've actually done that reasonably effectively. As you get up to the long end of the curve, those types investments that you make would be more opportunistic. Different deals come to the market at different times and so it's hard to really give a general rule of thumb there as you get out towards the 30-year end of the curve, but we're still being opportunistic on that front. But very, very challenging.

Thomas R. Watjen

Actually maybe if I add, to actually anywhere talking about the parallel pricing actions we're taking too, because certainly, the discount rate and the interest rate environment is certainly piece of the equation. But we don't believe sitting on our hands either because there's a set fair amount of activity going on to be sure that we reflect this lower rate in a business where there are certain parts of our business that are interest-sensitive but there's also a lot of parts of our business that are actually not interest-sensitive either.

John F. McGarry

In the case of the discount rate change, 25 basis-point discount rate change affects LTD rates by about 2%. We were in the process of putting mid-single-digit rate increases into the LTD market place during the course of this year to reflect both the interest rate environment and the sort of slight but steady volatility that we've had in incidence. As we look into 2013 in our renewal program, I expect it to be pricing in the mid- to high single-digit range increases for the LTD again to reflect those same claims trends and also the expectation that low interest rate environment will continue and that we might need to take a change in the discount rate. So we are going to price ahead of that. Most of our other lines don't have that kind of interest rate effect at all. STD and Life don't really get hurt at all by interest rates. When we will look at that in the STD line of business though as a deterioration of industry-wide experience. So we're are placing 10% to 15% price increases on STD. But basically we'll offset this deterioration on STD prevalence. So a lot of pricing activity going on and we think, on the pricing side, we're ahead of the curve in terms of low interest rates.

Richard P. McKenney

It's Rick again. If I come back around on the interest rate side, so I gave you some benchmarks of spot rates. I think it's important to look at what happened with actuals too in the second quarter. We actually put money to work at about 5.3%, including some of the hedges that we have out there as those hedges roll off. So those spot rates are tough. I think in the first quarter, as in the second quarter, we've actually done a pretty good job of finding the right investments out there to back our portfolio. I don't want to leave you the sense that everything we putting out there today is at 3%.

Operator

Our next question comes from Ed Spehar from Bank of America.

Edward A. Spehar - BofA Merrill Lynch, Research Division

I just had a follow-up question on the U.K. Group Life business. And I'm just wondering I believe April is the big renewal season and it seems like the recognition that you need to make some significant changes in Group Life has happened pretty recently. I understand that you're putting rate increases in, but I believe as recently as early May, you had been looking for the U.K. business to be sort of flattish in terms of earnings this year. So I'm wondering if you could help us understand how quickly you're going to be able to sort of get the profitability back to targeted levels given that we kind of missed, I think, the big renewal season.

Thomas R. Watjen

Maybe I'll ask Jack to start with that. It's not just the renewals, I think, Jack will speak to but there's also certain segments of the market where you can change. I think you are doing some work to change your strategy. We don't need to get into too much detail there it's not just rate, I think, in Group Life that's sort of entering in the picture. And maybe, Rick, if you could follow up just a little bit with just some of the outlook commentary.

Richard P. McKenney

Yes, we are looking to change the business mix. There are segments of the market that we pulled away from in selling new business. On the renewal piece, we were responding to this trend before it actually emerged, so we were already doing rate increases, they were a little bit lighter in the first quarter but we -- and during the second quarter, which would include that renewal cycle, we put double-digit rate increases into the market. As I said, we're right at the edge of double-digit. Now we expect that by year end, we'll be well into double digits. We expect to continue that through the 2013 renewal season and we'll be optimistic from there going forward as the marketplace and competitors allow. So I think we got a good jump on it. We didn't wait until May or June before we started to do renewals. A part of that is because the marketplace actually, I think, saw the blip in claims experience last year that we saw in the first half of this year. And so the marketplace had already begun to respond with rate increases last year and we followed suit on that. So I think we're -- excuse me, we're in a better spot than you might otherwise think. In addition, even though April is the big month, it's not like January in the U.S. Things are much flatter in the U.K. There's a good -- there's probably 40% of your renewals are still outstanding at midyear going forward. So we're optimistic that we caught the curve.

Thomas R. Watjen

And I think just, Rick, in terms of outlook, I don't think we're making -- we're assuming it takes some time to get back to the levels. But that's the thing I add to that.

Thomas R. Watjen

I'll sort of just take you back to our comments, we expect the second half of the year will be starting to run right between GBP 20 million to GBP 25 million which is down, as you know, relative to what we would have thought coming into the year. That reflects really more of the volatility coming out of the book and just the natural fluctuations we've seen. Pricing will take some time and so that's where -- even the actions Jack has taken thus far is going to be a process that works out really over the next couple of years, although we are on top of it right now.

Edward A. Spehar - BofA Merrill Lynch, Research Division

So should we assume to get back to the 20 ROE we're looking at 2 years out?

Thomas R. Watjen

I think that's probably a fair assumption. We'll come back and talk about it again next quarter but I think that from what we see right now, that's probably a fair assumption.

Operator

We'll take our next question from John Nadel from Sterne Agee.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Most of my more technical questions have been asked. Just wondering if you could give us an update on your view of the M&A landscape. I mean, it sounds like most of the activity at least that we're all pretty well aware of that's out there is sort of outside your core. But I'm just wondering if what the outlook looks like, what the opportunity set looks like within your mix?

Thomas R. Watjen

Maybe Rick, I'll start and ask you to supplement a little bit it too. But I think John, we really don't see a lot in our core. I want to come back to you with core is we very much just stay in to the focus of the things we do well and not getting too distracted by obviously some of the other things which, as you point out, there's an awful lot of activity in some of the better areas. There's enough places where, obviously, we want to play and have the characteristics of the things we can add value in. So again, we're staying very close to the marketplace, I think if there are things to happen that are close to our space in the marketplace we're aware of them, but it's a pretty quiet period of time right now because we don't see a lot of things that sort of fit within our sweet spot in terms of where we are as a strategy. But I do think, Rick, again, we're very much viewed I think both in the U.S. as well as maybe even the other markets around the world as a potential buyer for properties, which is a good thing. But that patience is very important.

Richard P. McKenney

I would just add to that, when you look at the processes there, we're pretty much involved with anything that's -- and it's going on. We're certainly introduced to most situations that are out there. It's true that much of it does not meet our core. I think the business line that we're in are very much favored by the markets today and so I don't think we'll see that much in the near term, it's something we'll keep an active eye on. And the second is, as we look at M&A, it's relative to purchasing our stock. It's a very, very high hurdle to actually go and do there and relative to where our stock is. So I think that's still our primary choice, although we'd want to see a good acquisition that fits.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Certainly. And then just a quick one on Colonial. So I think your commentary has been and it's been pretty consistent now for it seems a couple of quarters. But sales to existing accounts has been -- it's held in there pretty well. Maybe we could even characterize it as reasonably strong. But new client creation has been extremely difficult. Would you characterize that pressure on the new client creation as still primarily economically driven? Or do you see that as more competitively driven because it appears,, at least from my vantage point, that Aflac is doing a little bit better on the U.S. side, and maybe I'm wrong. But I'm just wondering if Aflac and Allstate and a few others are becoming a bit more competitive in that respect?

Thomas R. Watjen

Randy, let me ask you to on touch that, but maybe just to sort of set the framework a little. Just -- we didn't go into in-depth in our remarks but glad you raised because certainly Colonial, as Rick said in his comments, has been a steady contributor to the results of the company. But as you know, we think about the market really in 3 segments, our core commercial, it is a small business, was actually up about 2% or 3% for the quarter. Our large commercial actually is up pretty nicely for the quarter. The decrease was really more on the public sector. So as always, there's a segmentation process that applies to our core when it comes to market and I think some of the work that's been done certainly has improved our positioning. For example, in the core commercial marketplace we continue to see good results there. But with that, Randy, maybe you could add a little color to the market and what we're seeing, because I think sometimes the headline result doesn't necessarily translate into what's really happening in the market place.

Randall C. Horn

Sure, Tom. From an economic standpoint there certainly are still some headwinds out there for everyone. There is no question about that. I mean one of the key things we look at is consumer confidence and levels of discretionary income and that type of thing. But we're working through that just fine. So that's not a huge and not a new issue for us by any means. There is rising levels of competitive intensity out in the marketplace with a lot of different carriers getting into the voluntary space. But as Tom said overall, we feel comfortable with the activity levels and the success we're having in our core commercial markets. The real pressure this quarter was on new public sector sales and we just had a couple of real tough comparisons with the second quarter last year where we had a couple of larger cases on the public sector side. So really, John, no fundamental concerns. We feel like we're getting the right products and services out into the marketplace. We have good steady growth in our agent account and new offices that we're opening, new sales offices, et cetera. So we feel pretty good about the fundamentals and in the market overall and where we can take things. So again, economy is still not our friend, but we can overcome that and feel like we have good prospects going forward.

Operator

Our next question comes from Christopher Giovanni with Goldman Sachs.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

I guess, first question just on capital management, I guess I was a little surprised by the buyback activity in the quarter. I guess, one, just given where the shares were trading. And two, just given the smaller window you guys have in 4Q, so should be thinking that you guys kind of get through the rest of your $500 million authorization in 3Q?

Thomas R. Watjen

Rick, you want to pick that up?

Richard P. McKenney

Certainly, Chris. Actually when you think about the buyback activity, we've done $300 million year-to-date. Our second quarter actually looks quite active. When you think about the rest of the year, another $200 million to deal. I won't tell you exactly when we'll do it. We certainly see value in our shares today and where they're trading so we will be active. But right now we are sticking to our $500 million for the year, so that is our expectation. We still look back to our capital generation model and say, in still quite an uncertain environment, that we want to spend excess that we're generating and we also keep some pretty healthy capital levels behind that. So I think that's how the layout plays out between third and fourth quarter. I'd love to see how that goes.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. And then the tax rate was lower due to the tax accrual. Curious, as we look to the back half of this year, is there any other kind of onetime tax items that kind of are on the horizon?

Richard P. McKenney

There's always a lot going on in the tax line. And so we -- there's still some of that. I think as you look out to the year, probably lead you to an overall tax rate for the full year of right around 30%, which we'd say is a little bit lower in the third and fourth quarter than our expectations. We think there may be some couple of small onetime items that come through which bring that tax rate down, maybe in 29% to 30% type range.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

And then just quickly for Jack on the U.K. book. I guess the Group Life, I wanted to see if it's at all possible to kind of split out the legacy, kind of your older Unum clients in the U.K. versus the book of business that grew a bit more substantially when AEGON maybe exited the business a few years back.

John F. McGarry

Yes. One of the things in the U.K. is the entire block tended to be priced on a consistent basis. And so as rates in the marketplace fell and we followed that trend, we were renewing old cases, as well as younger cases. So if you look at the cases, rating is pretty similar across the block, similar opportunities for rate increases across the block. So it's not like in the U.S. where you might get more aggressive on new sales and have a higher rate on your existing cases.

Operator

We'll take our next question from Ryan Krueger from Dowling & Partners.

Ryan Krueger - Dowling & Partners Securities, LLC

I had a follow-up on the discount rates. Rick I wasn't sure if I correctly heard the earnings impact from a 25 basis-point change because I think in your investor presentation last year you said $14 million annually, is that correct?

Richard P. McKenney

That is correct annually. I gave you a the quarterly number of $3 million.

Ryan Krueger - Dowling & Partners Securities, LLC

And then you also made some discounted changes last year on the newer Individual Disability Block and I think you also made some changes in the U.K. Should we be expecting some adjustments there as well?

Richard P. McKenney

I'm not sure what you're referring to on the Disability Block in the U.K. Hard to predict and will reflect the interest rate environment there as well. But we don't see the same kind of pressure we see in the U.S. for similar pressures on new money investing. But in terms of adjustments and discount rates, it's not of the same magnitude as in the U.K.

Ryan Krueger - Dowling & Partners Securities, LLC

And then just lastly, when I look at the reserve real forwards in your supplement, the group disability recoveries has been pretty favorable now for a few years and then this quarter was even better and I think, probably the best you've had. Can you just talk a little bit about what factors are driving this, if you can continue around these levels?

Richard P. McKenney

In the recoveries, as you said, we've been outperforming on the recoveries for quite a number of quarters now. But even there, you get some degree of volatility. You quarters you are running at 110% actual expected recoveries. Some quarters, 113%, other quarters 108%. I think for the most part, we're right on the money pretty consistently in terms of number of recoveries that we expect to occur but you always get sales volatility around the average size of the claim. With the [indiscernible] you see bounce around this quarter. I think we had a little bit more favorable performance on the recoveries side, both in terms of price of recovery and number of recoveries. But I do expect it to continue.

Ryan Krueger - Dowling & Partners Securities, LLC

Okay. Just what's changed versus a few years ago? When I just look at the disclosure, seems like there's a significant improvement relative to what it was a few years ago. Is it that you're making more conservative upfront assumptions on recoveries or is it that recovery rates have actually improved?

Thomas R. Watjen

I don't think there's much of a process change or anything like that. I think we've got a very seasoned and well-oiled organization and that organization consistently performs. I think, I don't want to speculate but the economy begins to put consistent pressure. And the economy probably baiting just people to return to work a little bit more aggressively perhaps, but that's pure speculation. But I don't think we've made any internal process changes.

Operator

We'll take our next question from Mark from Mark Finkelstein with Evercore Partners.

A. Mark Finkelstein - Evercore Partners Inc., Research Division

I guess just to Ryan's question, I had similar thoughts, why shouldn't claim recovery patterns start to taper off over time? I mean, they've been very strong for a fairly prolonged period of time and just it's just things revert to the mean and you price for some of the improvement over time. Why shouldn't it start to taper off?

Kevin P. McCarthy

Yes, I can turn around and say why should it taper off? Yes, I guess recoveries are about sort of consistent, disciplined management of your claims processes, consistent and disciplined interaction with the claimants, with the claimants' employer, with the claimants' physician. And so it's a process and I just don't see any reason that we should expect it to move.

Thomas R. Watjen

Okay, I think you touched on it, but we made a very consistent steady investment in that part of our business. I mean that's maybe stating the obvious, but that is at the heart of what's stepped to this more consistent performance once the claim comes into our hands.

Kevin P. McCarthy

Yes, and I mean, exactly right. And I do think, Mark, you're talking about reversion to the mean. We've been performing at these recovery levels for 20 quarters, 16 quarters, whatever. But it's a long time that we've been performing at this level. And I think back 5, 6 years ago when we started to put a lot of these properties in place, we ramped up our organization for a lot of inventory control, standard control, all properties in place to measure we could have consistent performance and we've delivered on it, but don't see any reasons for it to move.

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Okay. Rick, you made an interesting comment in your opening remarks and it related to the Long-term Care business, and I'm not going to get the words exactly right, but you kind of alluded to longer-term improvement in LTC. Near-term, this is kind of a sustainable level of earnings that we should be looking for. And I guess when I look at that business, loss ratios have been trending higher, obviously, despite rate increases. Interest rates are obviously lower, who knows what happens to those 3, 4 years out? But I guess what gives you the confidence in making the statement about margin improvement in a business that has really only gone one direction for you and pretty much everybody else?

Richard P. McKenney

That is a fair. I think, Mark, when you look at it -- this is Rick. When you look at the LTC business, that statement really stems from the fact that we're very active in terms of raising rates in that business. Been talking for that now for a couple of years but those premiums are just starting to flow. So as you go back to when we started to raise rates, the process of actually getting premiums to start to flow will take some time. We'll be starting to see that now. All the pressures you talked about are still challenging. I mean, when I talk about improvement, it's slight improvement over time. It's nonmaterial improvement. But that will come from the repricing environment.

Thomas R. Watjen

And, Mark, if I could add to Rick's comments, I think I just would underscore the importance of having chosen to get out of that business completely, put it into Closed Block and the focus that brings in our organization. So I think to your point, Rick and Kevin, it's involvements as well. Once you make that decision and put into a Closed Block, it doesn't just sit there. There's an awful lot of focus on many things, including rate increases. And I can assure you, Mark, that we recognize this as a substantial portion of our capital supporting that part of the business. And there's not many new levers, but there are levers that we can use to, as Rick said, slightly improve the performance there.

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Okay, and then just one final question in the U.K. I mean if you look at this business historically, obviously very high returns, 20%-plus, you benefited from acquisitions you made a while ago that you put them on your own claims platform, they performed well. Obviously, the last few years, or the last couple of years have been much more disappointing. I guess my question is, how do we think about the true returns of this business longer term? I mean, is this really a 13%-, 14%-return business similar to kind of maybe what you'd expect in the U.S. Or is there reason to think that it should structurally be higher in the U.K. over the long term?

Thomas R. Watjen

Maybe I'll speak, maybe I'll ask Rick to speak too. I don't think Mark, that we, we've been saying actually for the last year or 2 -- those rates of return in the upper 20s and sometimes even into the 30s were not sustainable for any number of reasons. I think, obviously, we've been trying to bring people’s expectations about the returns in this business. I for one, I think we believe, as a management team, this is still a business produce well above industry sorts of ROE. That's why it's not going to get to those kinds of levels we saw before. But you have to -- Jack and his team too. The hope is that we're also doing is reducing the volatility of the BTA contribution, as I mentioned in my comments, just looking at the last 6 quarters was a low of 19 and high of 34 and bounced all round in between there. So part of it is also just getting to the right above industry average kind of ROE. There's also doing it at the business model that has more predictability in terms of its ability to produce a more consistent BTA performance as well. Rick, I don't know if you'll add anything.

Richard P. McKenney

I'll just add that when we look at that business we see things we can improve. I think that's a key thing. We've gotten to 12% ROE, we see action items we can take to improve the business. We see ability to take price into the marketplace and make risk selection and that differs from where we are today so I think that gives us confidence. We can be higher than here today. Jack, I don't know if you have a follow-up on that.

John F. McGarry

My view too is that the market is different in the U.K. There's only 4 major players in the business. That business tends to be a very small part of what they do overall. And there's a kind of market expansion opportunity in the U.K. So the dynamics of the business in the U.K. aren't the same today as they are in the U.S., where you have 25 carriers, you have deep penetration and there's a lot of fighting back and forth between carriers. So as long as those dynamics are still in place, I think you should still be able to get above industry returns on it.

Thomas R. Watjen

It looks like from the queue we've exhausted our questions. And so let me just thank you all for taking the time to join us. I think, as a couple of you mentioned, there's an awful lot of reporting companies here in a relatively short period of time. So we appreciate people taking the time. Obviously, we're all available for any follow-on questions. And operator, this will complete our second quarter 2012 earnings call.

Operator

That concludes today's conference. Thank you for your participation.

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