Unum Group (UNM)

Analyst Day 2014

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Dec 16, 2014

Well, good morning, everyone. We'll go ahead and get the meeting started. Welcome to the 2015 Outlook Meeting for Unum Group. My name is Tom White, head of investor relations for the company, and it's a pleasure to have everyone here. I'll remind you that safe harbor statement, non-GAAP financial measures are in the book, so please ask you to take a look at that. In terms of the meeting today, you see the list of participants here up on the stage right now. Of course, are Tom Watjen, Rick McKenney, and Jack McGarry, and then we'll have Mike Simonds representing Unum US, Peter O'Donnell representing the U.K., and actually two people representing Colonial Life. Randy Horn will be retiring here very shortly, and Tim Arnold will be taking over. Both Randy and Tim will be covering the Colonial Life operation when we get to that part of the meeting. Just taking a quick look at the agenda. What we'll do this morning is, first cover the top two items there, introduction, state of the business. That will be covered by Tom Watjen, Rick McKenney, and Jack McGarry covering the closed block. We'll do a Q&A session following their presentations for about 15-20 minutes and take on topics around the outlook, around the closed block. After a Q&A session, we'll move to our core business segment overviews with Unum US, the U.K. operation, as well as Colonial Life, and then we'll have a Q&A session around that. With that, let me go ahead and bring up Tom Watjen to start the meeting. Tom? Thank you, Tom, and good morning, everybody. Let me add my welcome to those here in New York, as well as those joining us by webcast. Again, appreciate very much taking the time to join us today. As Tom said, I just want to make a few opening comments to set the stage for what we're going to talk about the next couple of hours. As Tom said, we adjusted the format a little bit. We know very much things like the closed block are very much on your mind. So we want to organize our thinking so we can have that discussion early on, get that out, and get some Q&A going on that topic before we then move to the ongoing operations. Because again, they're two very distinct sets of issues, obviously affecting those two very important parts of our business. Frankly, again, I think as you know, we're a very specialized business. We're in the business of providing financial protection to people in their place of work, and we think that's a very good business, and I'll get into that in a few moments in some of my comments. So we don't want to miss that discussion really in the second half of our meeting, because again, that's really our growth engine. You'll see that some tremendous growth coming from that business. The last couple of years, we've started our discussion with a few things to remind us that if we manage our business well, this is a business capable of producing consistent, predictable results. Which again, in this day and age, I think is something that we all aspire for. We manage our business to generate consistent, predictable results. Whether that's the EPS history that we've seen, which I think reflects that consistency. The other piece of it is whether it's our capital management strategy, which again, consistently has had two elements to it. One is a repurchase program, which has been very active. You can see actually, we repurchased almost 32% of our shares over the last seven or eight years. Whether it's our dividend history, where we've averaged a double-digit dividend increase the last four or five years. Our business is capable of producing consistent, steady cash flows beyond what we actually need to support the business. We've shown a tendency as an organization and as a board to return that capital very swiftly to shareholders. The other piece is book value per share growth is very important to us as well. You can see in this exhibit, we've consistently grown book value per share. These four elements, I think we start each meeting with because it's good to remind ourselves that again, if we run our businesses well, we're able to produce these kind of results on a relatively consistent basis in good times and bad times, low interest rates and high interest rates, and we'll talk about interest rates in just a moment. The other element you're going to see us talk more about at this meeting than we did in prior years, not that it wasn't important every year, is growth. I think one of the things you're beginning to see now is some of the things that we've been talking about for a number of years is that we can grow this business. We can grow it very profitably, but we can grow this business if and when the market conditions allow. If you look at the sales results, for example, over the last 18 months or so, we've had some really nice sales growth, and we're going to talk about that in each of our businesses because we do believe that these sales trends are actually sustainable. As you know, the way this business works, sales ultimately translates into earned premium. We're starting to see some nice earned premium momentum. That'll become clear as we go through each of our businesses and talk further about where we see the 2015 outlook to be going. I wanted to highlight this piece only because, again, we've always tried to grow our business, but we've always made the point that it's going to be grown in a disciplined way and in a cautious way, in a way very sensitive to margin. But we are seeing this environment and this atmosphere is one across virtually every one of our business segments. We see some pretty good growth prospects out ahead for ourselves. Now, again, you're sensing probably a level of optimism and confidence in my tone, and you should take that. I'm actually quite optimistic about our future. There's some tough issues out there we've got to navigate through, and again, interest rates being the most visible one. But again, I'm confident for a number of reasons, actually. It starts with the fact that, again, it's an interesting place to start, but we're in some fairly attractive businesses. There's a tremendous need for the coverages that we sell. Again, we make a difference in consumers' lives by providing very basic financial protection at their time of need. Again, that's something we actually take great pride in as an organization. You see from some of these statistics that most consumers are underinsured for basic disability and life insurance protection, both in the U.S. and the U.K., our two primary markets. Again, that's opportunity for us. This is what actually drives our initiatives around the company, and actually is a huge focus point around the company. So again, at a macro level, there's a tremendous need for the product. You can see actually that need is accentuated by the fact that most consumers don't have a safety net to fall back on. 76% of consumers at some point live paycheck to paycheck. So if a life event happens, a disabling condition happens, an accident happens, they actually lack the resources to support themselves and their family. That's the business we're in, actually providing that support that's so essential to help them get through some difficult times. The other aspect of the attractive business comes in the fact we distribute through employers. Frankly, employers are a very potent way to get to large portions of the population. Some of these statistics may surprise you, but it's not just the life and disability insurance that we sell, but virtually most of the major financial products actually are distributed through the employer. We don't see that changing, despite the fact that obviously things like exchanges and other things have been raised, which I'm sure we'll get to in the Q&A session. Employers continue to be the hub of a lot of the distribution of basic products and services to consumers, both in the U.S. and the U.K. The last piece, I alluded to it before, if we run these businesses well, they're capable of producing solid returns for our shareholders. These are the returns for the last 12 months in each of our three operating businesses. As you can see, very strong results. Again, not just this past quarter or this past year. There's a history of very strong margins and very strong returns in these three businesses if we manage them well. I have a great deal of confidence that the business portfolio we have is a good one, and it's up to us to actually manage that portfolio effectively, but I'm very confident that we're doing so. In part because we have a tremendous team, a team of people that frankly have an enormous amount of experience doing the things that we need to do to be successful going forward. They've delivered results in the past. We spend a lot of time on succession planning, a lot of time on talent management so that we assure ourselves that we don't lose any of that institutional knowledge about what it means to stay disciplined, to stay focused, to stay within the core competencies you have as an organization. Again, many of these people are all here with us today. It gives you a little sense of their backgrounds, their experiences. The other thing you'll know, we've actually had some transition going on. Tom mentioned Randy's retirement, for example. We've had a number of those over the last four or five years. I think because we've got such a deep bench, you can see that we've actually had the ability to continue to replenish that talent when talent retires, with people who can actually continue to be sure that we don't lose any ground and continue to focus on the principles that got us to where we are as an organization. I just want to, Randy, thank you at this point for all that you've done. It's a wonderful business, and we're going to talk more about it, actually, but you're leaving things in a very good spot. Tim Arnold, who is going to be taking over for Randy as CEO and President, has an enormous amount of experience, both within Colonial but also within the Unum Group company as well. Again, people development, transition planning, succession planning, that's a huge part of our business and is one of the reasons when people say, "How come you can consistently outperform the business?" It's because we've got the institutional knowledge, the game plan, and the people who know how to deliver on that game plan. That's an important asset for us as a business. The other part of it is that group engages our employees and makes them understand the parts of the business they need to understand because, again, this is a business of a lot of small things. It's dealing with claim issues. It's dealing with underwriting decisions. It's dealing with pricing decisions. Institutionally, we have a very strong culture where our people understand what's required of them to help our company be successful. They're very engaged in the business. Again, I think this whole collective set of skill sets are really our greatest asset and why I have the greatest confidence in the world that we're going to continue to deliver on the things that we said we were going to deliver on. Now, the other piece of it, I think, is this management. You'll see a point of almost a cultural or style point is we're not afraid to confront tough issues. I think as you, we've used this exhibit with you before, but if you think about our core operations, there have been times when we've had to deal with some pretty substantial restructuring in that business. Now, the good news, it's been a long time, actually, since we've had to deal with some pretty significant issues. But in fact, when those issues come up, we're not afraid to deal with them. What you don't see or hear is a lot of the small things we deal with on a regular basis to be sure we protect our margins, protect the quality of our business, be sure we're sustainably growing and building for the future. I'll speak to one which you'll hear us talk a lot about, actually, over the course of the time together here today, because it is an issue that even though it's significant, we've dealt with these kind of issues before, and that's actually managing through a low interest rate environment. Obviously, rates today are not at particularly good levels for our business. We've managed through periods of time like this before. As we go to the outlook for 2015, we're making the assumption that rates don't improve materially from where they are today. I want to say that again. We're making the assumption that rates don't materially improve from where they are today, and in fact, actually making some business decisions as a result of that. You'll see that, and we'll talk about some of the pricing actions that we're taking. Let me get this up. Which again, as you know, many of our products are repriceable. So you'll see that we're making some pricing decisions. This also affects our discount rate strategy. But the point is, we're a management team, I think, that recognizes that when you see an issue, there actually are normally ways to deal with that issue, put that issue behind you, and be sure you make the right decisions for the business long term. This is a very important point because we're not afraid to take these issues on. We've dealt with these kind of issues before. You'll see how it weaves its way through the outlook as we go through the second step, through Rick McKenney's discussion here in just a moment for 2015, but also as we get down to the business units. But we're not afraid to step up to the plate and confront these kind of issues when they're there. The second piece of our story is one of a set of legacy businesses. I think there, again, we've been a group that I think has confronted these issues head on. As you recall, we put the long-term care business into a discontinued mode, so to speak. We actually re-staffed that area with some of the best talent we had in the company, Jack McGarry being a good example of that. You'll hear from Jack actually a little in just a few moments. We really put a lot of resources on being sure that we better understand that block, that we better have the tools in place to make good pricing decisions and risk assessment decisions. You're going to hear some of the product of those investments here in just a moment. You will see that we announced that following our normal reserve review process, that we're going to be strengthening group disability or be strengthening LTC reserves actually within the fourth quarter. Let me just tell you, it's something we spent a lot of time thinking about. That strengthening will be about, we've disclosed a range this morning of $600 million to $800 million. That's $400 million to $500 million after tax. It's a GAAP charge. The implications are very important because again, we are taking an important step largely on the back of the interest rate outlook that we have. The implications are very important. It really doesn't have any fundamental change in the outlook we had for capital at the end of this year. In fact, actually our capital position after injecting $150 million into our New York business, our capital position will be at or better than the estimates and the ranges that we gave you this time last year. Very importantly, too, that decision has no impact on the operating businesses for 2015. It has a small impact, which Jack McGarry will touch on in the closed block, but again, no impact on our ongoing businesses. The capital outlook we provide you for 2015 is going to look very similar to what we provided in 2014. Again, important decision for us to step up and deal with the issue, especially in light of where interest rates are right now, but one that really doesn't affect our ongoing businesses, and we're looking forward in a very positive way. To that point, before I turn things over to Rick McKenney, if you look at our outlook, we continue to feel we have a very strong outlook for this upcoming year. If you look at our ongoing businesses, you're going to see a little more top-line growth perhaps than you saw before. You're going to see a little wind in your face on the interest rates coming through a couple of our businesses in terms of the earnings growth. What you'll also see, though, is very strong margins in our businesses. Our returns continue to be very strong in our core businesses. You'll also obviously see the closed block continues to be a bit of a strain on the overall performance of the business, but you'll also see capital management will continue to be a portion of our game plan for 2015. Again, a very similar story to what you've heard in the past from us. Again, we've delivered on those commitments that we made to you in the past for a number of years now. We're very confident in this business plan that we're laying out for you today. We think it's responsible to the environment. It's also responsible to what we believe is going to be a tough road for interest rates. Yet on the other hand, we can manage very effectively through that through some of the actions we're going to talk about here with you this morning. With that, let me turn things over to Rick McKenney, and we'll begin to take a little deeper dive into the business. Rick? Thank you, Tom Watjen, and good morning, everybody. Welcome to those of you in New York, as well as those that are joining us on the webcast today. I'm going to take you through a little bit in 2014, and I think what's important about 2014 as well is the table setting that it does for 2015, because you will see very consistent themes as we roll through that. Let me start first with a view around. Sorry, one more. The most important thing about this year is we still expect that earnings this year, earnings per share, will be in the range that we initially set out at our Investor Day a year ago, and that's a range of 5%-10%. When you think about that, the year didn't play out exactly as we thought. I'll touch on that in a second. I think that importantly, given the resilience of the business model, we still generated EPS growth in the 5%-10% range, or expect to when we report our results. First off, the operating trends remain extremely good, and we will talk a lot about that. Sales and premiums actually are solid. Very strong in terms of what we are seeing, momentum coming into some of our sales results, and that is translating through with good persistency into our premium results. Risk results across the board, pretty good in terms of what we are seeing. So we went into the year expecting good results, and they actually outperformed what we expected from an overall return perspective. This is our underwriting margins, still very strong, generating the ROEs that we would expect. We went into the year expecting an interest rate environment that may have been slightly better, similar to the rest of the world, and that did not pan out. Actually, in fact, it went probably the other way when you take into credit spreads. We will talk about that. The decision we had to make and that we are making in the fourth quarter is to reduce our discount rates on our LTD new claims. The impact of that is about $26 million pre-tax, and so we think it is important. We will talk about how we are managing that because it is not a one-time thing. It is how we manage interest rates and price for it in our books of business. Tom mentioned on the long-term care side, and Jack will come up and talk more about that, the strengthening of our GAAP reserves to $600 million-$800 million. We will talk about the nuances of that, but I think it is one that we are leaning into overall in terms of what we see for an interest rate environment. We will talk about that. Importantly, as Tom said, our capital metrics still remain very strong. They are coming off the underpinnings of what we generate from a capital perspective and still looks good. We are infusing $150 million into our New York subsidiary, dealing with a different set of rules they have in New York. You might be familiar with that. We have actually done that in the past as well. But even given that, we actually look very good for the year. One thing to note is we are repurchasing $300 million of stock this year. We will not be repurchasing shares in the fourth quarter. Given some of the things that we were looking at in evaluations, we thought it is prudent not to be in the market buying our shares. But what you will see very quickly is that is coming right back in 2015. So it is something that is more of a timing item than anything. As you would have seen in 2014, our dividend increase of 14%, still an important part of our capital story overall. So let me transition a little bit to what is different about the year. So you heard it in my comments, but we originally went into the year expecting 5%-10% growth. We actually saw premiums are better, and so you will see that. So the premium is coming from both good sales we have seen as well as persistency. Very important as it sets us up as we go into 2015 because that is the underpinnings of that growth. Risk, as I mentioned, a little bit better than what we expected. Good underwriting claim performance that we saw really across all of our lines and across the business. Interest rates and the double negative here that you saw, interest rates lower than we expected going into the year. I think I'll show you on page 2, the credit spreads that we saw. Our ability to invest our portfolio at single A levels has been more challenged in 2014. Importantly, as you look through that, our operating return on equity is still very stable. Our 3 major operating businesses you see on the left-hand part of the slide, which come to about a 13.5% ROE, a good group disability result we've seen just over 12%, a life business generating over 16%, and then our supplementary and voluntary business over 13%. You bring those all together, a 13.5% unlevered ROE, a very strong business operating in this, what can be a very challenging environment. Our U.K. business, one we've been accustomed to, and Peter and the team in the U.K. have brought that back from where we were lower teens levels, which are still very good returns, up into the higher teens at 18%. Peter will talk about what they're doing there, but I think we're very happy about the repositioning he's done over the last year. Colonial Life, 17%, very stable, seeing good sales growth, premium growth, very stable returns. We'll talk a lot about that. But 17% unlevered returns in this business are excellent. Closed block, 3%. We'll talk about that, and that does bring down the overall to an 11% ROE in the aggregate. But I think what you see here are some very strong operating franchise positions with good growth trends that we see ahead of us, and we'll continue to take that forward. Let's talk about how we're doing so far this year in terms of the growth. To put some specifics to it on the left-hand part of this slide, you can see we expected some high single-digit type sales growth, and we're seeing high teens sales growth. As we look towards the end of the year, we still feel very good about where our sales growth has been. Our U.K. business, a little bit lighter than that. Really 2 stories here. We feel good about what we're doing on our group income protection product, but they've had to reposition the life business there, and so a little bit slower on the sales side, but we're making good strides in terms of the growth trajectory there. Colonial Life, that stable business generating close to a 10% growth rate on the sales side, translating over into an earnings side as well on the premium side. On the right-hand side, you'll also see, importantly, sales are one aspect of it, but the persistency of our business, how it stays, but equally as important, and ultimately the premiums are going to drive how the earnings growth of the business look. You look here, we're outside of our ranges on Unum US, above our range on Unum US. Our Unum UK business in the range, but I'd actually say even in the last few weeks, we expect that will be to the top end of that range to slightly above our premium outlook that we have there. Colonial Life that you see there, 3%-4% type growth levels we feel very good about. Overall, 3% premium growth. When you look at that's different than what we've seen over the last couple of years. There's a couple of reasons for that. On this next slide, we actually highlight, as we look to slide 21, you could see that we did see some impact on the sales side going through the Affordable Care Act discussion. Not because we felt it or that any of our products are impacted by it, but there was a distraction in the market which slowed our sales a little bit. We would've talked about that just over a year ago. We've kind of regained that ground. If you look over the longer term trend, we're seeing sales at a level that we would've expected, and we like the trends that we're at today, as well as the pricing that we're getting. The same would be true on the premium side. Now that we're starting to see premium growth rates that we saw in the last quarter of 4%, these are the fuel for in terms of growing the business that we have going forward, good persistency, good sales, and we actually like our top-line trends that we're starting to see. As well as we're starting to see a little bit of what we talk about as natural growth. We're actually starting to see more people on payrolls, a little bit of wage inflation, although that's still pretty muted. We're actually starting to see some of that lift we've talked about for several years, which has been flat to negative, if you look over a period of time. The top line, looking very good. If you go to the benefit ratios, you've seen Unum US for a series of years, and we've cut it here at 5 years, you can go back another 5 as well. We've seen that benefit ratio coming down. Good results we've seen across the underwriting portfolio, as well as we continue to see our mix of business shift to those products which actually garner a lower benefit ratio. We're very happy about where Unum US is from the benefit ratio and the margins that they're generating. Colonial Life, we expect to be in the 52%-53% range. You can see thus far this year, we've been just below that range. Good results overall from a risk perspective in Colonial Life, which generates those very high margins that we talked about in the earlier pages. Lastly, on the Unum UK, you would've seen over the last several years, we had a life business that needed to go through some repricing. You would see that as it's peaked back in 2012 from a benefit ratio perspective, and it has come down dramatically. Our group income protection business there, which is really the franchise position there, has remained actually pretty good from a benefit ratio perspective. This really has to do more with the repricing of our life business that we saw in the U.K. Let's turn to capital generation. I mentioned earlier that this is an important tenet of our overall business model. What underlies that is good, strong statutory earnings that we have in the U.S. This goes back to 2005, and you can see in every year for the last several years being north of $600 million, $650 million of statutory earnings. That stability gives us a lot of flexibility in planning and allows us to return capital to our shareholders. To take that together into our overall capital generation model, you will see in the upper left, U.S. statutory income combined with our Unum UK statutory income in the $700 million to $800 million range. If you take our capital uses, which is interest and growth funding, around $150 million, that is one area where interest expense has been a big piece of that, and we would like to see more actually consumed here in the growth funding and putting money behind our high-growing lines, but it has not consumed all the capital that we have had available to date. You could see $550 million to $650 million of overall capital generation before dividends. As I said earlier, active capital deployment is important to the company as we take that forward and continue to generate that capital. The slide here shows you that, as Tom mentioned earlier, we have actually retired about 32% of our shares since 2008, a consistent buyback program that we have had out there, retiring our shares at good prices and generating value for our shareholders overall, combined with a very steady dividend increase. We have more than doubled our dividend as you look back over the last several years, and we have had nice, steady double-digit dividend increases as well. We think this is an important way as well to continue to keep returning capital to our shareholders. Overall, we expect to end the year, we went into the year expecting 400% roughly, 375% to 400%, and over $500 million of capital available to us at the holding company. We are going to exceed those 400% levels of RBC, and we will have greater than $500 million as we end the year, even with all the things that we have talked about doing over the course of the year. We will end 2014 in as strong a position as we were coming into it. Let me take a couple of seconds to transition to our investment portfolio and our investment performance. When you think about it overall in terms of investments, the two pieces that I want to focus on today are our asset quality, important that the portfolio continues to stand up well in the face of any market that may come at it, as well as our interest rate management, which is certainly paramount today in terms of what we are looking at in the markets. First off, just to give you a snapshot of our portfolio, it is an investment grade bond portfolio primarily. We have a credit shop that actually makes sure that the investments they are putting their money into back our liabilities we have, back our product lines out there. I think when you look across our sectors that we have out there, very high grade, so it is kind of a single A overall quality and diversified across many sectors. We manage this for having a good quality portfolio. You can look on the right side the benefits of that. We've seen next to no credit losses here as you look back over the last 4 years. It's been in a benign credit market given that. You can even go back to some of the more challenging times. Having a good solid credit profile in our portfolio is first and foremost important to us, particularly environments where you can potentially be pushed outside of that if you're looking for yield. The second piece is the implication of the low interest rates. I split this chart in half here to show you, yes, the 10-year treasury has fluctuated. We've seen these lows before in the 10-year treasury in different markets. The challenge right now is in the right-hand side, which is the bond spreads. This is where we put our money to work. We don't buy treasuries for the most part. We buy corporate bonds. When you look at the right-hand side, this has been our challenge in the last several years, is that our asset selection has been more challenging just given what we're getting paid for to buy those single A credits that we like so much in our portfolio. What do we do about that in the environment that we're in today? Because that is the environment. We don't expect it to change, as Tom said. How are we going to deal with that over time? First, we'll talk a little bit about pricing flexibility. I'll show you how that looks across our entire portfolio. Included in that pricing flexibility is our ability to adjust discount rates to deal with this over time, as we did and made that choice here again in the fourth quarter. The next is on the manageable investable cash flows, and it matters on two fronts. Some of our lines that are asset intensive, at least have big portfolios behind them, actually don't have a lot of cash flows to invest this year. Even in a year where interest rates and credit spreads are extremely low, I'll show you what the details about how much cash we actually have to put to work, and that's what matters. Then lastly, as I mentioned earlier, discipline asset selection, make sure we're getting good credit assets at the right price. Let me start at the slide that Tom had up earlier and give you a little bit more detail around our investment product sensitivity. Because when we manage our portfolio, we do manage it product by product and looking at our ability to reprice that. In the left-hand side, you'll see our long-term disability businesses. Yes, they have some investment sensitivity to it, or medium, I would say, overall in the U.K. and the U.S., but we can reprice for that. We can manage those discount rates over time, and we have the ability to reprice, which we have done over the last several years and will continue to do to deal with that. If you go to the bottom of the page, you'll see our Group Life businesses and our voluntary benefit businesses. These are underwriting products. They do have assets that back them, but it's not as intensive as you might see in some other insurance products out there, and so they don't have the cash flows to put to work that we see elsewhere. On the far right-hand, lower right-hand corner, you'd see our closed disability block, which can be actually interest rate sensitive, but there are no cash flows that we have out there to invest. Basically, claims are taking the cash flows we have coming off of our portfolio. I'll show you those numbers in a second, but not much there. Then you have to note the long-term care business. Yes, this is an interest-sensitive business. We can reprice it, and we've done a good job with that. Jack McGarry will talk more about that. But it is more challenging to work through that process. When you look at our portfolio overall and take it as different chunks, we actually feel reasonably well-positioned for a challenging interest rate environment. The example I give you here is actually on the next slide. I'm looking at slide 32. How do we deal with discount rates and our overall yields? The left-hand side of the chart talks about as the company has invested its money, what has happened to where we've invested. You'd see some of the peaks going back to 2009. We're investing single A type assets at close to 9%. In the last year, it's been much more challenging to find those assets. The markets have not been good, but there also haven't been those assets that are in our sweet spot to invest in. All we have to do to deal with that is continue to lower our discount rate, as we did here in the fourth quarter, where we were lowering it 50 basis points. There is impact to that overall. You would have seen the $26 million in the fourth quarter. However, we can price for that. That's the key thing is that it doesn't all happen on day one, but you have the ability to price for that over time. What we've managed over that period of time, even going back to 2008, is a margin that's been around 90 basis points. That's actually excess of what we need. We like to keep 50 to 60 basis points. Even in this tough interest rate environment, with a combination of good investing as well as management of discount rates, we've managed that margin very consistently over a period of time. As we wrap up here on the interest rate side, I wanted to mention what we see from a manageable cash flow perspective. I'll start in the lower right. You have a business like Colonial Life, a portfolio of $2.6 billion. This year, we're going to have to invest $270 million. That's actually cash flows from new premiums, which are great, but also things coming off the portfolio, coupons, maturities, things like that. When you get to the Colonial Life portfolio, a very manageable chunk of investment that we have to make. You go up and actually look at the individual disability, it's only $90 million to invest there on a portfolio that's over $2 billion. It gets back to premiums coming in or actually paying off claims, so you just don't have the cash flows to invest behind that product line. Long-term disability on an $8 billion portfolio, about $240 million. So once again, these are manageable sized cash flows that given the right environment and given asset selection, we can do that. On the lower left-hand side, you'll see the closed block. I mentioned that earlier. There's $75 million to invest on a portfolio that's over $9 billion. So once again, premiums coming in, paying off claims, and we actually can manage that in a reasonable basis. Then the one I would note on there is long-term care. We do have a fair amount of long-term care cash flows to invest, and we're recognizing that in our reserves. We'll talk more about that today in terms of how we're dealing with that. But overall, the company, about $3 billion to invest on a $45 billion portfolio. It's something that we manage piece by piece, bond by bond that we buy. Overall, we've done a pretty good job of that over the last several years. With that, let me turn it over to Jack McGarry to give you some update on the closed block, and I'll come back up and talk about 2015. Jack? Thank you, Rick. Good morning. Just a brief overview of the closed block as a reminder. It's made up of two major pieces. One of those pieces is the individual disability block, the other is the long-term care block. They're about the same size, about $600 million of premium annually. The IDI block was closed in the mid-1990s. It's been very stable. Over time, it is a shrinking block as people age in the block and hit retirement and discontinue their IDI premium. The individual long-term care block was closed in 2009. The group block closed, and we took the loss recognition in 2011. It's a sizable block. There's almost $30 billion in assets back in the block, back in the reserves of the block. GAAP equity of approximately $3 billion. There's a lot of resources continue to be dedicated to it. Almost 325 claims management resources support both the closed IDI block as well as the long-term care block. As you know, the block does earn money, approximately $120 million of pre-tax earnings. However, it's basically a break-even block in that underwriting gains are pretty much zero, and we earn interest on surplus back in the block. We have conducted a comprehensive review. As you know, we invested a lot of resources behind the block in 2013. Those resources built some state-of-the-art financial analysis tools, and we undertook a comprehensive review of virtually every assumption underlying the long-term care block. The result of that review, there were puts and takes. Virtually every assumption underlying the block got updated, but when you take them in aggregate and look at them on the liability side of the balance sheet, it was pretty much a push. There were puts and takes, but they knitted to very close to the original reserve balance when they were all put together. We do see potentially taking a GAAP charge in the fourth quarter. That's a pre-tax charge of between $600 million and $800 million. Interest rate pressures are the driver of that charge. We'll be reducing the discount rate, supporting our long-term care reserves as a result of that. I would say the view of that reduction is assuming that the low interest rate environment persists for another 3-5 years and then reverts to a long-term average over the pursuing 5 years. One of the things we're looking at, as we take these charges in long-term care, is to make sure that we have some durability to the assumptions that we put underlying the block. From a statutory impact, we will take approximately $150 million charge in First Unum. As you're probably aware, First Unum has significantly more conservative asset cash flow testing standards. They assume lower interest rates. They're more stringent about the view of rate increases, and so that's what's driving that statutory charge in First Unum. We don't expect any of these charges to have a material impact on free cash flow generation in the future or on our capital management plans. These are GAAP charges other than the First Unum charge, and we don't expect it to affect statutory earnings going forward. We'll continue to actively manage the long-term care block going forward, as well as the entire closed block. Continue to focus on active claims management, focus on actually implementing the rate increases that we have in a timely fashion and with good customer service. A big focus on long-term care rate increases. We'll continue to pursue justified rate increases. That includes following up on previously filed rate increases. We also recently filed across the country a new set of rate increases on our biggest block of individual long-term care policies. That rate increase filing is a little bit different in which we're offering policyholders better options for dealing with the rate increase. So we filed the rate increase. Policyholders can actually forego the rate increase if they're willing to decrease their inflation protection rider from a 5% increase to a 3% rider. You know how sensitive the long-term care block is to interest rates. You can think about that rider as being a very similar impact to interest rates. A very powerful lever that we think does a good job of balancing the interest of policyholders in the current environment, the interest of our shareholders in terms of the impact that can have on the financials of the block, in the interest of regulators to help to address the long-term care issues that are affecting the industry with a palatable option for policyholders. We're going to continue to work on financial analysis. We did a lot of work in defining what the current assumption base is. The ongoing work is really around monitoring that for emerging experience and making sure that it stays current. We continue to focus on capital management. Again, I think that's a long-term focus in the short term, in the current interest rate environment and with some of the issues going on in long-term care. We don't see anything immediate come to the marketplace, but we'll stay vigilant. Our outlook for the block premium growth of 4%-6%. That largely reflects the shrinking closed disability block. The long-term care block actually grows very modestly where rate increases offset persistency. Operating earnings, we expect to be down in the 10%-12% range. Kind of three drivers of that. The first driver is the shrinking of the block. The second driver is we had some very favorable long-term care experience, particularly in the first half of the year. We don't expect that to repeat in 2015, so kind of a more normal 2015 loss ratio experience for long-term care. The third piece of it is yield pressures on our interest on surplus. Operating ROE in the 2%-3% range, again, breaking even on the capital underlying the block. Good. Thanks, Jack. Let me turn to 2015. As I said earlier, 2014 is actually a very good precursor in terms of things that we're seeing as we leave the year 2014 and expect to continue into 2015. If I hit you with the key messages, the first couple of things, one, we expect these premium trends will actually continue. One of the key components of that has been our persistency. Persistency has been good, and we expect to see that continuing over time. That, coupled with the sales side, we'll see good premium overall trends. Risk results we expect to be stable. This is one of the things that we continue to do. We price very effectively to our business, select our risk very carefully, and do a good job in terms of how we renew our business as well. All those things lead us to expect that we'll continue to see good risk results. We will see the impact of our discount rate adjustments in our long-term disability block, which will raise the overall expected benefit ratios there slightly. But even with that, we expect the benefit ratio to go down in our long-term disability block as we look up to 2015. We will see continued pressure on the investment income side. That is the reality. That is what we have factored in as we look out over the course of the year. We expect an environment very similar to what we see today with low rates, tight credit spreads, and I think as you look at 2015, that's the reality we're facing, and so that's what we've factored into our plans overall. As a result of that, we see our earnings per share growth at 2%-5% this year. So it's a little bit down from what we had seen in previous years. I'll take you through the waterfall of why that is. But we're very happy with the underlying growth that we're seeing, and we'll deal with some of the shorter-term issues we see around the interest rate environment. But equally as important, we're going to continue to redeploy capital to our investors. First and foremost, our range next year for share purchases, $400 million-$600 million, slightly higher at the lower end from what we expected going into this year. We have the capital to do so. As I said, we're leaving this year in a very good spot from a capital perspective, and we expect to continue to generating it. We will look to increase our dividends as well, as we look into 2015, consistent with what we have done over previous years. If I were to dissect what was going on in that overall 2%-5% range, let me start out, first of all, we are seeing very good premiums growth, 4%-5%. We will take this by business so you can see how that is playing out overall. This is actually the margin that we are generating off of that premium growth. We are not only getting good premium growth, we are getting it at very consistent, very strong margins. We mentioned the interest rate side, more challenging, 3%-4% headwind that we will see as a result of both the discount rate change we are making and then just overall portfolio drag that we will see with those cash flows we have out there. I think that is the reality of today's environment. We are staring into that. We hope that it is not that way, but we are certainly planning that it does stay consistent with what we see today. Small little change here on the closed block and on tax side. When you bring it back to capital management, 2%-3% growth, which is a little bit lower than what we have seen in previous years. Part of that is our timing with the fourth quarter of not doing share buyback in the fourth quarter, which actually that number should be likely in normal years would be a percent higher than what you see there today, which brings us back to the overall outlook. The other piece I raised in 2015, very consistent with what we have seen over a number of years. We are going into the year expecting a range in 2015 of an RBC level still in that 375%-400%. We have been operating the company much more at a 400% level, but we still are consistent with that range, knowing that 375%-400% is a fine range to continue to run the company in, even though this year we will end at an RBC ratio likely over 400%. Our cash and marketable securities at greater than $500 million continues to be 1.5-2 times what we need at the holding company, but we maintain that cash buffer to continue to be able to do things we want to do from a capital perspective and also be opportunistic when the opportunity provides itself. To drill down into that, I think it is important. This is a slide that Tom showed you, we have been showing you the last several years. It is actually a very straightforward model in terms of how we look at it. You can see the sales growth here, and we should note on the Unum US side, Mike will touch on this, a little bit lower than our expectations because sales are going to be that good this year, and so we are actually trying to be prudent in terms of what that growth rate looks like next year. We will see how that plays out for the year. But you can see a premium growth rate of 4%-6%. Very strong premium growth that we see in our Unum US business. The U.K. sales results will continue to be good. Premium levels in that 0%-2% range. We are continuing to look at the block of business and how it is going. We're okay with that, but that's certainly an area we'd like to grow in the future. As we said, on a normalized basis, we would expect to grow it. At Colonial Life sales levels 5%-8%, very strong sales coming off of a good year this year as well, 2%-4%, also benefiting from very good continued persistency. When you combine that all together, our core operations with sales levels growing 4%-6%, more importantly, the premium levels growing at 4%-6%, I think looks a lot better relative to our normalized expectations for the company overall. Jack McGarry mentioned the closed block, when you bring that all together, what you'll see in the aggregate is 2%-4% type premium growth levels for the company. On the earnings side, as you go by business unit, you'll also see some of those interest rate pressures that we have out there muting what is a very strong top line and a strong margin perspective. It brings the U.S. down a little bit, as well as the U.K. and Colonial Life. Still respectable in that 1%-3% range. We'd like to see that higher, but we're dealing with the interest rate environment we have it today, and we would expect that to be higher as you look out into future years, with operating ROE levels continuing to be 13%-14%. Very strong ROEs continuing to be generated by our lines of business. You bring that down to the closed block as well as the capital management, which is primarily share repurchase, you're looking at ROEs of 11%-12% being aided a little bit by what we're doing from a share repurchase perspective. So consistent to better with what we're seeing today and an EPS growth rate that we're seeing from 2%-5%. That gives you 2015. We want to stop here and actually make sure we take your questions about what we're seeing at the end of 2014. What we see going into 2015, and certainly if you have any questions on the closed block, take those at the time before we bring up our business leaders to talk about their businesses. Tom White, you want to moderate? Yeah. We'll have a microphone that'll need to come around so we pick up the question for the webcast. Why don't we start with John Nadel in the back row there? Thank you. John Nadel from Sterne Agee. Question, just a housekeeping item on the discount rate change. Can you tell us what that is going from and to, and that $26 million pre-tax impact, is that entirely in 4Q? I was not sure if that is what you were saying or if that is spread out in 2015. Yeah. No, sure. We do not really talk about where it is from and to in the detail level about what the discount rate change is. Once again, it is to maintain that margin that we see over time for that 50 basis point of discount. So we do manage it quarter by quarter, year by year to make sure we maintain a good margin and a good spread. The impact is actually the $26 million we mentioned is a full-year impact. So that is in 2015. What we will see in the fourth quarter is roughly $66 million of impact there, and that is factored into what we talked about. That fourth quarter impact, is that considered part of your operating earnings, the baseline off of which we judge the 2 to 5? Correct. Okay. It is in both periods. One quarter worth, then a full year. Yeah. On the long-term care side, obviously, the charge is going to be a non-operating item, so we won't impact the comparisons, right, from that? That's correct. Okay. Then maybe Jack, just a quick question for you. For the New York sub, what percentage of statutory long-term care reserves does that represent? What's the total STAT reserve and total GAAP reserve after you make these adjustments? Yeah. I don't have the specific reserve numbers. It's about 20% of our block in the New York sub. After the $600 million-$800 million increase in GAAP LTC reserves, is GAAP and STAT roughly similar or still a difference between them? There is still a multiple hundreds of millions of difference between them. Okay. Thank you. Sean Dargan from Macquarie. Jack, when you were talking about the liability side of LTC essentially being a push, I am wondering if you could give us a little more detail. There are some concerns around claim severity trends in the industry, and so assuming that trended worse versus when you put this block into runoff, I am just wondering what the offsets were. Yeah. We're not going to go through in great detail the puts and takes. I would say that we weren't completely inconsistent with the industry, so severity trends were worse. Rate increase prospects, as I talked about the new filing that we had, offset a lot of that. Hi, Tom Gallagher, Credit Suisse. Just to come back on long-term care. The assumption that rates stay low for 3 to 5 years, and then revert to the mean over the 5 years after that, how does that compare to the changes you made in 2011 when you took the last charge? Is it a more conservative forward interest rate outlook embedded now in the reserves? I guess the related question to that is if we then roll forward 3 years from now, would you have more cushion? If rates don't go anywhere, would you still potentially have to take another charge or is there more cushion after this go around? Let me take those in order. First around the charge relative to the 2011 charge. This charge was bigger than the 2011 charge. Three things drove that. One is we had hedges in place at the end of 2011 that we don't have now. The second piece of that, spreads have contracted. Actually, the interest rate environment's pretty similar to where it was in 2011, but spreads are much tighter today than they were then. The third piece is that assumption around the reversion to the mean. We did a much steeper clip to the mean in our 2011 charge than we did this time, so that 5-year reversion was much more gradual. I would say that as a result that the charge was bigger, the discount rate was lower. That helps to mitigate future charges. I wouldn't say we're immune to if the current environment persists longer than the 3 to 5-year time horizon, we'll probably have to revisit the assumption again. I would say too, though, you can think about biting this off in chunks. Every time you take a chunk in the discount rate, the distance you have to go gets smaller. We're kind of asymptotically approaching where we would be in 3 to 5-year chunks. Okay. Then just another question on the closed block. Last year, the guidance on the closed block was, I believe, 6%-9% earnings growth. This year, it's down 8%-10%. It's a pretty big reversal, and I know you highlighted three reasons. Almost a 20% year-over-year delta would still seem pretty meaningful. Is there anything else other, and I know you highlighted interest rates and less favorable long-term care claims experience. Yes. When you began the year, you weren't contemplating favorable. The year-over-year guide would seem to suggest something else is going on. Can you give any more granularity for what's going on in the closed block? Yeah. Actually, if you recall, in the fourth quarter of 2013, we re-domesticated our Bermuda to Vermont. When we did that, we strengthened statutory reserves. By strengthening statutory reserves, that added capital behind the line. That increase was largely the interest on surplus with that reserve strengthening. Okay. That doesn't- Really that's the main- That was a one-time event. Okay. Thanks. We'll just work our way across the room. Hi, Jimmy Bhullar, J.P. Morgan. On the LTC reserve increase, can you talk about what type of price increase assumptions you've got embedded in the reserves, and then what is the environment like for getting price hikes now that a lot of other companies are doing the same thing? Are you getting more pushback, less pushback from the regulators? Our price increase, we recently filed a new round of rate increases on our biggest individual long-term care block. That was the block I talked about where we filed it with an option to forego the rate increase if you'd reduce your future inflation rider. Our assumptions are basically that we will have a similar level of success on these recently filed rate increases that we've seen over the last couple of years. I do think we have a very extensive regulatory outreach program. I visited personally with, this year on that new rate filing with Texas, New York, Florida, all of our domestic regulators, Nevada, and California. I would say that, my judgment is there is a better recognition among regulators of the issues that the long-term care industry is facing, that they're more aware of their need to balance the financial strength of insurance companies with consumer considerations. I think the environment has gotten more favorable for rate increases. On buybacks, should we assume in the past you've been fairly even throughout the year. Should we assume a similar trend in 2015? Also, why wouldn't you buy back since you're saying you're going to buy back stock in 2015, why wouldn't you do some buybacks in 2014 or front-end more of that and do less in 2015 since you've got the capital? Yeah. So actually, Jimmy, when you look at 2014, from having a capital perspective, we could do that today, actually. But given the change that we have here, we've kept ourselves out of the market and doing that from a policy type of perspective as opposed to having the capital to do so. As we look to 2015 and the $400 million to $600 million we talked about, we will actually be reflective of what the market is. Although in 2014, we actually bought on a fairly consistent basis. It was a fairly consistent market as well in terms of where our share price was over time. So we like to take opportunities when the share price is at different levels to buy more at some point in time, and then when it goes up, buy less. But overall, you'll see us do that over the course of the year. Lastly for Jack McGarry, what are some of the things that we should be watching to get an idea on whether there's going to be a need for another reserve charge, like one, two, three years down the road? Obviously, interest rates is one, price hikes is another one, but what's going on in terms of incidence trends, claim severity, claims frequency, and so on? I think longer term, we expect the long-term care loss ratio to hover in that 85%-90% range. I think if it were outside of that range for a prolonged period of time, it would begin to put pressure on the reserve assumptions. The thing I would note, though, is these are very long-term assumptions. You look at one or two quarters worth of new information relative to the entire history of a block, and it just doesn't move that quickly. So over the two, three, four-year timeframe, you may begin to get pressure, but it's not something that we would react to as a result of one or two quarters of either favorable or adverse experience. Thanks. Thanks. Ryan Krueger, KBW. It seems like there's been some differences within the long-term care industry in terms of what companies are assuming for kind of morbidity incidence trends into the future as well as mortality. Can you give us any sense of what you're assuming in the future, if you're assuming morbidity improves or stays consistent where it's at now, as well as kind of what you're assuming for mortality improvement? We do have assumptions in there for morbidity improvement and mortality improvement. It's consistent with kind of the literature on the state of the art of morbidity, mortality. It's also, actually, we've seen morbidity improvement in our own results over the past several years. So it's consistent and actually less aggressive than what we've actually seen over the last couple of years. We also have mortality improvement in our numbers, and that's pretty consistent with kind of the Society of Actuaries' global mortality improvement assumptions. Okay. Just a quick one. What tax rate assumption are you using for 2015? Certainly. One of the things that you actually note in our press release is we do have a change in the accounting processes we have there. On a consistent basis, it would be right around that 30%, but given some of the moves with our tax advantaged securities that we have out there, it's going to step up to by about a point and a half. So it'll be 31%-32%. That's a pre-tax, after-tax thing. There really isn't much earnings impact. I would tell you that when we recast that, both in 2014 and 2015, it will remove about $0.04 of earnings, but that's from an accounting change perspective. So there's more details on that in the press release. But expect it'll be more in that 31-32 range. Thank you. It's going to be Nigel. Great. Thanks. Nigel Dally from Morgan Stanley. Had a question on your cash flow testing margin. Appreciate it's zero for New York, but outside of New York, what do you expect it to end of the year and how it's changed from the previous year? Any color there would be great. We don't disclose our cash flow testing margin outside of New York, but clearly, with this reserve charge, we'll affirm that our reserves are adequate on a GAAP basis. Again, there is some room in between the GAAP reserve and the STAT reserve. So by default, we also feel very comfortable with our statutory reserves. Get Steven on the back row. Thank you, Tom. Steven Schwartz, Raymond James. A couple more for Jack. Jack, the 2011 charge was very much informed by a Society of Actuaries study that had come out, if I remember correctly. Yes. Any new sources of data that you incorporated in there? Yeah. We have representatives on the committee that did the new society study of claim termination rates. So we got a preliminary draft of that study. We looked at that draft. I can't say that it drove a lot of our assumption base, but we were very comfortable with the assumptions we made relative to that new study. We wouldn't expect that when the final study's actually published, it would have a material impact on where we are. Okay. Then as a follow-up to that, particularly on the group side, I guess, you have a very young book of business. Yes. Was there a substantial change in the amount of data from your own experience that you could use relative to having used industry type of sources? We relied pretty heavily on our own data. The group side, you probably don't have quite as much claim data. We have a lot of claim data on the individual side, so we relied pretty heavily on that. We were informed by industry data. As I said, we looked at the table. We had purchased some industry data from consultants, so it was an aggregate view, but a lot reliant on our own. Okay, thanks, Jack. These two over here. Thanks. Eric Bass with Citi. Just a question on the discount rate change. Are you making changes to your pricing? Should we expect that, I guess, the benefits ratio headwind to go away over the course of the year? If you are changing pricing, what is the impact expected on sales there? Certainly. I think when you look at our pricing dynamics that we've had out there, Mike can talk about this when he comes up as well, is actually we've been very consistently taking price in the market as you look over the last several years. This isn't a new thing on that front. As we look at it, we actually feel very comfortable with that discount rate change. I say we feel comfortable. We have work to do, obviously, to generate those sales. But given the price changes that we have out there, we think we'll continue to actually see good growth rates, even inclusive of some of the pricing changes we'll need to do to reflect some of the discount rates. We can ask Mike when he comes back up to talk more about that if you like. Got it. On that sort of $6 million-$6.5 million quarterly drag, do you expect that to persist going forward or will, as the pricing increases, kind of earn in that your benefits ratio would improve? Yeah. So that drag will continue because that is purely what's going on from a discount rate perspective. Where it gets offset is actually in increasing margin and premiums in the line. So we do expect to offset over time, and it takes a couple of years to go through that pricing cycle, but that's very consistent with what we've been really doing for the last couple of years. It's nothing really new on that front, even though this discount rate change is something new. Jay. Jay Gelb from Barclays. For the return on equity outlook in 2015 of 11%-12%, is that taking into account the GAAP charge? Yes. Okay. For the fourth quarter, I just wanted to see if there's any other one-timers we should take into account. So we have no share buybacks, the $6 million pre-tax impact from the change in the discount rate. Is there anything else we should keep in mind there? Not that I can highlight at this point in time, no. There was a drag in 3Q from a lack of prepayment income on investment income. Is that a factor in 4Q? Prepayment income will be volatile. We will bring that out as part of our fourth quarter results in terms of where that ends up. Okay. Deutsche Bank. Jack, one more for you. I think you said that when liabilities basically were a push, there was a pricing component there as well. Yes Repricing. I am assuming that is also forward repricing and maybe even does that include things that have not been filed yet? Does it include any change in the approval rate from the regulators, let us say, over the last three or five years? As I said, it is based on filed rate increases. They have been there. Probably the only exception to that is we have states that will approve smaller than requested rate increases, but have, say, we will approve the 15%, 20% rate increase this year, come back next year. It anticipates that revolving piece with states that do that. The vast majority of it is assuming that we get results consistent with our history on currently filed rate increases. Is there any way to think about the sensitivity of, let us say, pricing increases coming in above or below expectations? Given the way that we do our reserves, which is kind of a lockdown, that delta would have a very modest impact in the short term. It would be more about how soon you would need to revisit reserve assumptions going forward. Thanks. Sunny Kumar from UBS. I guess first, for Rick McKenney, a definitional question. In your outlook guidance, you are giving us sort of the reported and then the normalized. There is like a normalized column. Yes. What are you normalizing for? Is there a table somewhere where we can sort of see that? Is it just for the discount rate change? Yeah, no. The normalized column is to represent how the business earnings profile will look in a, what I would consider, a more normal environment. We could all debate exactly what that looks like. But what that does look like to us in a normal environment is that we're seeing good economic growth in the economy, that the wage and the employment picture looks similar to what we've seen in the past, and interest rates would be a little bit more normal than they are today, which means they would have increased some. With those headwinds, that's what's keeping us down from that normalized. It's not any kind of pure reconciliation that you should go through. It's kind of how we price our products, how we expect them to grow, and without the headwinds that we have out there, how we'd see the whole company. You're not adjusting the base or anything like that. It's just kind of. No, it's much more. More steady of a forward-looking view in terms of what the profitability profile of the company would look like. Okay. I guess for Jack, on LTC again. I guess I'm just trying to understand why we didn't see a charge on a STAT basis other than the New York. I think the New York, for us to clarify, is something that you typically do every year anyway, right? Like 125. Yes. Tom, you did something like that last year. I'm assuming that's built into your capital generation plan. Yes. Why wasn't there a bigger charge on a STAT basis? A big piece of it is we had a pretty good gap between our statutory reserves and our GAAP reserves. Just to be clear on that, is that something that you've managed to, meaning, because we've gone back and forth on this on conference calls, like whether that's a relevant thing for us to look at, the difference between STAT and GAAP, because you've pointed that out in instances in the past. Then I think you've also said, "Well, they're sort of calculated differently." So, it just by coincidence, they're the same. Yeah. So they are calculated differently. Right. You can't reconcile that gap by looking at the assumptions between them. But the fact of the matter is, until your GAAP reserves exceed your STAT reserves, any charges you take or other things you do with reserves will show up on a GAAP basis and not a STAT basis. Got it. As long as there's a margin, we feel comfortable that, A, our GAAP reserves are adequate, and by default, we feel comfortable with where our statutory reserves are. Got it. Okay, thanks. We'll go ahead and get these last three questions here, and then we'll move to the second section. We've had a pretty big decline in interest rates this week. When did you write this speech and fill in the blanks for the numbers? Did it incorporate the current 2.05 ten-year? I got a couple quick follow-ups. Yeah. I would actually say it goes back a few weeks. We aren't as real-time as this morning putting it together. But I would tell you it's immaterial impacts in terms of what we've seen really over the last month. I wouldn't say our sensitivity is not that great to those shorter-term moves, and we'll see how that pans out as we get into 2015. And each sort of 50 basis point change is exponential or additive? CNA sort of gives an exponential sensitivity analysis to changes in interest rates. How about you guys? No, we actually don't give that sensitivity. I would tell you that in any given year, it probably wouldn't be exponential, but you will have a compounding as you look out to multiple years. But we wouldn't have similar things to that. On your year out, year 5 and out assumption, do you use a forward curve? Do you use a history of 50 years of interest rates? There seems to be a wide range of methodologies for how to approach the terminal year normal discount rate. Generally, I'm not talking about 5 years, but generally, we do pay attention to what the forward curve is telling us in terms of rates. That's one of the changes that we saw this year was not just where rates are today, but also the view of the forward curve changed pretty dramatically as you went from the beginning of this year to the end. But I would say in our planning as we look to 2015, it's not that material because that curve is so flat at the moment. But we try to use forward curves and other means in terms to inform us in terms of what we see interest rates looking like as we look out beyond next year and future years. But let's say you're using like a 50-year history, you can You could use a higher rate than the forward curve would suggest. The other methodologies tend to be less conservative. I would say our methodology, in particular to 2015, is reasonably conservative. Taking today's rates and rolling that through our plans is conservative. We do. We think it's reasonable in terms of taking where we are today and rolling that through our 2015 plans. You get beyond that, which we're not talking about beyond that, there's a whole bunch of different ways you could look at that, but that's how we're looking at 2015. Thank you. Hi. Thank you. Seth Weiss, Bank of America Merrill Lynch. If I could just follow up on Sunit's question on the statutory charges in New York entity. I believe in 2013 you didn't take a STAT charge, which isn't surprising considering how rates went up. If we think about the path that interest rates need to take going forward for you not to take persistent charges in the New York entity, how do we think about that? I would look to the history of charges in New York. So we took two charges I think in 2011, 2012 of 125. We took 150 this year. I would look to the history as a guide moving forward. Maybe asked another way, if charges stayed flat or just went along the forward curve, which the forward curve doesn't suggest any kind of robust improvement, would that indicate a threat of, again, a modest charge to 2015? You're talking about rate increases. On the STAT. Yeah. I think it would be consistent. There's a lot more that goes into it than just interest rates. There's rate increase success. There's morbidity and mortality changes that happen. Yeah, I think that history is probably a pretty good indicator. Thanks. I think it's also important to add that we think about those sensitivities as we lay out our capital plans too. Right. If we do end up in a similar situation, we'll be able to incorporate that into our capital plans and still feel comfortable doing the things that I laid out for you in 2015. Eric Berg from RBC. My understanding is that your competitors, working presumably with the same forward yield curves as you have, are contemplating, not dramatic, but nonetheless real increases in interest rates. I think if you reference MetLife's presentation last week, for example, which I suspect you've certainly taken a look at, you're aware that it is contemplating an increase in interest rates, and I believe that is true for Prudential, and others as well that have given earnings outlooks for next year. My question is, if the forward curve does have increases baked into it, why are you taking a more cautious view than that and your competitors? Thanks. I would- It sounds like that's a broader question- Yeah than some of the other ones, which is we look at it when we think about it. So you can use that, and ours is not to criticize their methodology. Ours is to say how we're looking at it in terms of dealing with that. I think as we went into last year, we saw some of that challenge in a lower interest rate environment, that things didn't turn out the way the forward curve does, and in fact, they rarely do turn out that way. So as we go into the year, keeping it consistent with where we're seeing today or slightly above that, I think someone mentioned that earlier, very slightly, consistent over the course of 2015 is how we've chosen to do our planning for this year. All right. Thank you. Okay. Great. Thank you. We have 5 minutes. We'll catch you afterwards, John. We're going to go ahead and have a quick shift change and have our next set of presenters come up to the podium. All right. Good morning. My name's Mike Simonds. I'm responsible for the Unum US business. There we go. Just by way of profile, Unum US is a $4.6 billion business. It generates strong and consistent profitability in the range of a 12%-14% return on equity. I don't suspect that is new news to anyone in this room. I'd say what I would like to highlight, though, is that growth for this franchise is beginning to accelerate. We have a top three market position in all of our product lines and segments, and it is the case actually with all of our ongoing operations, Colonial Life and Unum UK. We are completely focused on employee benefits. I think this focus on the worksite brings a distinct advantage as the market changes, and these are some interesting times in the employee benefits business. We're 100% focused on ensuring that we make the changes in the investments in the franchise to not only weather any of the winds of change externally, but that we actually position our franchise to benefit from those changes. First and foremost, we see an increasing demand for the financial protection of our products amongst consumers, and Tom Watjen highlighted that at the outset. If you just take one pervasive trend around healthcare where deductibles continue to move up, really what you're seeing is at the worksite, healthcare is becoming more so of a catastrophic coverage than it is a first dollar coverage. That means greater financial exposure to working Americans that are already living paycheck to paycheck. While this isn't a sudden change, this is a gradual and continued change that we think is a real tailwind for our business around the demand for basic financial protection. On the employer front, employers are remaining engaged in employee benefits. The nature of that involvement, though, is changing over time, where more and more often, they are looking to provide strong choices for employees to elect the coverage of products and levels and amounts, and to contribute in the funding towards those coverages. As funding shifts from employer towards employees, employers that remain very involved in selecting benefit carriers, they are a little less price sensitive and a little more service sensitive. They are increasingly concerned with not just the price and the underwriting, but they're more and more concerned with the strength of the delivery of the benefit. They're looking to do business with fewer carriers to put strong programs in place and to leave those in place for the long term. We believe our franchise is exceptionally well positioned to benefit from those changes. We think that because our foundation is a unique one. Given our scale in the employee benefits business, we're able to invest in the people and the process and the technology to deliver exceptionally strong service. Our claim management approach is powered by over 2,500 benefits professionals, including over 200 physicians, nurses, and rehab specialists. Our pricing and underwriting is based on a very large and diverse data set. When it comes to disability insurance, we have the largest data set, I believe, short of the Social Security Administration. This scale and disciplined approach has enabled us to deliver historically, very strong persistency and very predictable benefit ratios. Increasingly, this client base is providing a very strong source of growth for us. Let's talk about the Unum client base. First, we have a very strong position against a very diverse set of employers. You see the chart there, that shows long-term disability clients in the small end of the market, so strong market share there. At the other end of the market, amongst Fortune 100, you see over 40% of them have Unum as part of their benefit portfolio. If you were to look at it geographically, you'd see actually that the Unum client base matches up with DMB almost to the percentage point from the East Coast to the West Coast. Having this share, I think is increasingly a competitive advantage for us when it comes to growth as increasingly benefits become consumerized. Those clients become stickier and what they look for out of their benefits provider becomes a little bit more involved. I am going to take this page and work it from right to left, almost the opposite way. You see first that continued steady, gradual shift from 100% employer funded towards employee contribution. We see that year in and year out, and we do not see that trend reversing anytime soon. Again, as that shift occurs, and I think this is really fundamental, the delivery of benefit becomes increasingly important when employers make selections around which benefit providers they are going to do business with. So who brings enrollment capabilities, who brings administrative capabilities, who is able to integrate with the technology that they are using to manage their payroll and their benefits. Increasingly, I think our focus plays to good advantage, and you see that in the middle chart, where the percentage of our sales that are coming from existing clients continues to increase. We feel like this is a big growth opportunity. If you were to look at the Unum client base today, you would see on average, we have 2.5 product lines per employer client. A fully integrated Unum client would have north of 7 product lines in place. You could see that there is significant headroom for growth. But on top of the fact that there is growth potential within these employers, is also the fact that premium comes in more favorably priced to going out and getting a new client in the marketplace. That client comes in with slightly lower acquisition costs. Perhaps the biggest lever is actually each time we go in and find growth within an existing client, we further the stickiness of that relationship. We are going to get a good example as we sort of look to adjust pricing for interest rates next year. We are going into a client base with modest increases, and the scope of those relationships are much broader than a single client line. We fully anticipate that persistency will stay high. As we are able to make this shift towards employee pay, and as we are able to build growth within the existing client base, you see the aggregate sales trend has been a positive. Rick highlighted it. We did take a pause when the market froze up a bit due to ACA implementation, but outside of that, it has been a pretty steady and consistent growth trend. Switching and talking about 2015 more specifically. We do expect continued strong persistency due to the depth of those relationships and the strength of the service value proposition. We are running right about 90% this year. We expect strong sales growth really across our lines and segments. There is really one exception, and Rick highlighted it at a high level. 2014 is proving to be a very good year across our businesses, but in particular in the large employer group segment. That is an opportunistic business for us. Where we find new client acquisition opportunities and we can acquire them within our pricing guidelines, we are very anxious to do so. 2014 is shaping up to be one of those opportunistic environments. But as we sort of look forward into 2015, our business plans do not contemplate a repeat of that exact same environment. If those additional large employers present themselves, we certainly have the capacity to take them on, but we will only do so within our pricing environment. Sales should be strong next year. But if you take the large case and set them aside, we are actually contemplating a little bit of a decline. Everything else we were expecting to grow in the 6%-8% range. Rick highlighted it, a stable risk environment. In general, as we sort of look through that block of business and look at the trends, we feel good. In fact, as the economy continues to improve, we hope there is a little bit of a tailwind when it comes to things like disability risk headed into next year. The continued year in, year out renewal program that we run that works profitability at the edges to always be looking for pockets of profit improvement, that will continue to play out in 2015. While the loss ratio will have some pressure from the 50 basis point drop on new LTD claim incurrals discount rate, we feel like over time that we will be able to absorb that through the renewal program and through the price increases. We will continue with our pricing discipline, not only on renewals, but new business pricing. Given interest rates, we are going to move our pricing up in the low to mid single digit range in 2015. This is not a dramatic shift from where we have been. We feel like and are optimistic that the environment is a good one for placing these types of increases. Generally, when we look at industry level data, we know that the interest rate problem is a universal one. But on top of that, the industry has not done a very good job of managing loss ratios. While we feel very good about where we sit relative to claim risk and do not need to make adjustments due to that factor, the industry does. What we are anticipating is that as we will need to move up for interest rates, that we will not see a wider spread from where the rest of the industry is. That being said, the relative hardness of the pricing environments next year is exogenous to us, and we will watch it play out over the balance of 2015. I think important that while we continue to generate strong and predictable performance financially quarter in, quarter out, that also includes significant investments in the long-term strength in the business. Our business plans this year and certainly in 2015 include additional investments in employee paid product and technology to enable us to reach through the employer to that end employee. Improvements in our client experience, so we continue to see growth out of those existing clients. Then increasingly strong partnerships, both in terms of products partnerships, but also technology partnerships that are enabling us to get these important financial protection benefits out to employees. Similar to what Rick did at the group level, here is Unum US from a waterfall perspective. You do see first that accelerating top line contributing. That business is coming in at good margins, so we would see 4%-6% BTOE growth due to the top line. Another 4%-6% as we continue to see improvements in our operating expense and our risk line. The operating expense, just to pause for a second, not major swings, but gradual improvements that we're anticipating there in 2015. That's a function of two things. One is over the last several years, we've changed our service model and moved responsive service out of our field locations and into a central organization. We're seeing improvements in both quality and efficiency. Then increasingly across our businesses, we're looking to centers of excellence. Those are providing services across our business segments and doing so again at higher quality and lower expense. Not a dramatic change, but just continued strong expense discipline contributing to earnings. Then you have the headwind of both the anticipated decrease in net investment income, but then also the $26 million of discount rate pressure that comes through on LTD. The net is 1%-3%. I think if you think about the magnitude of the interest rate environment to have the business continuing to generate BTOE growth is a testament to the strength of the franchise. Then just summing it up, you'd see in 2015 we're anticipating sales growth of 2%-4%. Again, if you were to pull out new large case group client sales, that would be more in the 6%-8% range. Again, if those opportunities present themselves again in 2015, we would certainly find ourselves to the top end of this range or exceeding it. But again, we'd only do so if it was within our pricing parameters. Premium growth accelerating into the 4%-6% range. BTOE, we went through the waterfall 1%-3%, then continued strong ROE in the 12%-14% range. I look forward to taking your questions, but before we get to the Q&A, let me turn it over to Peter O'Donnell to talk about the U.K. Good morning, everybody. Delighted to be here in the U.S., sorry, from the U.K. It's a year on, so unfortunately, I've got glasses. I'm not that familiar with how to use the glasses yet, so I'll try with them on because my sight is beginning to go. We'll see how that goes. If we start with a similar snapshot to Mike's version for the U.K. business. There you see earned premium, about 360 million, PToE 88 million, and ROE of above 18%. We're in a slightly different position than the rest of the business, and I sort of go to the premium chart to bring that out. We've been repositioning this business over the last couple of years, and particularly the Group Life business. As you can see there, net earned premium is about 21% on that. If you went back two years ago, it was about 30%. I guess the STAT I'd use, there's a lot of different moving parts on reinsurance and rate, what's going on there is on the Group Life business, we've shrunk premiums on a growth basis by about 12%, but exposure by over 30%. That's been the core drive within the business. We've basically taken a lot of the loss-making business out of the exposure and basically put a lot of rate through that business. That's what's driven those margins up. That's been quite a big effort across our business with brokers and employers to maintain a positive franchise spirit while we reposition the business. That work is done now and now we're ready to move to the next phase, which is taking advantage of some of the growth opportunities that exist. I'll talk a bit more about that in a minute. Just talking a bit about the U.K. for a minute. Actually, if you took the U.S. and talked about low interest rates, positive economy, employment growth, well, it's the same in the U.K. Very similar trends for the U.K. As Tom mentioned, there's also an increasing push to move towards the employer as where they're going to place insurance products. In the U.S., you've got healthcare, and in the U.K., we've got auto-enrollment for pensions. That is rolling out over all employers. We're in the process of that. It's going to take the next three or four years, but basically every employer over 100 employees will have a pension scheme in place by the end of 2017. So a big opportunity for those who are playing in the employee benefit space. The question for us is how do we take advantage of that? The other significant item in the U.K. is around regulation. Like the U.S., we're seeing increasing focus on regulation and governance. In particular, in the U.K., we've got Solvency II coming in, which is a major change for European insurers, and I'll talk a bit about that in a minute. So what's the strategy? A lot of this, hopefully, is very familiar to you. The opportunity to grow the group income protection market remains. I'll talk a bit about how we've been getting on in a minute, but basically it still remains that only just above one in seven employees in the U.K. have got income protection. It's increasingly known both at the employer, the employee, and at the government side that that's a great opportunity for everybody to increase their coverage and do more individual protection. That's a push that we're playing into, which is we're seeing an open door on, but it's relatively slow moving. Having repositioned the Group Life block, we now have an opportunity to grow in there, and we've identified some segments in the Group Life block, particularly where we would like to grow, particularly around the small and medium end of the employer market, which is less price sensitive and actually is a bit more attractive from a capital perspective as the new capital rules come into place. Then finally, the third box, introduce related products and services. We've launched short-term disability. We're seeing some momentum on that coming through the U.K. We hope to see that continue over 2015 and 2016. But there are other products and services that we're also looking at, particularly the embryonic voluntary market remains of interest to us. If we see the right opportunity to take advantage of that, we will do that over the next few years. That's something that is on our agenda. Nothing to report to date, but an area that I would expect to return to over the next 2 or 3 years. The bottom area, I think you could draw for Unum Enterprise, really. Industry-leading customer experience. I'm sure Randy and Tim will talk about that, and Mike did talk about that. That's a key aspect of our business proposition as well. Our customer today is more of the employer. But it may well become the employee, and we need to make sure we're well prepared for that. Simplifications of processes and operations. Mike talked about his change, about moving activity from branches into the head office. Similar thing took place in the U.K. this year. We've done a sort of reorganization, which has taken activity out of branches into regional office. But particularly in the U.K., we're looking to invest in technology. During 2015 and 2016, we're going to replace our administration platform. Two aspects to that, really. One is preparing for perhaps some of the changes as we see the auto-enrollment and platforms come into the U.K. and being able to automatically interface with those. I see e-business being something that will become more significant. Then secondly, just a simplification of our processes and an opportunity to move to more modern 21st century technology. So there's some investment going in in the U.K. to replace that administration platform. Develop and enhance our leadership, something the enterprise has been doing a lot on, and we will continue to do. Then capital management strategy. Solvency II becomes live on the 1st of the 1st 2016. That means a number of changes to the way it's a risk-based capital approach, which is similar to what we've been used, but it has changes to both the way we govern our business, but also how capital works on a number of different risks. Therefore, how you optimize in that regime is something that we will look to do during 2015. That could be the use of reinsurance, for example, may become different as we move through 2015 than it has been historically. So looking at the outlook during 2015, investing in that technology to accelerate growth. I think we will see the expense ratio run about 21% or a little bit above 21% during 2015 and in 2016. Then we'd look to come down as we push that investment and see some of the benefits coming through, both in terms of growth and efficiencies. Then we will continue to place rates to offset interest rate pressures as well. So Mike talked about, and Rick talked about the discount rate, and lower NII. It's the same in the U.K. We've been putting rate through over the past 2 or 3 years into the group income protection book, to sort of offset that. We'll continue to place low, small digit rate increases through the book to offset those interest rate pressures. But it does take a little bit of time to get that machine totally aligned with that new interest rate world, and discount world that we've seen come through this year. I guess the thing I'd say is, for Unum, having some competitive advantage, I think it's a good thing that we assume that interest rate environment, because it does push management to take action to offset that through pushing rate. Whereas if you don't assume the interest rate environment, then you may not feel that level of pressure to put the rate through your book. But that's something Unum has continued to do over the past 2 or 3 years. I talked about the primary focus expanding the group income protection markets. So we, over the last 2 years, have been working very hard on that. Between 2011 and 2013, the number of employees covered went from 1.8 million to 2 million in the U.K., so 200,000. And we're seeing around about a 5% increase, seeing as the norm there. So that's what we're assuming in our plan, that the market will grow by around about 5%. And you can see the group income protection book sort of showing that. And again, next year, we're sort of in the premium growth of about 3% to 4% because it's just in terms of timing. It takes a little bit of time to come through that. And we'll take our market share of that. So of that 5%, we expect to get 2% to 3% of that. We'll continue to develop the U.K. short-term disability market. As I said, we'll start to target attractive group life segments. We are seeing some growth now in group life as we see that small and medium case proposition begin to work. It takes a little while to turn the line. So you can see we're flattening the line out for group life. And then post-2015, I expect to see us start growing that life segment again, and look to launch some other products. In particular, we're looking at group critical illness proposition, where our reinsurers are working with us. They've got some access to some new data, some new insights into that market. And we'll look to work with them to sort of relaunch that proposition. Then finally on the reinsurance, we are assuming that the reinsurance we put in place in 2013 and 2014 will continue in 2015. So you'll remember there is a quota share element to that and an excess. We're still continuing to use that quota share. Different reasons in the past, perhaps. It was a little bit of protection in terms of as we put the rate through. The economic terms seem to be very attractive at the moment. So really, it was a deal we couldn't say no to. And then as we look at 2015 and look at the new regime, as I said, we'll revisit our reinsurance arrangements in a Solvency II world. A little bit more about how we're going to do that. So, on the income protection, we've been doing a lot of work for those 200,000 employees. To be honest, primarily come about by the work Unum's been doing in the marketplace. We built a large social media sort of campaign. We've got over 15,000 Twitter followers, 22,000 Facebook followers. All employers who are interested in our proposition. We've been using that to support our brokers in terms of bringing new employees to market. We've also been working with the government and doing a lot of work on that in terms of making them more aware of the benefits of having individuals protect themselves. Increasingly, they are on the same mantra as us around the workplace being the best place to distribute insurance products. Capabilities to enhance growth. Something I haven't talked about is the productivity of our brokerage distribution channel. We've rearranged our distribution in this quarter. We're bringing some new roles into place to work with brokers who are currently not in the group risk space. They might be networks or wealth managers or asset managers. Equally, their income is under pressure due to some distribution changes in the U.K. around commission. They're looking for new products. They're unskilled in selling group risk products. We're putting targeting roles in there to bring more brokers into the marketplace, to sort of continue to expand coverage. Then risk management, really just continuing that underwriting and pricing discipline. That's a mainstay of Unum, really. In terms of the financial outlook. Sales growth. We're slightly below the normalized level. Actually, if you looked at that, really, that's just about getting some of those other products motoring. To get to that 10%-12%, what I'd see is some new product coming in there, and I'd hope to get that in in 2016, 2017. Premium growth. Really, the key there is that on the income protection, as I said, we're getting about 3%-4%. We've got the low end of the range even in 2015, and I expect the economy hopefully to pick up, as Rick said, to get us into that sort of normalized range. Then really it's about getting the momentum behind the other products to sort of match that. Operating earnings growth dampened a little bit as we sort of take the discount range changes and lower NII through, and continue to put rate through to offset that in future. As I said, we're doing a bit of investment this year as well. We'll continue in 2016 to sort of put that new admin system in. Then the ROE, 16-18. Even a post Solvency II world, I'd expect to be in the 15%-20% range in moving forward. With that, let's hand over to Randy. Well, thank you, Peter. Good morning, everyone. I'm a short-timer at this point, so I'm going to provide a quick overview of Colonial Life and our position in the marketplace, and then hand it over to Tim to talk about the future. Just to get everyone grounded again on Colonial Life, we have a very robust product portfolio. You can see that listing there on the left-hand side of the slide. Again, keep in mind, these are all short-term, fixed benefit, basically indemnity-type products, which provides us with a very stable risk profile. Our sales and our premium is very well diversified among these various product lines, very well balanced, again, whether you're looking at sales distribution or premium. Again, that really helps with our risk profile. In terms of market share, we are a major player, hopefully you all know that. In the VB marketplace, we have a strong ranking, you can see that listed there, in all the product segments that we emphasize out in the marketplace. We go to market exclusively through our career agency system, and that has two components to it. In the smaller end of the market, and with newer agents in particular, we have direct sales, again, especially to smaller employers. Then as our agents work upmarket, as they get more experience, they then partner with brokers. You can see we have over 14,000 broker relationships all across the U.S. On the right-hand side of the slide, you can see our sales distribution through the first nine months of this year, broken down by market segment. Our target segments are composed of primarily that commercial under 100 employees. You can see that's about 38% of our sales here in the first nine months of 2014. We also emphasize that 100 to 1,000 category. That's another 32% of our sales. Then our third primary target segment is the public sector. We've got a long history in that segment, and it averages about 20% or so of our annual sales. You can see here this year, we also have about 12% of our sales in that large employer segment. That's very volatile. It's going to jump all over on us, and we take what we get at standard pricing in that marketplace. We are continuing to see very strong sales momentum. As I think Rick McKenney mentioned earlier in one of his slides, we have about 9% sales growth here in the first nine months of the year. Again, continuing to see that momentum here in the fourth quarter. We're very pleased with that. I do want to point out the sales growth we're seeing in the under 100 segment. Again, on any given day, that's where most of our agents are spending their time. I think Mike Simonds pointed out with the implementation of the Affordable Care Act, and just general economic conditions, we did see a fair amount of pressure in that small employer market in the latter part of 2012 and throughout 2013. But we're seeing that swing back now and seeing some very strong results in that segment here in the fourth quarter. So kind of putting it all together, Colonial Life is a large business at this point, a very important component of the Unum Enterprise, about $1.3 billion of annualized premium. We continue to maintain very strong profit margins and consistent financial performance, which I think you'll find fits within the ranges, if not above, that we provide all of you every year. ROEs in that 17% range. I guess to close, I feel like the position is very well positioned to take advantage of what we see as some very significant opportunities in the VB market going forward. So good luck, Tim. Come up and tell them how you're going to do it. Okay. Thank you. Thanks, Randy. Good morning, everyone. Let me first start by saying it's an honor and a privilege to have the opportunity to lead a company that has been providing financial protection benefits to America's workers for the last 75 years. It's a great company and a great franchise. I'm going to talk a little bit about the momentum we have this year and then focus my comments on the marketplace and the plan for going forward. Randy mentioned we do have some strong momentum this year in sales, and we're pleased with not only the overall level of our sales, but especially pleased with the balance and the quality of those sales. When you look at our sales results, we have strong growth in every target market, every size segment, every sales region, and every product category. It's a really strong year for Colonial Life this year. We're also seeing great results out of new offices and new reps, and we're pleased with that. You see some of those numbers here. But we are seeing tremendous results from our existing offices and our existing reps as well. a very good story for 2004. Mike touched on some of the things that are going on in the marketplace in 2015. Thought I'd talk a little bit about the Colonial Life perspective on some of those things. Employers are under the pressures that Mike described earlier, and especially small employers. They continue to be confronted with significant increases in their medical plan costs. And in order to try to retain their employees and deal with those increases, they're increasingly putting in large deductibles and higher out-of-pocket costs to their employees. Our products like our critical illness and our Medical Bridge and our accident and cancer products fit very nicely into the gaps that are created when employers make those changes. Brokers are seeking solutions for their clients who are also confronted with those medical costs, and they're looking for opportunities to replace commissions that have been lost on the medical side. We have a number of solutions for brokers. We have what we believe to be a turnkey solution for brokers, which includes product, which includes benefits counseling. We have over 7,000 benefits counselors in the U.S., and includes enrollment services. That's a part of our story that we probably need to do a better job of telling. Enrollment capabilities is a key competitive advantage for Colonial Life. For every dollar of Colonial Life sales premium we enroll, we enroll $10 of core premium. We do the medical enrollments for a lot of the small businesses in the country, and it's a key competitive advantage for us and something that most of our competitors are unable to offer. Tom showed a slide earlier that said that brokers choose Colonial Life as the company that they most like to work for, especially in the small market, for the last seven years now. Consumers are struggling with a lot of the same challenges. Consumers have to make choices about medical plans that have significantly higher costs in them for themselves. They also are frequently uneducated about the changes in medical plans that are occurring as employers and brokers are confronted with higher costs. The 7,000 benefits counselors that Colonial Life has are able to provide assistance, not just with Colonial Life's products, but also with the medical products and other products that are being enrolled. As a part of that, it creates advantage for us because when an employee understands the gaps in their financial protection coverage, we have very affordable solutions to help them fill those gaps. As we look forward to 2015, our plan is focused in these four areas. I know we're getting a little bit short on time, so I won't spend a lot of time on each one. I will tell you we're very heavily focused on continuing the strong momentum we have on the growth side. We expect to increase the number of sales offices we have throughout the country, as well as the number of sales professionals who are out with Colonial Life products. We're also enhancing the relationships that we have with key partners on the brokerage side. On the customer experience side, customers today want to interact on the web and with mobile technology, and we are building new capabilities that allow them to do that, which is great for us as well. On the productivity side, Mike mentioned centers of excellence. A number of people in the Columbia campus now report in through centers of excellence. What we're seeing with those centers of excellence is not only improvement on the efficiency side, which you might expect through a center of excellence, we're also seeing nice improvement on the service side. We'll continue to invest in tools and technology that allow our employees to improve their productivity in 2015 and beyond. Then finally, talent. We've been heavily focused on talent acquisition and development over the last couple of years. We just completed a very successful talent and leadership development program with our top 45 key sales leaders, and as judged by the people reporting to those people, it was an incredibly successful program. We're rolling that out to a number of home office leaders in 2015 as well. When you think about the market opportunity and you think about our plan, we feel pretty good about being able to deliver the types of numbers shown here. So sales growth in the 5%-8%. We see a lot of opportunity in the marketplace still, translating to a little lower level of premium growth due to some muted sales growth we had in 2013, and an operating earnings of 2%-4% and overall ROEs in that traditional 15%-17%. I want to thank Randy for building such a strong foundation and platform in the franchise. We have a lot of good things to work from going here. I think, Tom, at this point, we're going to move back to Q&A. Thank you, Tim. Now we'll go to a final Q&A session. This time, I think we'll start on my left-hand side and move to I'll tell you what, we'll go to John Nadel first, since John, we cut him off with the last one. That's right. John Nadel from Sterne Agee. Thanks, Tom. I had one quick follow-up question on the long-term care side. I'm sorry about that. I know you wanted to move forward. I'm not too terribly surprised. You told us that you're reducing your discount rate on the LTD block by 50 basis points, and I understand for competitive and other reasons, you don't want to tell us the point from and the point to. I was curious whether you'd be willing to tell us how much you dropped the discount rate on the long-term care block, even if not from point X to point Y. Sure. I think actually, if you look at our disclosures from last year, we talked about changing the discount rate of 25 basis points equated to $400 million. I think you could actually back your way into that basis point change in a reasonable way. Okay, perfect. There is a linearity there. Should be consistent with that, yeah. Thank you. That is all I had. Thank you. Okay. Now let's come back over here. Thanks. Eric Berg from RBC. Just one question also on the LTC. Is this an increase in both reserves, namely the active life reserve and the disabled life reserve? The vast majority of the increase will be in the active life reserve. So some, but a- As we get to reporting in the first quarter, I think you will get more details of that. But I think that just given the nature of the change, it is going to be mostly in the active life reserve. Thank you. Humphrey Lee from Dowling & Partners. A change, not an LTC question. From the core businesses, in terms of the top line growth, in terms of the underlying assumptions, what are you thinking in terms of employment growth and wage growth in your outlook? Want me to take that? Yeah, Rick highlighted at the beginning, what we would have assumed is basically flat. It had been decreasing in years prior, and now we're starting to sort of see maybe up to about a point of growth that's coming through, both in terms of employment and wages with a significant weight on employment growth versus wages at this point. Okay. In terms of your client base, how much exposure do you have to the oil industry? Yeah, I can talk to it. I think it's modest. It's representative of about the share from an economic point of view. We actually have been watching that one pretty closely and feel like it's manageable at this point. Yeah. All right, you guys can do that. Sunil. Thanks. Suneet Kamath from UBS. Just to follow up on Humphrey's question about energy. Can you talk about the exposure in your investment portfolio, both investment grade and below investment grade? I should just grab the mic. Breege, you want to come up and handle that one? Let me have Breege Farrell, who's our Chief Investment Officer, address that. Breege. Thank you. I'd be happy to talk about our energy exposure. We have about $5.5 billion in energy exposure in total in the portfolio. That is divided, to your point, I think first and foremost between investment grade, which is about 87% of the portfolio, and then below investment grade holdings, which would be 13%. Of that 13%, the bulk of that is in the high end of the below investment grade, the double B-rated. The vast majority of our exposure is in bonds, either public bonds or private placements. We hold de minimis exposure in any equity format or real asset format or anything like that. To further give you some insight, because with what's going on in the oil markets, I'm sure everyone is looking at this across the board. We've put together a portfolio fairly carefully, and as you heard echoed through all the presentations, that underlies our investment strategy across sectors. Within energy, if you looked at the breakdown of where we put our money about 41% would be in the midstream segment. This is the segment that operates the pipelines and is often done on a take or pay basis with the major oil companies who are producing. It's not affected as directly by a change in oil prices. Within that segment, we like to be in segments where we have a lot of diversity. We'll be in gas. Somebody who has gas pipelines, who has oil pipelines, who's both in the Gulf, who's in the shale, who's going cross country, that kind of thing. Because if you're exposed to one pipe in one specific area, you can run into trouble more quickly. That's our largest area, as I said, with 41% of our investments. Our smallest area with about 5% is twofold. One is refining, which is also not directly impacted by oil prices. Refiners tend to operate based on demand for gasoline and refined product, and they're oil price takers. The reason we tend to be light in refining is it's a very volatile sector, independent of oil prices. The other area we have about 5% of our investments is oil field services. This is very deliberate. The reason is because oil field services tend to be the most volatile with changes in oil prices. What happens is when energy companies see low oil prices, they immediately cut their CapEx. You've seen that if you follow announcements in the oil sector. The rigs get taken out. Basically, the exploration comes way down. The rigs are brought out of service, less oil is produced, and then you'll see that affecting the oil service companies. We have tended to build our portfolio with extremely limited exposure to those entities. The last segment, which is about 25% of our exposure, is the oil and gas independents. This is not your large integrated companies like your Chevron. This would be the Devon Energy, the Anadarko, the people who don't also refine, who tend to not be as worldwide, but tend to produce oil and gas. We tend to be in the higher end of that group. Right now our analysis, which as you can imagine, is pretty focused, would say that those companies will come through at current oil prices without much problem. In fact, we are expecting oil prices to go lower in the first half of this year as people sort out their production and their exploration and pull those CapEx levels down. We are looking for those lower prices. For the most part, that will not hurt our companies. The main reason is because they're mostly hedged. One of the things you look at when you buy oil and gas bonds is how well do they hedge in the near term? What that says is, how much flexibility do they have to pull those CapEx levels down? You can't really do that necessarily in one year, but over two and three years you can do it. You can be responsive to the price changes. We're fairly happy with our energy exposure, though it is as I said, on a book value basis, about 5.5. It's still over that on a market value basis, reflecting the higher quality that we hold and the fact that it is bonds and not equity investments. That should give you a fairly good overview, and I'd be happy to take any more questions if you have them. Just to follow up. You said it's still trading above book. Is that current as of right now, or is that as of third quarter? No, it's definitely above book on third quarter. It was $6.5 million market in the third quarter, but I believe it would still be above today, although we don't run the numbers till the end of the month. Understood. I was going to shift to the closed block if I could. On the IDI side, I guess there were some concerns in the market that you might have to do something there. I can't remember if you addressed it in your prepared remarks, but how close was that block to needing some additional reserves? Jack, why don't you come up to get you on the microphone there? I think, as we said, the IDI block has very little cash flow. It's very mature, so it's not really exposed to the interest rate environment. We've had some volatility in results over the past year. But overall, it still looks like a pretty stable block, and it wasn't a consideration. Where should we think about the loss ratio of that business kind of trending over the next? I think in the plans it trends up very modestly. That has less to do with the underlying risk and more to do with some of the dynamics of how the reserves work as a block ages. But we're looking at a stable risk outlook for it. Okay, thanks. Let's just come over here to Yaron. Thank you. Yaron Orenstein, Deutsche Bank. One of your competitors had talked about the exchanges not really generating as much earnings growth or maybe just being a little bit on the low end in their expectations for 2015. I know that's not an area that you've emphasized in the past, but just curious to hear your thoughts on how the exchanges are developing and how the opportunity is developing. Mike? I'll take that. Yeah, I think our experience would be consistent. Certainly, it's gotten a lot of play given the marketing push from the exchange players and some intermediaries. We've not seen the volume come through, perhaps as those expectations were set. That being said, what we find is the vast majority of exchanges are benefit administration technologies that have been around for a period of time. So we've been focused on employee benefits and on enrollment, electronic enrollment and other for a while. So we have a little bit of a head start, 40-plus connections into the benefit administration technologies that are now, in some cases, being marketed as exchanges. So those are both on the Colonial and the Unum fronts. To give you a sense, if you look at our voluntary benefit sales this year, and obviously a lot of work that happened here in the last couple of weeks, but we'll do north of $100 million that'll come through connections with benefit technology companies. I wouldn't necessarily describe those as exchanges, but increasingly, technology is an important part of the delivery system. And we actually see that as a big opportunity because as technology improves, as it becomes more scalable, as smaller employers can take advantage of it, what it does is it creates administrative ease and more access so that we could see market growth coming on the back of expanded technology. But I'm always a little cautious around just pinning it on the idea of exchanges in particular. Yeah. Randy or Tim, anything from the Colonial perspective? Yeah, from a Colonial Life perspective, again, we are participating very selectively on private exchanges, so we are involved in that space. Not seeing a lot of take rate, not a lot of activity yet in terms of actual sales results. But to Mike's point, you go to the broader category of third-party connections with Ben admin firms, and we're seeing consistent, strong growth in that area. I guess the one other comment I would make as pertains to exchanges, we've not yet come across one, nor do we anticipate one where employers remove themselves from selecting the carrier that's going to offer the financial protection benefits. So we see that as strategically very important to us because of our brand with employers, and that seems to be the way that these systems are playing out. Just one quick clarification. The $100 million, that is sales? That is new sales, voluntary benefits. That will be up a little bit from last year, but not dramatically so. That would be up again from two and three years ago, but again, not dramatically. It really predates the marketing of the idea of exchange. As Randy Horn was saying, these are just strong benefit administration technologies that employers use and we plug into. Okay, thanks. I should go right behind you there. Yeah. Thank you. Eric Bass with Citi. If you could just speak a little bit more broadly about voluntary benefits and what's driving the sales growth. Is it employers adding benefits, or are you actually seeing increases in kind of penetration at the case level as well? Tim. Yeah, for us, it goes back to a couple of things, as I mentioned. Employers are dealing with medical plans that have gaps, and that creates opportunity. Brokers increasingly are looking for voluntary to replace lost income on the medical side. Consumers see the value of the product, and they want to make the purchase. Do you have any numbers around at a case level, what the penetration rates or kind of take rates are for voluntary benefits and how that's trending? It depends on the product, but we see take rates on the low side are in the low 20s, moving up into the 45%-50% range. Thanks. If I could just ask one on Colonial, just on the recruiting front, it seems like you have been at a very good year for adding new agents this year. We have heard from some competitors that that market is becoming a bit more competitive. Just any color you could provide there? Yeah, we have had a very good year for recruiting, and we are finding that there are a lot of opportunities to bring high-quality people into the organization. I think they see the opportunity. They certainly see the momentum that we have going now. We have shifted the strategy just a bit to include more training and development for people before they go out, so they are having better success rates. Great. Why don't we get Ryan here? Thanks. Ryan Krueger with KBW. I had a follow-up on the long-term disability discount rate. You show a margin right now of 91 basis points. Based on the 50 basis point decline in the new claim discount rate, how would you expect that to trend going forward if interest rates remain at similar levels to where we are at today? Yeah. It's important to note that that margin is the aggregate of the portfolio, and the adjustment we made is on new claim incurral, so it's not a movement in the old portfolio for those that aren't familiar with it. We actually expect that will trend based on what we see today, very similarly to that 90 basis points towards the end of the year. We'll have to see how that plays out from an overall investing perspective this year. We think it'll be pretty close to that. I guess my follow-up is, you consistently talked about a target of 60 basis points. Can you help us understand why it seems like you're setting the new claims discount rate to keep it closer to 90? I think when we look out, and we do this in looking out multiple years, so it's not in any one year in terms of how the We talked about our nature in terms of how we do our planning around interest rates. When you look out over a couple of years, we want to make sure that we're adjusting that proactively to be able to manage through that. We've done better, I think, in previous years than we expected in terms of where those actually monies got deployed to back that line of business, is probably one of the major things. We like maintaining a good margin on that business. We don't need 90, but certainly it's something as we look out over multiple years, we want to do it on a basis that's very consistent. Certainly one that's reflected in the market that way. Steve? Steven Schwartz, Raymond James. A few quickies. First for Jack, going back to the LTC charge, the non-New York subs, was margin from other products needed to support the LTC margins? No, LTC was looked at alone. Okay, great. Rick, I think you mentioned the change in geography for the LIHTC investments was going to cost about $0.04 a year. Is that accurate? That's correct. When we go through that accounting change, which will go back to inception, actually, what you'll see is about a $0.04 impact this year, or I'm sorry, 2014 and 2015 as well. Okay. So you're going to restate all that? It won't impact the growth rate, but you'll see the movement. Okay. All right. And you're going to restate 2014? That's correct. When we get to 2015. So we're looking forward a little bit. So 2014 won't change. When we get into 2015, we'll restate prior periods. Okay. You'll lose $0.04. Then, a little bit off the wall. Yesterday it was reported that the D.C. Circuit Court found that Washington, D.C. could. Mike's nodding his head, so he knows. Washington, D.C. can tax supplemental health products as a user fee for the ACA. Thoughts on that, Mike? Yeah. It's something that we've been working with industry groups. We would strongly contest that since we're by statute not enabled to participate on the public exchanges, that we ought not to be funding their creation and maintenance. We think we have a pretty strong case, and we continue to pursue it through the system. We look at the exposure of the number of states, what they're planning to spend. It's not a significant liability, it's more just about the precedent that it sets. Okay, are there any other states or territories looking to do the same thing? I think there's the sense that eyes are on it. But again, it's not a significant exposure. All right. Thank you. Let's get Tom Gallagher back here, and then we'll come to Colin. Thanks, Tom. Tom Gallagher, Credit Suisse. Couple of questions. First, just to focus on the Unum US business. Can you comment at all, both on top line and bottom line, how you think about the different lines within Unum US, group disability, and then Group Life and AD&D, and then IDI newly issued? Are there any, if you talk about what's the strongest, what's the weakest within those when you think about growth and then where underwriting results go? Yeah. Just to keep it in general terms, actually, the trends are pretty consistent across. We probably see as we have in years past, the strongest growth in terms of earned premium in the voluntary benefits, which is in that supplemental segment. I think the price increases as they come through, they'll have a dampening impact to a degree, particularly around LTD. So I think group disability is probably towards the lower end of the range. But that's kind of the color and all fall actually pretty tightly within that range. Okay. Just a question on aggregate cash flow. The projections that you have, what are you contemplating for all of the captives? Because you still have Northwind, Tailwind, and the new captive that you set up for the long-term care business. Are you expecting those to generate positive cash flow, negative cash flow? How does that factor into your overall corporate-wide cash flow projections? I guess I'll hit the overall. I think when you think about those multiple entities, you have a mix. You have some that are generating that cash flow, some of that's going to service the debt that specifically backs some of those lines of business. There are others that may, as we continue to keep the ratios up, continue to need a tiny bit of cash as we go through that. When you bring all that together, it's not a material impact in terms of the overall cash flows of the company, both to and from what's happening in the overall. Rick, would you say it's roughly break even on all the captive entities if you aggregate them? It's roughly break even. I think you have to look at it in terms of choices that we make around managing RBC levels and those different companies and things like that. There may be a slight outflow, but we're talking about some $50 million, something like that. That will change. The thing is it's nothing that is material as part of our overall capital plan. We'll take the last question from Colin Devine. Thank you. Colin Devine, Jefferies. I've got a couple. First, just a clarification on the new claims discount rate change. Does that apply across all of the businesses first? Second, looking at the various business lines, first with respect to the U.K., could we get a little more granularity on the impact of Solvency II, what it's going to mean for reserves, pricing, capital repatriation, all that. Second on Colonial. You were talking about agent recruiting. How about retention? Can we go into that a little bit? Then finally for the main Unum US business. When I'm looking at the premium growth, how much of that is coming from you're actually adding more employees that you're covering? Which I thought we would have had a bit of a headwind here from unemployment coming down and how much of it is just increases on existing people. Rick, you want to get the discount rate? Yeah, I'll get us started on that four-part question there. Thanks, Colin. Starting on the LTD, that is a specific long-term disability, the discount rate moves there. We look at it line by line, and it actually falls similar to what you saw in my deployable cash flow chart. So we're going to look at that piece by piece. So that 50 basis points is very specific to that line. Just hit the U.S., but are LTD in Colonial and LTD in the U.K.? No, LTD in Colonial is not managed. I mean, it's not as relevant by the way that product is priced in the market, so we don't have to look at those new claim incurrals. In a similar type way, interest rate does have a little bit of headwind there, but not material like we're seeing in our U.S. business, just based on size on a relative basis. In the U.K., we manage it very similarly. So there's actually adjustments to the discount rate that come through in pricing as well. Similar to Colonial or similar to the U.S.? That would be similar in process to the U.S., but in no way as material as a 50 basis point discount rate move. It's going to be smaller moves along the way that are not as notable. Okay. Solvency II? You could start and I'll sort of jump in. Yeah. The rules are not set yet. That's part of the challenge. The European regulators have a number of views to still sort of finalize off, and then the U.K. has to localize those and actually set out how it's going to interpret those rules, particularly around transition rules. Part of the thing is what exactly is your capital position on the 1st of the 1st 2016, because it may not be a Solvency II world. You may have transition to get to that Solvency II world from the current pillar one, pillar two arena. That's quite a big announcement that they're meant to be making this month. We're waiting to see on that. In terms of the underlying economics of the business and pricing, it's very similar actually to the way we price today, because we price economically today on a pillar two basis using a risk-based approach. I don't see a fundamental shift there. There are some tweaks within that, so some of the risks do move around, and therefore that changes potentially how reinsurance might work and also pricing between products. Really that's the nuance that we're sort of using to focus on that. Then on dividends, we're continuing to pay dividends. The cash flow may be impacted, but I wouldn't see it as material. Rick, I don't know what your view is. Yeah. I think when you look out in 2015, even in anticipation of a one implementation, we still are going to flow dividends from our U.K. subsidiary. There will be things that we look at from a sensitivity perspective to the implementation of Solvency II, all those things Peter O'Donnell talked about, but we're still flowing cash from our U.S. subsidiary as part of the overall enterprise in 2015. Okay. Colonial question? Yeah, on the agent retention, it would be nice if we could retain all of them every year. That is not the model. But I would tell you that we have the highest success rate in new agents and new offices than we have ever had. So we track the percentage of people who hit plans at certain increments, and those numbers have never been better. So the way to retain them is to have them earn an income, and that is what we are seeing. Can you compare that a little more granularly to industry numbers if we look at what comes out of LIMRA? Yeah, we don't disclose that. Well, probably the one thing that we have talked about, I think we can disclose is five-year retention rates have been in that low 20% range, Colin, so kind of in line with industry norms. As Tim said, with the great success we're seeing now in our first-year retention, which as you know, that's the key year. If we can get them over that hump, we expect that to go up and we're seeing it heading in the right direction at this point. Okay. Colin, I'll take a shot, but tell me if I'm getting to your question. We sort of think about growth in three buckets. The first is we are the beneficiary of what we would call natural growth, and that's an existing client with a plan in place. A lot of our products hinge on salary levels, so as they put merit increases out there or hire new employees, they come on the plan automatically. We think of that as maybe a point of growth to the earlier question. The other two categories are, okay, what are we doing proactively with an existing client? Often that's going in and re-enrolling to drive participation up. On occasion, it's changing the product design to usually put a richer product in place to increase the coverage. That drives some premium growth. That's probably more like two points. The last part of the growth equation is another point or two, and that's new clients, new employers coming on. I don't know if that gets exactly to your question. Okay. Great. Thank you, and I will ask Tom to come up and wrap things up for us. Tom? Tom, I walked up behind you with a comment about how Well, first of all, thanks very much. I know we covered an awful lot of ground, obviously, and the hope is we covered the issues that are on your mind. Hopefully, you see also why the wisdom of putting the closed block discussion at the front end so we could try to create some separation, but also give us a chance to get into in more depth some of the things that are very much on your mind. I guess I would close with actually the exact same comments I made last year. Hopefully, what you take away from this is the fact that we have some very good businesses that frankly are well positioned in this environment, ones where, again, hopefully, you have seen a track record of solid performance, making the right calls in terms of growth versus profitability. Hopefully, you also see a level of boldness, actually, in terms of what we are doing for 2015, when we actually, in fact, are recognizing the headwinds with interest rates, reflecting that in our outlook for both pricing and discount rates. Again, solid businesses which are very confident will perform in 2015. But as you can imagine, some of the decisions we make in 2015, which we think are the right ones, have a positive impact on 2016, 2017, and 2018 as well. Again, an awfully good starting point as we think about these businesses, and again, we are just continuing to get better at those. Just like you, the closed block is an area of great focus for us. You can see the resources we have put behind this. You can see the actions that we have taken. We think they are the right actions. This will continue to be an area of focus for us, just as it is for you. But rest assured, we take this business very seriously. We're spending the time and effort with Jack and his team to do the right things, to take the actions we can take in the marketplace. Again, think the announcement that we made today with respect to what we're going to do in the fourth quarter is actually reposition this business in a very positive way in what obviously is a very difficult interest rate environment. Amongst all the things that you see as an asset here is hopefully the fact that we generate a lot of capital. Again, financial flexibility continues to be a significant resource for this company. I think Rick touched on it in one of the responses to one of his questions. We contemplate some of these issues as we think about the next year or 2, where we may have to put additional capital when we give you the guidance. So the guidance, frankly, we think reflects many of the things we think could emerge over time. Again, that guidance, as you can see, is a very solid guidance, not just in terms of the capital ratios, but the continued commitment to buy back shares and to raise the dividend over the course of 2015 as well. Again, as you can imagine, this is a balancing act. We think we're making the right decisions as it relates to the trade-offs between short and long term, between the pricing actions we take in the market versus margin protection versus capital preservation. Again, the outlook we provided you, I think today, actually gives you a good sense of that balance, and we're very confident that we can deliver on these results, just as we've said we've delivered in past years. Again, we're very confident as a team. I think that this is going to be another good year for the company. Again, thank you all for joining us here in New York. Thank you for joining us by webinar.

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