Unum Group (UNM)

Investor update

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Dec 17, 2012

Well, good afternoon and welcome. My name is Tom White, Senior Vice President, Investor Relations with the company. It is my pleasure to welcome the folks who are here in person as well as the people who are joining us on our webcast. Today's meeting is a little bit of a transition for us. In the past, we have done a kind of a full analyst meeting in the middle of November, where we talk about strategy, we talk about our outlook. What we will be transitioning to is more of an outlook type meeting, held this time of year. Then we will complement that with a little more strategic discussion, which we will do in mid-year. You can kind of think of this meeting as a little bit of a hybrid because we will cover our 2013 outlook, but we will do a kind of a short assessment of the position of the company right now. For those of you in the room, hopefully you got a presentation book when you came in. If you did not, we would be happy to get you one. For the folks on the webcast, the slides are available on our website. I will ask you to take a quick look and call your attention to the safe harbor statement. Representing management today are, to my left, Tom Watjen, President and Chief Executive Officer of the company, Kevin McCarthy, Executive Vice President and Chief Operating Officer, and on the far end of the table is Rick McKenney, Executive Vice President and Chief Financial Officer. With that, I will turn the program over to Tom. Thank you, Tom, and good afternoon, everybody. As Tom said, it is great to have you here. This is an exciting time, obviously, we believe, for the company. Tom mentioned there was a format change. One of the things we are going to try to do is we will certainly get to the discussion of the 2013 outlook. But before we do, we thought we would actually step back a little bit and talk about the business today, just at a very high level, how it is performing, what is working. Frankly, there's some challenges that we all face, and we'll certainly want to talk about those challenge areas and use that discussion as a basis to talk about what happened both in 2012, but then we will certainly have some time to talk about the 2013 outlook. Again, some of the foundational discussion that we'll have at the front end I think you'll find to be very helpful in understanding how and why we got to where we did in 2012, but most importantly, how you can then see some of the things that we see emerging as we look to 2013. So with that little bit of a preview, you can see actually, again, what we're going to do is get a little more deeply into some of the, we think, the highlights of the year in terms of just some of the trends that we see in the business. You'll see we'll spend some time on operating performance. You'll see we'll spend some time on the strength of the brand. We'll spend some time talking about the investment portfolio, including how we're managing interest rates in this very difficult environment. We'll spend some time, obviously, talking about the balance sheet. And last, we'll certainly talk about how the capital strategy component has been a big piece of our strategy going forward. I don't think any of these things are new to you. It may be a little more clear as we go through them, though, why the company's actually doing pretty well on a number of fronts, actually, as we go through some of the detail for that. As I mentioned, too, we also want to spend some time talking about the challenges. There's really nothing new here. As you've watched the company over the last few quarters, as we've talked about the outlook for the business as part of our releasing of our financial results each quarter. There are a couple of operating areas where obviously we need to continue to improve some of the performance in those businesses, and so we'll talk through those. But obviously, even though we think we've done a good job with investment management and interest rate management to this point, where rates are today obviously continues to be a very significant headwind for us and everybody else in the industry. As I mentioned, the other couple things we'll do is we'll then connect that to what changed between our outlook last year and today for 2012. But most importantly, get to a discussion of 2013, and we'll leave plenty of time for your questions. I just want to touch on one of those aspects that you see above, which is the balanced earnings. Because frankly, this is a very strategic decision we made as a company about six or seven years ago. And that strategic decision was to understand that we, as an organization, certainly were very proud of our disability legacy. The things we've done in that business certainly are behind much of our success as a company in building a brand, building some awareness in the marketplace. But we made a decision six or seven years ago to really emphasize the voluntary portions of our business. Not to the detriment of our disability business, mind you, but actually, we saw a tremendous opportunity to grow that portion of our business. We saw customers needing that more balanced portfolio of group products and voluntary products, and we thought we had a significant competitive advantage to actually being able to do that, and Kevin will talk about that in some of his reports. The other part of it, though, is it presents a much more balanced company, which obviously in these choppy financial times is a real asset. And you look at the wheel on the right-hand side now, you look at the significant growth you saw in the voluntary business within Unum US, look at the significant growth you saw in Colonial. Those things just didn't happen as a result of just market forces. They happened because we made a strategic decision at that time to truly emphasize the voluntary business. So the company you see today, again, certainly has its disability legacy, which is a very important part of our history, but we're much more of a broad-based benefits provider. And again, that'll come forward in the discussions that we're going to have right now. Again, that was a very strategic decision. It's obviously one that we're very pleased we made because we've actually been able to capitalize on some things in the market that we couldn't otherwise capitalize on. But it also gives us a lot more components to our story as we think about managing through difficult financial and economic times. And with that, let me turn things over to Kevin to begin the process of walking us through some of the operating results. Great. Thanks, Tom, and good afternoon, everyone. It's good to be here with you. What I'm going to try to do here is walk you through the operating performance from which we build our earnings trajectories from. And I'm going to approach it from the standpoint of giving you a sense of from the top line all the way through to the bottom line, how do we manage our business? Let me start with sort of our market segmentation. As you know from prior discussions, we really break our markets into really two kinds of categories, those where we're targeted and focused on growth and those that we're more disciplined and opportunistic around making sure that we're very selective in our underwriting process. In our growth businesses, we aspire to grow those businesses at about 1.5 to 2 times the market growth rates. Whereas in our opportunistic businesses, we basically aspire to be about flat with the marketplace. Not trying to steal share, but rather to be more disciplined about the way in which we capture share. For example, in Unum US, in the core marketplace, the industry is growing at about 3% through 2012. Unum US is growing at 5% and sales are up 10% during that same period of time. If we take a look at our voluntary businesses, our Colonial Life operation and our Unum US VB businesses, again, those businesses are up a combined about 8% in sales year to date. The industry is up more in the 5%-6% range. So consistent with our story of trying to outperform the marketplace in terms of growth. On the other hand, in our opportunistic markets, as I said, we try to basically grow sort of at the market rate. We're always selective, particularly in the Unum US large case business, looking for the right opportunity to establish a business relationship with an account that can be long-term and sustainable and profitable for both parties. Consistently, that's turned into basically roughly flat sales year over year with some choppiness. Every once in a while, we'll get a large case that is a long-standing relationship with us, and that segment of the business grows more. Other times, we just don't see the opportunities during the course of the year. The same kind of approach exists in our Unum US IDI business, our recently issued business. This year, we've had a little bit stronger growth because we've had some selective opportunities to build bigger relationships this year. But again, in that business, expect some choppiness, and our objective is to just grow it at a market level and continue to generate earnings. Lastly, and I'll talk more about this later, in the U.K., as you know, we've had some hiccups in our UK Group Life business, particularly this year. I would expect that you'll see some decline in that business as we cleanse that portfolio, purge some of the non-performing business, increase rates, and probably have some sort of a downward effect on persistency. So all in all, we're pretty much doing what we set out to do and what we said we would do, growing our growth markets, and maintaining discipline in our opportunistic markets. And what the result of that has been a good, solid, steady core growth performance, 2.5% roughly in our opportunistic business and 5% premium growth in our growth markets. It's not just a one-year story. So if we take a look at it over several years, we've got a consistent and solid trend here. Back along in the fourth quarter 2009, first quarter 2010, in our growth markets, we were really managing those markets to the decline in so-called natural growth. There was a dip in employment rates, a dip in wage inflation rates, and that's what sort of drove that curve down for us, and we've worked our way steadily back up through that process to the point where we've had consistent growth rates over this period. In our opportunistic markets, we had not only a combination of that sort of downward pressure on wage and employment, but we also being very selective during that period of time as businesses downsized, et cetera, in how we selected and underwrote that business. Over the course of time, though, again, we've steadily worked that up. Now if we look forward into 2013, we could benefit from some employment growth and some uptick in wage inflation, but that remains to be seen. Given that, we are moving rates up in group disability. We are moving rates up, as you know, also in our Unum UK group disability business and especially in our UK Group Life business, so I would expect some downward pressure on persistency during the course of 2013, just in terms of setting reasonable expectations. Nevertheless, our long-term trajectory should stay intact. If we take a look at that in more depth on the sales side, first on the left-hand side here, consistently building the pipeline, 4% growth in new accounts from 2010 to 2011, 9% growth in new accounts, new customers, from 2011 to 2012. I would expect that we would end up somewhere around 20,000 new accounts as a result of our sales and marketing efforts during 2012. At the same time, we've deepened our relationships with our existing brokers and accounts. Significant growth in our, what we call our NBOC, new business additions to existing contractual relationships, up 11% year to date. As we talked about before, 70% of our customers buy at least two lines of business with us, 35%-40% of our customers buy three lines of business with us, and as Tom mentioned, the growth in our voluntary benefit strategy, we've had a consistent and steady increment in the growth rate of our existing customers adding voluntary lines. 7% of our sales in 2009, 8% of our sales in 2010, 9% of our sales in 2011, 13% of our sales through third quarter in 2012, voluntary lines attached to our group business. So good, solid, steady deepening of relationships and at the same time on the left-hand side, building new customer relationships. If we then get inside of that and say, "Well, how's that turning out for you on the risk management side?" Again, consistent, steady risk management performance. Consistent downward trajectory in our loss ratio in Unum US driven by increased voluntary benefits mix, consistent application of disciplined underwriting and group income protection strategic rate increases as needed, especially in the recent 12 months as we look at dealing with low interest rates and adjusted discount rates, and then very strong and consistent claims performance. On the Colonial Life side, different kind of a risk profile. Basically very consistent and steady performance. A little bit unsustainable, too good kind of risk performance in 2007, 2008, and I think we shared with you as we were experiencing that that wasn't going to be able to hold itself up. We have had a steady movement towards our target area, which is in the 50%-53% kind of range for loss ratios in our voluntary business. We've been growing in our critical illness and accident lines, which have higher margins, even though they have slightly higher loss ratios. So all the way along, both in Unum US in terms of disciplined risk management and at Colonial in terms of diversification of business mix management, doing quite well on the risk side. That's also true on the expense ratio side. Unum US, in the period from 2006 to 2008, we were changing our mix of business, moving from a company that had quite a large volume of large case business, steadily purging that large case business, getting it sort of to right size levels and right profitability levels, which then reflected themselves in those declining loss ratios on the prior page. At the same time, once we got sort of that business reset, then steadily looking at productivity improvements and expense management improvements. In particular, driving our in-force service costs down and driving our acquisition productivity up. Similar story at Colonial. Managing its product mix, looking for more distribution efficiency and focus, and at the same time, working together between Unum US and Colonial Life, sharing resources where appropriate, doing some back office development and some infrastructure and technology development together, looking to leverage the capabilities of both companies to drive down expense ratios. The result of that has been good, solid, steady, consistent growth rates, and earnings per share over a sustained period of time, and good solid rates of return. When we look at that on an ROE basis, again, similar story. Good solid outperformance by all of our active growth businesses, in excess of 12% return on equity. You might ask, so how has that played out in the marketplace? You can see how disciplined we've been in terms of strategic effectiveness and focus, where we're looking for growth from, how we're managing risk, how we're managing expenses at the same time, but how does that turn out in play with your distribution systems, and with your customers? Well, if you look at our satisfaction just in one category, long-term disability claimants, just consistent outperformance of the industry, satisfaction expressed by our customers, that we not only deliver sort of the right risk management result for our shareholders, but we deliver the right customer management result for our claimants and customers. It shows up in the financials as well. Good, solid, steady persistency performance. Customers buy from us, and they stick with us. On the brand side, consistent and steady growth and build of our brand image and reputation, and that reflects itself in a variety of places that report on whether we're the best place to work, or one of the most reputable companies, or a corporate leader in disclosure and transparency, or a green company. All in all, our business focus on business strategy has played out well for us, both in terms of sustained financial performance and sustained brand building. With that, I'll turn it over to Rick. Great. Thank you, Kevin. What I want to take you through is some of those things that have led to the strength of our company. Kevin took you through on the brand front. I think one of the things that has certainly set us apart, if you look over the last several years, has been the quality of our investment portfolio and also how we've continued to invest funds. If I take you then to four measurements in terms of when we look at our investment portfolio and the very strong credit quality that we've had over the last several years in a profile that continues very similarly on that front. I'll start by giving you a sense of the defaults that we've seen. This is relative to industry benchmarks, how we've been much less than the rest of the industry. I think this is very different as you look back in 2008 and 2009. As you look over the last several years, we've actually seen the default profile come down for everyone. But like that, we have been at de minimis levels of default experience that we've seen. As we continue to put new money to work, we continue to actually have the same portfolio mix that we've had over time and that has done very well by us. To give you a current view on the upper right-hand side in terms of what we see out there in the portfolio that we continue to watch, I would note that this is only a watchlist. These things are not ones that we are looking to sell today, but keeping an eye on, you'll see that level has come up slightly off of year-end levels in the third quarter. But I would tell you that since the end of the third quarter results, we've taken some actions around some of these names. This is not anything that we're concerned about, what we have in the portfolio. We certainly have the wherewithal to make sure that the credit profile of the company continues to look very similar to what you've come to expect over the last several years. Another indicator is what we see in Europe. We continue to keep a good eye on Europe, although we have little exposure of note. If you look on the left-hand side of the chart, it talks about our exposure that we have in the U.K. Given the state of our U.K. business, this is what you would expect. In terms of what we have overall, very strong profile here with corporate credit. Some of the sovereign bonds in the U.K. that back our profile with our index-linked gilts that we have relative to our profile and continues to look very good. Our other eurozone that we have out there, think of infrastructure companies that we have, actually very little sovereign risk there. When you go to some of the more troubled companies, we have no sovereign exposure. Actually, the companies that we have there are very strong, usually actually operate outside the bounds of those countries. We haven't talked about this too much lately, but I'd tell you this profile continues to be very consistent. And we haven't needed to take any action around this profile because these companies have been strong and continue to weather the storm very well, what we see in Europe. Then finally, I think the proof is in what you see here in terms of sales and write-downs we've seen on the investment profile, a small amount that we saw back in the height of the crisis. If you look over the last three years, we've actually booked a gain in each of those years relative to the overall profile. So we don't talk about it as much anymore. I think that it's important that we note that we've stayed very consistent on this front and that we stay with a focus very much on having a strong profile, even in an environment where interest rates are increasingly challenging. So that takes you to 2012 and what we did over the course of the year and our active interest rate management that we've had through this period of time. First, I'd take you back to Investor Day. We laid out a slide to you, which I will refresh for you today. We're talking about the money that we had to put to work over the course of the year, the portfolios that it broke down by. Just to give you a sense, and this is as of the third quarter, we put $2.7 billion to work, a new money yield of 4.88% on a hedge-adjusted basis. So we were actually able to accomplish in a very difficult environment what we set out to do. I wouldn't minimize that it continues to be challenging. I'll talk about that as we get towards our outlook as well. But our overall portfolio yield has held up very well, down only 13 basis points to around 6.5% on a current investment portfolio that's worth just under $52 billion. So thus far, we've done well in 2012, and we'll talk a little bit more about that. If you think about interest rate impacts to the company overall, think of it on three fronts. One is very simply new cash flows that we're putting to work at lower rates. This is a challenge for us as it is for the rest of the industry. We have not deviated from the quality or the type of investments that we have invested in. Also what you would have seen, and we did this actually in the third quarter, we've decreased our reserve discount rates. You would have seen us reduce by 50 basis points in the third quarter. Actually, this just past third quarter off of a year ago where we've reduced another 25 basis points. So we're continuing to take these discount rates down. That does have an immediate impact, one which we will offset over time, which I'll touch on in a second. But there is something, the recognition of us responding to the interest rates, not just with how we invest, but also with what we do within the balance sheet. Lastly, as Kevin McCarthy mentioned, we will take price to offset some of the interest rate pressure that we've seen within our product portfolio. You would see actually some persistency impacts to that. Although I can tell you this year, even with some of the moves that we made around pricing, we've seen very strong persistency. It's something we look at as we look out to and have built into our plans as we get towards 2013. Then lastly, the mitigating factors, as I mentioned, the premium rate increases that we continue to take. This is something we'll touch on in 2013. It's been a very consistent path. We very much acknowledge the interest rate environment that we're in today, and we're trying to take an action basis in terms of responding to it. You will see over the course of the year, our reserve margins will come down slightly, but this is off of very high levels and still well in excess of what we would expect to maintain for an overall reserve margin. Then lastly, it's important to note that we continue to do everything else within our control around operating effectiveness, as Kevin McCarthy mentioned, both in terms of the expense management that we do within the company and in the overall risk management and the maintenance of margins within the overall company. So a very difficult investment environment. We put this as something that we think we've done pretty well. Our investment team stayed the course throughout the year, have been opportunistic in where and when they've put money to work, and we think we've had a pretty decent result in a very difficult environment. With that, let me talk a little bit about the balance sheet. In these type of environments, it's important to not just look about one aspect of it, such as the investment portfolio. When we think about it across the multiple things, we actually think our balance sheet is in a very good shape. If you look at the overall, starting with asset quality, one thing to look at is our overall low level of intangibles. We carry about $200 million of goodwill and a reasonable level of DAC. So actually, when you benchmark that across the industry, we have one of the lowest level of goodwill and intangibles out there as a percentage of equity. We think this helps through a difficult period of time, such as today. As I mentioned, it's complemented very much with a very solid investment portfolio. When you think about the liabilities of the company, think about comfortable leverage. We were able to issue 30-year debt in the third quarter. Our leverage ratio is right around 25%, a very comfortable level. I'd also tell you that we don't have any maturities until 2015, so we actually don't have any refinancing difficulties that we see over the near-term horizon. One thing that we don't talk about enough, which I think is a very important piece, is we have very low disintermediation risk. What I mean by that is when you look at the liabilities in our company, there's very little cash or almost no cash surrender value in these policies. So as you see interest rates go back up, and I think there is an expectation that when rates do rebound, they will rebound fairly rapidly. We won't see any of our liabilities actually go through this disintermediation risk, which you might see in many of the other lines which are in the insurance space. Our policies, because they do have no cash surrender value, it is all about putting money to work into these policies over a period of time. A period of rising interest rates or even rapidly rising interest rates are quite good for our company. Then lastly, on the capital front, we have maintained very good, very strong RBC levels through this period of time and holding company cash levels. You can see that on the chart here. We are at all-time highs for our RBC levels as well as cash levels, which I will talk about in terms of how we expect to handle that as well in 2013. But I would also note that at our holding company, we do not have any letters of credit outstanding. We do not have anything from a refinancing risk. The cash that we hold at our holding company is purely that, and it is available for our use and for any means that we may want, including capital redeployment, which we have used it for over the last several years. With all that, when you take the building capital levels that we have in the company with the good earnings trajectory we have seen, you will see a very good book value per share growth that we have seen over the last several years. We have seen the earnings growth adding to that, and at the same time as we have retired shares at a discount to book, we have actually seen this grow at an even faster rate. I think this is a key indicator in terms of the strength, the capital levels of the company, in terms of how that has grown over the last several years. Important to that is the capital management side. If I could take you through slide 20 from a stable cash flow perspective. First and foremost, and we have reiterated this a few times, is looking at the statutory net income of the company. If you look over the last several years, you would actually see a very strong statutory cash flow, very consistent. It looks very much like the products that we write, which are cash flowing positively. And you would see a statutory net income level that has been over $600 million very consistently over a long period of time. As I mentioned several times, the most important thing too is if you look at the green bar at the bottom, we have not been consuming any of that good statutory net income with capital losses in the portfolio. With that, you see very good, very strong, very stable capital generation coming from our key subsidiaries. If you look at the right-hand side of the page, you will see how this fits into our capital generation model. Note that this is very consistent with what we have been telling you from a free cash flow of $500 million per year. If I break that down for you would actually see coming from our U.S. and our U.K. subsidiaries between 600 and 650. As you can see, very much denoted on the left-hand side of the page, and with our U.K. generating $100 million to $150 million of capital on an annual basis. You take out of that a plus or minus capital requirement number. We have had very consistent capital required behind the business, basically of zero change year-over-year that we have seen for the last several years. You take out the interest expense coming out of the holding company, and you're seeing actually excess capital generated of $550 million to $650 million. What we pulled out of here is actually the dividends. We've seen our dividends continue to grow very rapidly. We want to talk about the real sources, which is what you see on the right-hand side of this page. What we're generating with capital, we think dividends as well as share repurchase are good uses of what we want to actually use that capital generated to return to our shareholders over a period of time. By then, to take that into the numbers we've seen this year in just a quick reference on this chart. We have talked very consistently about an operating level of RBC that we wanted to operate as greater than 350%. We think that's how it would denote the risk level within our companies. We've also said that given some of the choppiness we've seen in the market, some of the challenges that we see out there, in 2012, we put out a target range of 375% to 400%, and as we ended the third quarter, we're at 407%. So we've actually exceeded the range that we have set out there for ourselves, even as we've gone through and repurchased stock and raised our dividend through that period of time. So we feel very good about where we are from a risk-based capital perspective. Then equally as strongly on the right-hand side of the page, you'd see our expectation is to maintain between one times and two times coverage. I would note that this coverage is for both dividends and interest at the holding company. We ended the third quarter with $762 million. So we're exceeding our levels that we would expect there. So we feel very good about the position that leaves us going into the end of this year, as well as the flexibility that provides us as we enter 2013. To give you a sense of what it's looked like over the last several years, this consistent capital generation model and the excess capital we have, we've continued to buy back stock over that period of time at a very consistent rate. If you look at 2012 and the $500 million of share repurchase we've done this year, it's very consistent with the capital that we've generated. We've had that as a philosophy over the last several years in a more difficult time, is that we're going to return to our shareholders through share repurchase that which we generate. It very much ties into the capital generation model that we just looked at. You also should notice the dividend increases we've had over the last several years. We think dividends and an ever-increasing dividend rate is an important way to return capital back to our shareholders. It also is indicative of the cash generation capital model that we have as a company. We've continued to take up that rate of dividends over that period of time. Oh. You printing now, Rick? Downloading. Okay. Catching up. All right, good. How we doing in the back there? Can I go forward? Yeah. All good. No. It froze up here for a second. Let me talk a little bit more about share purchases and dividends. Seems to have frozen up. You got that, Tom? Yeah, the dance is on there. For those on the webcast, we are having a little technical difficulty with the slides. We really like this chart, as you can tell. I will keep moving on, keep talking about that slide if we can't get this pulled up quickly. I'm trying to move to reference in the books. What's that? Reference- Yeah. Maybe just keep going. Yeah, Rick. Because people have the materials on the- Okay. We're having a little difficulty with the slides here, but what I will do is keep going off of your books, if that's okay with you. I had a great build on this slide, so I'm actually upset that I can't You lost the momentum. Yeah, I lost the momentum on that front. Let me take that through and give you a sense from a capital generation perspective and what we've been able to return to shareholders. It's good from an annual basis and dividend increase as well as our share repurchase. I think also it's accumulated, if you look back since 2008, where we returned $2.75 billion to our shareholders, both through share repurchase as well as dividends. Through that period of time, equally as importantly, as year by year, we've increased the amount that we've dividend back to our shareholders, as well as what we've bought back from a share repurchase perspective. We've seen dividend or we've seen rating agency upgrades from S&P twice, from Moody's twice, AM Best. We've continued to see very good recognition of what we have from a strength of our capital position both from a share repurchase dividends, and then just the health of our balance sheet that we've maintained over this period of time. I think I keep going. Thank you. Yeah. Let's transition. Turn over to Kevin, and what we're going to talk about now is some of our things that we're working on as we move into next year. Okay. For those of you in the books, I'm moving on to page 24 here. We're going to talk about two key challenges in our operating areas and then one key challenge in our financial management area. First, on page 25, Unum UK. As I said earlier, some of the experience that we've had in 2012 in the U.K. has been a little bit disappointing. I can tell you, though, that it is not a group income protection issue. Our group income protection business is running very soundly. Loss ratios are stable. We are moving rate increases into the marketplace in the U.K. to cover low interest rate and discount rate pressures, and we continue to move sales up. Sales are up 7% year-over-year in group income protection in the U.K. So good, solid performing story there. And we continue to work on improving our underwriting and claim management processes to continue to improve the earnings generation of that business. So it's really a UK Group Life business that's a challenge here, and our primary focus in 2013 is going to be to restore profitability and returns and growth in that business. A couple of key action areas. First and foremost, we are moving rates up. We began moving rates up during the course of this year, moving rates up on an average of about 12%. A number of segments, though, those rate increases are in excess of 30%. We've also stopped selling in certain market segments in UK Group Life. And in particular, a problem that we're quite familiar with because we experienced it back, large account UK Group Life business in the U.K. The loss ratios on large account UK Group Life business in the U.K. are 16 points higher than they are in the core small and mid-market group life business in the U.K. We are withdrawing or at least pulling away from and being more selective, more opportunistic, if you will, similar to what I talked about earlier with our U.S. experience, doing that in the U.K. as well. I definitely would expect, therefore, both sales and persistency to experience some downward pressure in 2013. But the gain on that downward pressure is a restoration of profitable growth in the U.K. and our group life business that will take place over the course of the next year and a half as we move those renewal price increases and change our mix of business into the marketplace. Moving on to page 26, the other primary area of operating management focus is our long-term care business. I want to show you right up front that we're right on top of this. We have a very good line of sight to what we're trying to do here. We think that we currently have about 2-3 years of sufficient margin for the low interest rates as a result of the restructuring that we did at the end of last year. We are experiencing some expected claim volatility in this business. We're in the very early stages of the group long-term care business. The experience will emerge over the next 25 or even 30 years. As that experience emerges, we'll keep adjusting to it. But we're in the very early stages, and we feel quite confident about the assumptions that we made when we went through the restructuring last year. We are moving prices up. We are filing in every single jurisdiction. We're about 60% of the way through that process right now. We're looking for an expected value of about a 25% overall rate increase in our long-term care business. We are currently exceeding that in terms of approvals, although we still have a ways to go to go all the way through that program. But to date, we're feeling pretty good about where we are, feeling good about the rate increases that are getting approved, feeling pretty good about the relationships that we're building and walking through the assumptions with state regulators. This will be an iterative renewal process. This is not a one-time thing. We're going to just have to keep going through it as experience emerges and as interest rates emerge past 2015. But the bottom line is we're tracking according to our planned expectations right now. We are moving rates up, and those rates continue to emerge. We feel very solid about our assumptions around interest rates, at least through the year 2014 into 2015. Great. Let me take that from there and talk about interest rate management overall for the company. Slide 27, you can actually see where we invest, where many of the insurance industry invested in the 10-year single A bonds. When we started 2012, we had a good plan in terms of where we were going forward. We took that same plan forward through the course of the year, and as I mentioned earlier, saw some good results. There's no question that the movement in the 10-year single A and using that as a credit spread, which have tightened over time, because actually, if you look at this chart, the 10-year has actually moved in about 20 basis points relative to our projections. Most of that has been the tightening of credit spreads. It continues to be a very challenging market we have out there in the insurance space at large as well as our own. Let me talk to you a little bit about the different ways we're going to combat this. It actually looks very similar to what we told you last year as well. First is around the amount of cash flow that we have to invest overall in the portfolio. I'll give you some details on that. We maintain our strong interest margins. Kevin talked about that a little bit, but also in our long-term disability lines, we still maintain a very healthy margin above where we would expect. When you look at the hedging that we continue to have on our portfolio, about 20% of our cash flows are hedged, particularly to our LTC line. As Kevin mentioned in some detail, the pricing adjustments that we'll see over the course of the year, we really can get that back across all of our product lines where we have the ability to reprice those liabilities. On slide 28, it gives you a sense in the overall interest rate management, highlighting that first point, which was the amount of cash we have to invest. As our investment team looks at it, we're looking at this year about $2.6 billion to invest in the overall portfolio. Last year, we would have been looking at $2.9 billion for that period of time. If you break that down line by line, starting out with long-term care, you can see roughly $744 million to invest this year, and this is in longer money that we have out there. Think of 30-year type money that we put behind this line, as well as the credit spreads we get behind that. This is one that we'll continue to push on over this period of time. As Kevin mentioned, we've been reflective of what the market looks like today, and we still see the ability over a couple of years as we look out to continue to weather this market. If you go down to the bottom of the page on almost a $10 billion portfolio, you'll see that this year it's about $12 million to invest. That's $12 million. We actually have very little cash flow to invest in our individual disability closed block. The reason for that is as we take in cash flows today from bond maturities as well as new premiums, those go to pay out claims. So actually, the cash flow on a net basis is actually very little on that front. Even when you go to the right-hand side of the page, some of the lines that I'll talk about in a second in terms of their levering to the interest rate environment, you can see our long-term disability line, just over $400 million to invest, a very reasonable level. You think when we put behind this line commercial mortgage loans as well as private placements, we can actually achieve our rates on a reasonable basis there, although we would continue to see some pressure. Between both the individual disability recently issued and our Unum UK business, between $100 million and $200 million per line. As you aggregate these, they seem like large numbers, but when you break it down in kind of day-by-day investing throughout the course of the year, as I was able to show you for 2012, we can actually break this down and get reasonable rates, be opportunistic in how we go at that, and think of different asset classes as they go in and out of favor over that period of time. To take you on slide 29 to each of our product liabilities, we shared this with you last year as well, putting on the metrics of our repricing flexibility against our interest rate dependency. I'll start on the upper left, which is our long-term disability business, where we do have interest rate dependency in terms of the claims reserves that we put against this line. But we do have very much the ability to reprice this. It takes some time, given some of the guarantees in our products, but that's certainly something that we see we can attack. Sorry. When you look at the lower left-hand side, you'll see the U.S. Group Life lines. These lines are very low amount of interest rate dependency. The new cash flows that we have here today are important. We have the ability to reprice them, but as we would've seen across our product lines, a lot less dependence on the interest rate environment. As you move towards the right-hand side with our voluntary benefits, we price these with a fair bit of margin today. When you look at the interest rate dependency, it's lower. Of course, when you go to the upper side to the long-term care business, this is one that does have interest rate dependency, as I just mentioned. Our repricing flexibility is certainly there. As Kevin mentioned, we're working very diligently to reprice that business commensurate with the returns that we've seen in that business. You can see our desire to drive that to the lower right-hand side of the page. Let me take you through a view of the 2012 assessment. I think this is actually a very good lead-in to as we talk about 2013, and from a financial perspective overall, what we've seen happening with the market overall, and then ultimately to our book of business. These are third quarter numbers when you look at it, and these are numbers we put out at Investor Day for our overall outlook for the year. You'll see from a sales perspective, running kind of right in the middle of our range. We've seen some good growth coming out of our voluntary lines of business. As Kevin mentioned, Colonial Life still continues to see good sales, and so we're happy with the sales growth we've seen and the momentum, particularly that carries us into 2013. On the premium side, our expectations were 0%-2%. You had actually in here the runoff, some of our closed block business. So we've actually exceeded this as you look over the first nine months of the year, running close to 3% premium. Premium growth has been better than we expected. We actually have seen some good persistency in the business as well as the sales growth. So we're actually optimistic about what we see from the overall premium growth coming from the company in a challenging period of time. You'll see our EPS growth at 6%-12% with the expectations a year ago we went into. You'll see we're slightly below that, and we mentioned that as we changed our outlook from the 6%-12% and then brought it down slightly. We're still running just under the 6% level through the first nine months. So we think given some of the headwinds, which I'll show you in a minute, we think we're still seeing very good results. Then, of course, our return on equity at 12%, slightly above our range. So overall, even with many of these headwinds, many of the challenges in the market today, generating for the overall company just over a 12% return on equity. Slide 32 gives you a sense of what has changed relative to the outlook we would've shared with you last November. We went into the year expecting 6%-12% growth. You can see that the businesses actually did quite well relative to our expectations. I mentioned persistency has been particularly good. Sales and premium growth have been good. There's no question the interest rate impact has been a challenge over the course of the year. So we saw some deterioration off of what we saw given the curve that I showed you of the single A 10-year Treasury where interest rates have been impactful over the course of this year. As Kevin mentioned, relative to our expectations going into 2012, the U.K. business and the LTC business have been a little bit more challenging than we've expected. Of course, we're taking action across both of these businesses, and so as we see 2013 getting some of that back. I would also note that our current outlook of 3%-6% growth in this environment, given everything else we've seen, is still good and sets us up in terms of where we are for 2013. We feel very good about the results that we've seen there. Let me turn it back to Tom and talk a little bit about our outlook as we get into 2013. Thank you, Rick. I just want to make a few brief comments just to set the tone. Rick will work through the exhibits you see in your materials just to get a little more specific, but just a couple key assumptions. First off, as we look to 2013, frankly, we think the more conservative thing to do is to presume the economic environment does not get better, the employment picture does not get better, nor do we see any fundamental shift in interest rates, which again, you'll see in a moment. As you can see, we're taking very strong actions in anticipation of that, but we really do not expect the environment to get better. I will say, though, that despite my comments about the environment, we continue to see that there's actually a substantial demand for the products and services we sell. As Kevin went through some of his discussions of our operating results for 2012, you saw very good traction in the marketplace. Again, the things that we do continue to have appeal in the marketplace. Our competitive position continues to be strong. So don't interpolate from the bad environment to our company, meaning that we don't continue to see sales growth because we continue to see very good abilities to grow our business. Again, we'll talk about that in just a second. Again, with the assumption the environment does not get better, we are taking the appropriate actions to deal with what obviously is the biggest headwind we face, which is low interest rates. So the pricing actions that we're taking, we began to take earlier this year, and we're obviously continuing to take those, and we'll continue to take them as we go through 2013. For those that know our industry well, when you take a pricing action or decide to take a pricing action, it takes time to work its way through your income statement. So we certainly will see some of the impact of our pricing actions that have been taken this year and next year, but more of it begins to have an effect on 2014 and beyond. So just keep that in mind as you look at the materials Rick will go through in just a second. I will say, too, we are going to continue to stay with the commitment to return capital to our shareholders. You'll see that again, we've developed a pattern of continuing to raise dividends each and every year. We've developed a pattern of continuing to repurchase shares, roughly $500 million per year. You'll see that's very much implicit in the forecast we're going to take you through. Then just bringing it to the bottom line in 2013, so we are going to see that operating income is going to be low. It will be below our long-term targets, but our EPS growth will continue to be positive. Again, it'll be the ninth consecutive year that we'll show positive earnings per share growth. So with that, Rick, why don't you walk us through just some of the details of the 2013 outlook? Great. Thank you, Tom. If I give you a sense of the 2013 outlook, I think that through this roll forward, you can see some of the challenges we face. I think I would start you off with some of the very good things that we see, and that is on the left-hand side, where the underlying growth in the company continues to generate about 3%-5%. It is slightly under what we would expect longer term, but given the environment, the underlying trends that we see in our business, both from a risk perspective as well from an overall growth perspective, continues to be good at around 3%-5% growth. The interest rate impact is the second bar. No question about it. It is a challenging environment out there to put money to work. You saw the curve that I mentioned to you. This will create headwinds for us. We have dimensioned those for you so you can get a sense of how we see it today, given where the overall rates are and where the overall credit spreads are. Obviously, this will change over the course of the year. But we wanted to give you kind of a spot look as you look at that. The impacts there that you see, down six to down eight, include both reinvesting new cash flow, which is about two-thirds of the challenge that we see here, as well as discount rate impacts, which is another third of what we see. So it is a combination of those two things and a little bit of the persistency I mentioned that you see in here. But interest rates clearly are the big challenge for the year, and this would be no different than others that you see in the insurance space. Importantly, to the right-hand side of that, though, which may be different, is the interest rate offsets, and this is the price that we are taking within the market today. It is not a one for one. We think over time it should be a one for one, but the reality is, as we reprice our products today, and we are taking pricing action, you are not able to get all that back in the first year that you do that. So this will be something that builds as we look out over the next several years. But we very much have a view that we are able to manage through the interest rate over time through some of the price increases that we will see out there. A couple of more pieces which are more housekeeping in terms of the incremental interest expense we see out there. We did issue debt in the third quarter, so we have a little bit higher interest expense. Our tax rate will be impactful next year. We actually have benefited from a tax rate which was down closer to 28% this year. Next year, that will be around 31%, which is more of our normal run rate that we would see over that period of time. So it is important to call that out. That is, although it was in our plans for this year, is a year-over-year challenge that we have for next year. Importantly, the capital management front. Tom mentioned the $500 million share repurchase. We really get back most of that interest rate impact through continuing to repurchase shares and pay out dividends. This is something we have done very consistently over a number of years. We certainly have the capital to do so, the capital generation to do so. When you bring all those together, we see a year where we're at 0%-6% growth. It is below what longer term we think our business generates, but you see some of the near-term headwinds we see that we're able to overcome here over a couple year period of time. On the capital front, just to dimension this on slide 36, you can see our 2012 projections. We're running ahead of our projections or at least at the top end of the range for 2012. As you look out at 2013, it's very similar. This is one that you'd see a very steady normal course. Targets for next year, 375%-400% RBC levels. Leverage around 24 to 25, given some of the long-term debt that we issued. A holding company cash level of $500 million-$800 million. This is inclusive of share repurchase that we've seen over time as well as our dividends, which have increased steadily over a period of time. We feel very good about this capital outlook being reflective of a challenging environment out there, but also knowing that as we continue to generate a fair bit of capital, returning that to shareholders makes sense. Slide 37 is a fair bit of detail to give you kind of the depths of our 2013 outlook. Building up off of the sales growth, very consistent with the stories that we've mentioned to you. Unum US seeing 3%-6% sales growth. If you go into some of the lines under this, our voluntary benefits line closer to 10%. If you look at our large case business, that'll be closer to flat. There's a number of items in there. Coming off of a very good sales growth year this year, we're looking to continue to extend that into 2013. Unum UK on the sales front, no surprise in terms of as we continue to reposition this business, we will see sales down year over year. The focus here is on our profitable long-term disability business in the U.K. and pulling back some on our life business, making sure we get the right returns across this business line. Colonial Life, consistent with the market that we see out there on the worksite voluntary benefits side, 3%-6% sales growth. You'll see that correspondingly into the premium side as well. Although in aggregate sales down a little bit when you go underneath that, as Kevin mentioned in his opening comments, the lines that we are targeting for growth, we expect to see good growth in 2013. If I then take you into the premium growth side, you can see actually in the Unum US, 1%-3% growth here. The natural growth we would expect to see in this business has not been factored in. We expect a challenging year, as Tom mentioned. When you look at the overall premium side, a little bit of persistency, given some of our pricing actions that we see here, persistency coming down a little bit. You'll see premium growth in the 1%-3% range. Unum UK, down 17%-20% in premium. One of the things that we have assumed in here is as we look at this business and go through the right sizing of some of the different pieces, we may use reinsurance as a vehicle to balance some of our risk and return that we have across the enterprise. We have factored in some premium detraction from that, and that is the majority of that. Although once again, as we reposition our life business, as Kevin mentioned, we may see some premium contraction on that as well. Colonial Life has been very steady over the last several years, 3%-5% projected last year. We have seen 5% premium type growth in this line over a number of years. We continue to grow the premium line. This would actually be a target for the core operations of zero to 2%, similar to what we had coming into this year. This year to date, we have been able to outperform. We will continue to look hard at how we continue to grow the premium in the business over that period of time. The earnings growth column that you look at here is actually heavily impacted by the interest rate environment, and it is really across all the different lines that you see here. If you look at Unum US, 0%-2%, if you take out some of the interest rate impacts we are talking about, you would see a more normalized number of around five to flat year over year. That is going to be more of a reflection of what we see going on across the business and the repositioning that we will see in that line of business. Colonial Life at 1%-3%, a small amount, a couple of points of impact from interest rates as well. So interest rates, as you would have seen on the last slide in aggregate, are actually impacting our business lines individually as well as you go through that. As we mentioned in total, though, 0%-6% operating earnings growth that we see in the company from an EPS perspective. Importantly, as you go to the return on equity of our businesses over a period of time, what you will see here on the top half of the page, very strong returning businesses, very consistent with what Kevin highlighted earlier that you see across the top three. Unum US, pretty consistent with what we would have demonstrated a couple of years ago from a longer-term trajectory in this business. Unum UK at 15%-17%, we would expect to see this grow actually over the next several years as we reposition the business. Colonial Life, a very steady, very strong 15%-17% type growth. When you bring that all together with the closed block, which is still in the 2%-4% range, you will see a total operations of 10%-12%. If you take on to that some capital management we are looking at, you would see a total of around 11%-12% ROE next year. That is below our longer-term expectations, what you would see continuing within the company given that excess capital position as we do have some dilution from that. But even in that environment where we choose to have a conservative stance, 11%-12% return on equity on a very consistent basis continues to be very good in the overall environment. Maybe I am going to turn it back to Tom for some closing comments. No, I will keep our comments, certainly closing comments very short so we can get to your questions. But again, hopefully, as you have heard us discuss the business, both in terms of the things that work, but also the places that we are focused on, you sense a sense of focus on the right issues. But hopefully, you take away a few of these messages, I think, which are very, very important. One is we still feel good about the businesses that we are in. We think they have got good long-term growth potential. They have got good solid returns if we execute our business plans effectively. And so again, in general, we feel pretty good about our portfolio of businesses. Even though we are talking about growth, I want to emphasize that we are still sticking to our knitting of staying disciplined. You sensed in Kevin's comments a very sharp focus around the businesses that we want to grow, but also those that are more opportunistic. And so therefore, even though these are difficult times and continue to be difficult environments, we are not going to stretch for growth. We are not going to stretch for yield. We are going to continue to do the things that got us to where we sit here today. The other thing I would say, too, is the financial foundation of the company, both in terms of the assets and the balance sheet that Rick talked about, but also very importantly, the ability to generate consistent cash flow we think actually remains an asset. And hopefully, you have seen the pattern of behavior of the company over the last four or five years. We are consistently returning capital to shareholders through both dividend increases as well as share buybacks. And so our business model is one that frankly we think is a good business, but it is also one that if you manage it well, will produce those consistent cash flows and capitals that allow you to continue to return it consistently to shareholders, and we have shown that over time. You sense though here from us a relative, and we think we are being realistic, but a cautious view of the environment. We think that is the right thing to do because it causes you to take certain actions in terms of pricing and other things, which we think we should be doing. So again, we are maybe a little more cautious, but we think for good reason because of the headwinds of where interest rates are. We do not want to use rose-colored glasses and presume that changes tomorrow. We are making the right actions to continue to be sure we add value, maintain margins, and continue to create that very stable cash flow that allows us to return capital to shareholders on a regular basis. I just want to come back to what I started with and start with the right-hand side of this exhibit. If you think about it, there is no new challenges I do not think we shared with you today that you did not know about. We know these are the places we need to focus our attention. Hopefully, you got a sense from both Rick and Kevin that we have got to focus on the right issues, where the levers are. We know where the levers are. We put the right resources behind those areas and fully intend to continue to actively manage those issues which remain challenges. On the other hand, do not want to miss the stuff on the left-hand side either, because there is an awful lot of things at the company that we think are working very, very well. By the way, as Kevin said in his comments, they did not just work well last year. There has been a steady pattern of consistent delivery, which we intend to continue to deliver those consistent sort of performance metrics over time. When we do, that puts us in a very good position to continue to create value for our shareholders. With that, Tom, I think it is time to we will move to the question and answer session, and you want to start with that? Yeah, we will move to Q&A. We have got three microphones that will be moving around the room, and I just ask that as you ask a question for the benefit of the people on the webcast and for the transcript, if you could give us your name and affiliation. Why don't we start with Suneet and then we can work down the row here? Thanks, Tom. Suneet Kamath with UBS. I guess a question on capital management. How sustainable is the $500 million share repurchase program? Because I know you changed the slide a little bit in terms of the capital generation model, but if we take the $550 million to $650 million free cash flow, maybe take out $150 million for dividends, you're kind of $400 million or $500 million. You're saying, I think, $500 million for buyback next year, which I'm assuming is exclusive of the dividend. So it feels like you're sort of maybe dipping into that interest coverage a little bit in terms of paying the dividend or using that to fund the dividend. Certainly. No, I wouldn't say that. I would say, actually, we still feel very comfortable. If you look at the $650 million level, very comfortable in terms of generating capital, how we're using that capital to repurchase our shares. The change in the look of the slide was more to denote that when we have choices to make, we are very fortunate to have a very good capital generation model we have. We have choices to make between share repurchase and our dividend rate as well. But we've been choosing, as you've seen, from a very consistent pattern to be doing consistently both, buying back $500 million of our stock and at the same time increasing our dividends. So I wouldn't read more into that. I think the capital generation model still very much intact. Okay, and so just to confirm the $500 million, that's just the buyback and then the dividend on top of it. Just the buyback. Okay. Then I guess my second question is on the long-term care interest rate exposure. So I guess your slide said 2-3 years of margin in the current interest rate environment. But as we think about a potential charge that you might have to take 2-3 years from now in terms of interest rates, can we look back to what you took at the end of last year as a guide? Because I think based on my math, it was the interest rate related component to that in isolation was around $190 million. Can we use that as a base in terms of what you might see a couple years from now, or how should we think about that? Yeah, no, I think actually if you look back to the process we went through last year, and I think as you mentioned, the timeframe that we're looking at is very consistent with what we would have said last year as well. We were looking at 3-5 years. You would see the chart in terms of what has moved relative to where we were last year. So we said that's probably at the shorter end of that range in terms of what that looks like, as Kevin McCarthy mentioned. Then you can use some of the dimensioning that we would have mentioned last year in terms of the split of the charge that we took overall. Roughly half of that charge related to the interest rate environment and take that and say it's effectively taken us 3 years or 3-5 years in a more reasonable environment, and that would be a similar type pattern. But the interest rate piece is about what it would be a couple of years from now is basically what you're saying. Yes. Okay. Thanks. We'll go to Eric here in the brown sweater. Thanks very much. Thank you very much, Eric Berg from RBC Capital Markets. I have a question regarding the U.K. and one regarding long-term care. With respect to the U.K., it would look like your 2013 outlook contemplates a major improvement in profit margins there, as evidenced by the fact that you're expecting earnings growth materially in excess of the premium growth. Given the competitive, and I guess what you're really saying is that you expect to push through to impose major price increases or to seek major price increases, and for those price increases to stick. Why should we think in a highly competitive marketplace that's going to happen? Well, I'll start with our experience in Unum US. Back from 2004 through 2008, we were placing rate increases in excess of 10%, 10%-15% every year for those four years. We cranked up our renewal machine. We were willing to forgo non-performing business and let it lapse. We stuck with that discipline. And all during that period of time, not only do we accomplish our rate increase goals, but we did it with persistency consistently in the 85%-87% range. We're applying that same machinery in the U.K. What I think is happening in the U.K. is we're placing, as I said, about 5%, give or take, rate increases in group income protection. That's pretty consistent with low interest rates and discount rates. We'd expect our competitors to be sort of in a similar ballpark, at least in terms of what they need to do. On the group life side, we're placing 12% rate increases on average. As I said, some of that is in excess of 30%, and to some extent, we are willing to walk away from and forgo certain business segments within group life. Also, in particular, shift away from large case. It's basically the same strategy that we executed on in the U.S. Yeah. If I could add to that's actually a very important part, Eric, because you recall the experience we had in the U.S. There's a lot of power that comes from losing the right cases in terms of showing period-over-period growth and pre-tax earnings. Because if you're losing a zero margin or a negative margin piece of business, that's actually got a very powerful impact on your margin. Right. Fair point. Good point. Then just a question to clarify what you're saying about claims experience in long-term care. At one point, I thought I heard, I think Rick say that the claims experience has been consistent with your expectations, but then at another point, you showing it hurting your results in 2012. So has the claim experience been consistent? Has the emerging claims experience this year been consistent with the claims experience that you embedded in your reserves when you hiked them in last year's December quarter? David? Yeah. Certainly, I think how you've actually taken it into two different pieces is the important part. If you look at this year and the experience that we've had, we did see some volatility. We've called that out on a quarter-by-quarter basis. I think we have not changed our long-term view about how these claims will emerge over a longer period of time. It's important that we look at the claims and where they are in their life cycle, and this will go on for a much longer period of time. So we've not changed the longer-term view of what claims experience will look like. Although we can see intra-quarter volatility as claims actually come in on different parts of the overall life cycle of our claims block. We're going to see that kind of volatility. As I said, this is a business that's going to stretch out 25, 30, 40 years. The average age of a group long-term care customer is 47. The average age of our individual long-term care, and it's about a 50/50 roughly split between group and individual, is 67. Long way to go before you get the claims. We're in the very early stages. We're tracking well with the assumptions that we made last year using the Society of Actuaries emerging data. As Rick said, what we experienced this year was incidence volatility for the most part, which you'd expect when you're so early in the cycle. Okay. Thank you. Thank you. Excuse me. John Nadel from Sterne Agee. I've got a couple. Just to follow up on long-term care, or maybe the closed block entirely. 15%-20% year-over-year earnings growth, is that more a function of 2012 than it is of 2013? By which I mean the claims experience earlier part of this year affecting that year-over-year growth rate. Yeah. When you look at the full year-over-year, certainly we had some pressure earlier in the year in the block, and so we would've said that our run rate was closer to $25 million per quarter when you look at that. I think as we look out to next year, given a couple of factors, one is as the block continues to grow, it actually will generate more income just given the size of the investment portfolio backing it. We'll see that number move up into the $25 million to $30 million range over the course of the year. Okay. Then, related to that, looking at the long-term care, the cash flows to invest, why is it so high? I mean, it's $700 million-plus of cash flows net. I think that's a net cash flow to invest. Is that just a function of so much in premiums is still coming in and we're going to pay out claims so far in the future that that's just the way it's going to work for a while? That is the way it's going to work a while. If you looked at the number last year, I don't have it. It was in the 600 somewhere, and so it's going to be right around that level over a period of time. It's just new premiums coming in the door that we've got to invest. How far out in the future until we get to the point where those cash flows are sort of closer to breakeven? Is that 10 years out, 15 years out, or it's further? Yes. Okay. Then a couple of housekeeping ones. Just one, can you just remind us what one point on the risk-based capital ratio is worth, about? $10 million. About $10 million? Okay. Then I think you mentioned that about a third of the interest rate pressure was expected to be from reserve discount rate change. Is that the 2012 50 basis points that you took, or is there some expectation in 2013 for further cuts? Yeah. When you look at the long-term disability line, the majority of it is the 50-basis point reduction we did in the third quarter, and then there's some small pieces in other lines of business that have been built into our plans for next year of discount rate changes. Okay. Last one, just given how many employment relationships that you have, especially in the U.S., just a broader picture, fiscal cliff related. Do you have a strong sense as to how much pent-up hiring there might be nationwide as a result of some sort of a version of the cliff? Is there an expectation that that's going to result in some significant hiring, or is there just some expectation that maybe there's just other spending that companies are setting aside? I think from an operational planning point of view, we're trying to be sort of agnostic about it. We're trying to focus on the business that we have, the relationships that we have, and the growth rates that we're experiencing, sort of, or not experiencing, in a way, in the existing business, and the amount of share that we're capturing in terms of both, as I said, the new pipeline stuff and the deepening of relationships with existing customers. To the extent that we get some wage inflation, to the extent that we get some job growth, that's all sort of upside for us, and that's the way we're managing the business. But as far as, I'm no economist, so I'm just asking there about it more from your perspective, meeting with benefit departments. You would think, right, that a lot of businesses are tight on inventory. There's probably pent-up consumer demand. You'd think at some point we're going to get a benefit. But when? Who knows? We can't plan on it. We got to plan sort of in a more prudent way. Thank you. If I could, Kevin, bring back to something you said before. The more potent, powerful thing for us is just deepening relationships with existing customers, which frankly has happened regardless of the uncertainty, either economically or with the fiscal cliff, actually. Good, thanks. Tom, can you talk about the M&A? It's Jay Gelb at Barclays. Hi, Jay. How are you? Fine, thanks. Can you talk about the M&A environment? Are you seeing blocks of business out there in terms of opportunities and what is Unum's appetite? Well, I will just say an appetite point, then maybe Rick, you can give an update point. I think actually, again, we have said all along we have a standalone business plan that we can fulfill our objectives to our shareholders and our business actually just by doing the things you heard us talk about today. So we do not need to do M&A to fulfill some of the things we have laid out in terms of plans, which I think is a good thing. Because unfortunately, again, we take an active role in looking at things, but we have a very high threshold in order for us to take capital that we think we can put back to shareholders with dividend increases and buybacks to put that into an acquisition. So we have got a very high threshold. Then Rick, maybe just talk about what we see as inventory, because again, we want to be there, we look. But as I said, extremely disciplined about the process. Yeah, I think in concert with that, where we do have a high threshold is given the types of businesses that we would like to be doing M&A with and as part of, the inventory is actually quite low. The environment that you'd see today is one where there is movement in the market. But these are not lines of business where we would be part of today. It's not part of our overall strategy of being a provider at the employer space and the types of product lines that we're in. I can't give you much more than that to say that we think there may be a time where there is more inventory building up, and we certainly remained diligent, prepared, and looking. But that moment is not right now. Then a separate issue for Rick McKenney. On investment income, I would anticipate in 2012 for the full year that overall net investment income is down very slightly year-over-year. Would you also expect that to be the case in 2013? Hard to look at the overall level of investment income. I'm sure we could pull that for you, I think, but when we look at the aggregate, I would expect it to be slightly down given the asset level as we continue to buy back shares. When you look at the basis points on the portfolio this year, through three quarters, we're down about 15 basis points. We think of it more from that perspective. As you would've seen in the slide, we expect that to come in a little bit in 2013 as well, given the rate environment. Why don't we go to the back of the room here? We'll move to this side, too, at some point, won't we, Tom? I think we're going to. Thanks. Erik Bass with Citi. Hey. First, if you could just remind us with the hedges, how much benefit on a dollar basis you're getting, and then what kind of the expiration is of those hedges on the interest rate side? Difficult to quantify in terms of a pure dollar. As part of our 10-Q, you'll see some of those hedges out there on the interest rate side to see that benefit. When we think about it, the hedges come due roughly every quarter. Those are interest rate hedges, so we have benefited over the course of the year, given the credit and spread environment was better, and we've continued to see that come through our results. I think overall for the year, it's been about 20 basis points. As I mentioned, those new purchase yields of 488, I think it's benefited by about 20 basis points over the course of the year. 2013, they will run off over time, over this year. That will continue to be something we watch, but it's only about 20% this year. We've seen that gradual downtick of those hedges over that period of time. Sorry, but 20% of them are running off in 2013? No, 20% is actually the total interest rate coverage that we have for our long-term care cash flows, and they will be run off in 2013. Okay. Then just one, if you could talk a little bit more broadly about the competitive environment in the U.S. And you've talked about the rate increases that you're getting, but what kind of actions are you seeing from competitors? I think it varies. Some competitors are being very consistent with what we're thinking about in terms of moving rates up. I think in the small and mid-market, we've seen some evidence of price hardening. I wouldn't put it in the category that you see maybe in the P&C cycles. But in the larger case end of the marketplace, and I think appropriate for our business strategy, we're still very disciplined because the market sometimes is not. There's quite a bit of volatility in pricing levels in the larger case end of the marketplace. But in the core market, I'd say it's in as good a place as it's been. Ryan Krueger. Thanks. Ryan Krueger with Dowling. First, I wanted to make sure I had it right. What did you say the impact of the group life reinsurance transaction was in the U.K.? We actually said if you look at the premium level, that's a result of some quota share reinsurance. Well, again, it's not a transaction that's completed. It's more of an evaluation we're going through, so we would shrink the size of the group life block. I think probably two-thirds to three-quarters of that premium decrease would be actually some of that reinsurance. But it's important to know that that's not done yet, so I think that that's something we're evaluating as part of the plan. Okay, would you expect that to have an associated capital release in the U.K.? Yes. Can you quantify it? Not that I would want to right now. Let's do the transaction. We will be happy to share with you all the details once it is done. Okay. I guess thinking longer term in the U.K., the 15%-17% ROE for 2013, still certainly a good return relative to most businesses, but below where you would have said a normalized return was a couple of years ago. Do you think this is now kind of we are at a sustainable level, 15%-17%, or do you still think you can get that higher given what you are seeing in the U.K.? No. Go ahead. I would think we would eventually be able to move it back up again. The dip this year was primarily driven by the group life. We will be moving rates up in group life, managing our mix of business, using reinsurance to reduce severity volatility, continuing to place rate increase in order to support the low interest rate environment in group income protection. We continue to capture, share, and grow the market and grow sales in group income protection. I would expect ROE to work its way up. Thank you. If I could just. Kevin's absolutely right, but I do not think it is going to go back to the levels we saw a few years ago. I think we have been sharing that with the Street, actually, for some time, as those run sustainable ROEs. But we were unfortunately surprised at how quickly they came down. We have got some work to get them back up again, but they will not get back to those kinds of levels. Right. Why don't we go to Sean here? Good morning. Sean Dargan from Macquarie. Kevin, if you could comment maybe on the impact of healthcare reform and as the exchanges progress, what, I guess, the wallet share of employee benefits looks like at a lot of your core clients and where you see that progressing? Yeah, I think post-election, it seems likely that exchanges are going to move forward, probably on a schedule similar to the 2014 schedule. I think there will be a number of waivers out there that will make adjustments to that. I think the types of exchanges are going to vary in terms of how robust, if you will, versus how soft. We are tracking the types of exchanges. We are tracking how we want to play. We are partnering with benefit administration companies in some areas around how will we wrap around exchanges. We are partnering with healthcare carriers around distribution in other locations. We are continuing to build our portfolio around the expectation that exchanges will exist. I think the key to that whole process is going to be education. I think the strength of our distribution system and the strength of the relationships that we have with brokers and through brokers to employers is going to be a really, really big benefit for us. We've got a robust set of voluntary products with probably the strongest enrollment capacity in the industry. We should be able to deploy that against the gaps that need to be filled around healthcare reform, and the affordability, accessibility for our voluntary portfolio around filling in those financial protection gaps over the course of time, I think should generally benefit us and our business should continue to grow. I think that said, there will be sort of the natural confusion disruption effect that happens when each state goes through their own process. But we've been through this in Massachusetts, for example, already we still have very strong sales results and growth results in that region of our U.S. business, and I wouldn't expect anything very different over time. Thank you. There are a couple of hands in the back of the room there. Yeah. Hi, Mike Hurley, Decade. Questions about capital management and the rating agencies. AIG and Prudential both referenced rating agency pressure to de-lever as the main reason that they cannot buy back stock among a couple others. Your leverage in the guidance is going up a little bit. You've done a great job improving your rating, as referenced in slide 22, over the years. I just was curious to know if you're having similar discussions. I understand they're much more global and have variable annuities and things that you do not have. But have you had those conversations, and has that factored into the buyback guidance? Certainly. Maybe I talk for a second about the leverage, though. I think we mentioned it being comfortable leverage. Our leverage has gone up a tick, but it was under-levered prior to that. So we had a lower leverage level as you look at that. As we issued 30-year debt, we were very comfortable with that level. We certainly have ongoing discussions with the rating agencies, but I would say some of those upgrades were actually quite recent, relative to that. They are very aware of the plans that we are sharing with you here today, and I think on all fronts we feel good about how that trajectory looks. Why don't we. Let's get this question in the back of the room, then we will come to John for the next one. Hi, Miranda Davidson, Raymond James. I was just wondering, when you are talking about the 0%-6% in 2013, is that including the tax benefits from the last two quarters? Would you expect another tax benefit in the fourth quarter? Because I think you said 28% was the tax rate looking at coming out to this year, but I think it might be closer to 29. Yeah, no, I think I said 28 and something. Okay. We don't expect any outsized tax benefits in the fourth. There's always a lot of changes that can happen as part of the fourth quarters, but we expect to be pretty consistent as we go through the rest of this year. I think those tax benefits we've seen last year were partially one time in nature related to the U.K., in terms of their changes in the overall tax rates. Those will be embedded going forward, but I think you should look closer to a 31% number as we look to 2013. Okay. Did you suggest that we should expect another decrease in the group income discount rate? No, what I said on the group income discount rate is when you look at that, the 50 basis points that we have taken as of the third quarter would be very consistent. We'll have to always look at it continually. Okay. I think embedded in the plans, we'll continue to look at that probably later in the second half of next year. I think 50 basis points, along with the strong margins we have today is certainly sufficient for this period of time. What I did say is that there will be discount rate changes in other lines of business which add up to a small amount over the course of the year. Thank you. Thank you. Okay, John. Thanks. John Nadel from Sterne Agee. I guess I'm curious, 6-8 points of growth taken away by low rates, and some expectation of being able to get that back through pricing actions, whether it was through early 2000 or 2012 renewals into 2013 renewals, new business, et cetera. At what point, I think, Kevin, you mentioned earlier, by 2014, we really start to see the positive influence of rate actions. How should we see that play out? I mean, this 0%-2% premium growth, I think it is company-wide for 2013. Is that something where we should see that similar environment as sort of the backdrop? We should see that zero to two jump to two to four, two to five? Or how should that play out over the next couple of years, assuming you get the rates through the book of business to combat low interest rates? Right. I don't want to get too far out on the limb in terms of quantifying out years in a plan. I'm trying to understand timing more than- I mean, the way it ought to work is it'll take roughly, for the U.S., roughly 2.5 years to get through a full renewal cycle, right? To compensate for the drop in discount rates that we took for our third quarter of last year and then again third quarter this year. So in that sense, you'd be out into basically your 2014 sales and renewals up to that point. You'd have sort of gotten all those rate increases through and you'd start to see between mid-2014 and early 2015, you'd start to see the revenue impact of that offsetting sort of the accumulated interest rate impact that's been the downward pressure up to that point in time. I think the interesting part of our business is if we're successful at sustaining those relationships, keeping persistency at 87, 88, 89. No doubt. Then that means those rate increases that we've placed, they continue, right? Even though they're no longer catching up for those interest rates. Then you start to see some top-line pop and some bottom-line pop as a result of the continuity of those rate increases that no longer have interest rate drag to cover. So I view that as sort of on the outer side of the curve, sort of a positive because rates typically in group insurance sort of don't work their way back down once they've worked their way up. Understood. Thank you. That helped. Thanks. Thanks, Tom. Suneet Kamath with UBS. Follow-up on the reserves. You've given some comments around GAAP, but I was wondering if we could shift focus to statutory and how you're feeling about, especially as it relates to long-term care, excuse me. How are you feeling about the statutory reserve level? And there, at what point would you need to take some actions? Yeah, certainly. When you look at the stat reserves across the board, as I think we've said multiple times, they actually are pretty similar level to the GAAP reserves. One exception there that you would have seen at the end of last year, actually a reserve strengthening that we did as a result of one of our entities that has a little bit more onerous type of rules around what the asset adequacy tests look like. You'd probably see a similar level to that as we get through the end of this year and go through those processes. All that's factored into all the actions that we've talked about today. That's the only place where I'd be concerned on that front. I guess on the RBC, you'd mentioned you want to be prudent and stay kind of 400-ish percent, I guess, maybe a little bit lower. What would you need to see to be comfortable taking that more towards the midpoint or low point of your range? Is it just purely interest rates related to long-term care? Or is it, to John's point, as you start to get some of these price increases come through, and maybe there's more capital generation, and at that point you maybe feel a little bit better about the capital outlook? Yeah, certainly, I think it's very multifaceted. As you look over the last several years, we've maintained a higher level of capital given the environment. It's changed in terms of what the attributes were or what the concerns were, certainly in the environment around us. That continues to be the case in terms of items outside of our business today and where we don't want to be repurchasing a fair more than the $500 million of stock, which we are already doing today, given a difficult environment. I think we're in that. As you look to 2013, there's a variety of elements when you look at the employment picture, when you look at interest rates, which cause some concern for the environment. It's important to note, though, those don't cause an over amount of concern for us today. We just want to be managing our balance sheet very prudently as we look to many of the factors which will impact 2013. Thanks. Any other questions? All right, well, we'll conclude the meeting. For the folks on the webcast, thank you for joining us.

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