Earnings Call: Q3 2012

Nov 1, 2012

Good day, and welcome to the Unum Group third quarter 2012 earnings results conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Senior Vice President, Investor Relations, Mr. Tom White. Please go ahead, sir. Great. Thank you. Good morning, everyone, and welcome to the third quarter 2012 analyst and investor conference call for Unum. Our remarks this morning will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the SEC and are also located in the sections titled Cautionary Statement regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2011, as well as our subsequently filed Forms 10-Q. Our SEC filings can be found in the Investors section of our website at unum.com. I remind you that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on our website, also in the Investors section. Participating in this morning's conference call are Tom Watjen, President and CEO, Rick McKenney, Executive Vice President and CFO, and also Kevin McCarthy for Unum US and Unum UK, and Randy Horn for Colonial Life. Now I'll turn the call over to Tom Watjen. Thank you, Tom, and good morning. Overall, the third quarter was a solid one for the company, with operating earnings per share growing by 6.7%, and I'm generally pleased with the results around the company. Let me touch on a few of those here just to start the call. First, we continue to generate solid results in our two largest operating businesses, Unum US and Colonial Life. In both business segments, we again experienced positive year-over-year growth in premium income and operating income. In Unum US, premium income grew 3.5% this quarter as we continue to see positive sales momentum in our target markets and strong persistency across our major product lines. Risk results also remain generally stable, helping to produce a 3.4% increase in operating income for the third quarter. At Colonial Life, we saw similar results this quarter, with 5.5% premium growth and operating income growth of 3%. While Colonial sales results were down somewhat, which is an area of focus for our team, we continue to enjoy strong persistency across most of our market segments. The return on equity for both of these businesses is very strong, in the 13%-14% range for Unum US and in the 16%-17% range for Colonial Life. I am very pleased with the consistency of performance of these two businesses. Results of our Unum UK operations continue to underperform our expectations in the quarter. The business in general remains very profitable and has produced a 12% return on equity so far in 2012, with our group disability business continuing to generally meet our expectations. Our group life results, though, are disappointing, and we are taking aggressive pricing actions and repositioning our life block to address this issue. We have done this before, and I am confident we will see gradual improvement here as well as we execute on this plan. Rick will touch on this further in his comments. Next, the results of our closed block segment were in line with our expectations as the more favorable results from our individual disability line offset the somewhat weaker results in our long-term care line, which not surprisingly continues to be somewhat more volatile quarter to quarter. Rick will cover the performance of our closed block in his comments. Now moving to our investment results. We continue to generate very solid investment performance this quarter. Today's low interest rates, though, continue to put pressure on our net investment income and on those products which are more interest rate sensitive. Since we are not expecting the rate environment to improve anytime soon, nor willing to sacrifice investment quality in order to stretch for yield, we are taking the actions needed to maintain our solid profit and reserve margins, particularly in our Unum US LTD business. This includes adjusting our discount rate and increasing our pricing in the market. You will hear more about this in Rick's comments. Finally, our capital position remains in very good shape. Our quarter-end risk-based capital level of approximately 407% remains above our target range of 375%-400%. Our holding company cash position is $762 million, providing us with significant financial flexibility. We continue to balance maintaining a strong capital position with our goal of returning capital to shareholders. In the third quarter, we repurchased $100 million of stock, which keeps us on pace to complete our plan of $500 million of repurchases for full-year 2012. When completed, we will have repurchased over $2 billion of our common stock, or almost 25% of our shares, over the past five years. While operating earnings growth in this environment remains challenging, we remain committed to maintaining our consistent, steady program of returning capital to our shareholders. In summary, I continue to feel good about our company's position in what remains a tough environment. We have been able to maintain a strong investment portfolio and capital position, grow our businesses in several strategically important areas, and generate consistent, solid profitability across the majority of our businesses. We have also continued to consistently return capital to our shareholders through our share repurchases and dividend increases while maintaining a solid credit rating. I would note that two of our rating agencies recently upgraded the company's ratings. I will now turn things over to Tom White for a review of our operating results this quarter. Tom? Great. Thank you, Tom. As you can see from our press release yesterday afternoon, we reported net income of $230.2 million for the third quarter of 2012, or $0.83 per diluted common share, compared to net income in the year-ago quarter of $202 million, or $0.68 per diluted common share. Included in net income for the third quarter of 2012 are after-tax, non-operating retirement related losses of $7.6 million and an after-tax net realized investment gain of $13.8 million. Included in last year's third quarter are non-operating retirement related losses of $5.2 million and a net realized investment loss of $15.9 million. Excluding these items, after-tax operating income was $224 million for this quarter or $0.80 for diluted common share, compared to $223.1 million or $0.75 per diluted common share in the year-ago quarter. Turning to the business segments, operating income for the Unum US segment increased 3.4% to $216.3 million in the third quarter, with premium income increasing by 3.5%. The expense ratio improved on a year-over-year basis, and risk experience was generally stable with the benefit ratio for the segment at 73% this quarter, compared to 72.8% in the year-ago quarter. Operating income in the Unum US group disability line was $74.5 million in the third quarter, compared to $72.7 million last year. Premium income increased 0.7% over last year due to recent favorable sales and persistency trends, but total operating revenue declined by 0.9% as net investment income declined by 6.6%. The benefit ratio, as we will discuss later, was 84.9% in the quarter, down from the year-ago level of 85.5%. In the group life and AD&D line, operating income increased 7.3% to $56.1 million in the quarter, an increase of 6.9% in premium income, as well as higher net investment income and lower operating expenses, which offset an increase in the benefit ratio. In the supplemental and voluntary line, operating income increased 1.8% to $85.7 million with solid growth in premium income of 4.9%, offsetting a slight increase in the benefit ratio. Moving to Unum UK, operating income in this segment declined to £17.3 million from £21.5 million in the year-ago quarter. Results in the group life line of business were significantly weaker than the year-ago quarter, while income in the group disability line improved over last year's third quarter results. Concluding our core operations, Colonial Life reported an increase in operating income of 3% this quarter to $68.7 million. Premium income increased by 5.5%, and the benefit ratio was slightly higher than a year ago. Results in the closed block segment this quarter showed a decline in operating income to $25.6 million from $30.8 million in the year-ago quarter. For the corporate segment, we reported an operating loss of $27.4 million for the third quarter, compared to a loss of $20.8 million in the year-ago third quarter. Net investment income is lower due to lower asset levels, a lower proportion of assets invested at long-term interest rates, and a decrease in investment income attributable to tax credit partnerships. Interest and debt expense was higher at $33.9 million in the quarter, compared to $32.2 million in the year-ago quarter, reflecting our issuance of $250 million of 30-year senior notes during the third quarter. It is important to remember that the negative impact on net investment income from the tax credit partnerships is offset by a lower income tax rate due to the tax benefits recognized as a result of the tax credit partnerships. Finally, the tax rate in the third quarter is also lower due to a reduction of $9.3 million in our income tax expense in the third quarter to reflect the impact of the U.K. tax rate reduction on our net tax liability related to our U.K. operations. The reduction in our tax expense from a similar rate reduction was $6.8 million in the year-ago quarter. These were driven by reductions in U.K. income tax rates that were enacted in both the third quarter of 2012 and 2011. With that, I will turn things over to Rick McKenney for further analysis of this quarter's results. Great. Thank you, Tom. This morning, I will cover the profit trends we experienced in our business segments this quarter, a little more detail on our sales and growth trends, and I will also update you on our investment results and capital position. First, on the operating results for the third quarter, I will begin with Unum US, where we had another strong quarter for the overall segment. Operating earnings growth was 3.4% and risk experience was generally solid across the segment. Focusing on risk results, for group disability, the benefit ratio remained generally stable at just under 85% for the quarter compared to 85.5% in the year-ago quarter and 84.7% in the second quarter. In the third quarter, we lowered the discount rate for new claim incurrals on the group long-term disability by 50 basis points. While our interest reserve margin remains at a very healthy level of 86 basis points, we continued our measured pace of new claim discount rate adjustments given the extraordinarily low interest rate environment. This is particularly true for 10-year public and private bonds, our primary assets backing this line. As we have outlined in the past, the discount rate reduction of this magnitude reduces quarterly earnings by about $6.5 million. The impact of the discount rate change was largely negated by several factors related to risk trends this quarter, namely stable paid incidence trends, a lower average size of new claims, and continued very good claim recovery experience as well as our ongoing price discipline on new sales and renewals. Our profit margins continue to remain at healthy levels for the group disability business. The group life and AD&D line was also a strong earnings contributor this quarter at $56 million, up 7.5% from last year. The benefit ratio was 72.3% in the third quarter, higher than the 70.2% a year ago quarter due to an increased volume of large claims in the quarter. Margins also remain very strong in our group life and AD&D line. The supplemental and voluntary line within Unum US continues to produce a very strong level of earnings for us, with earnings of $85.7 million for the quarter. Risk experience remained generally stable with a benefit ratio of 51.5% compared to 51% in the year ago quarter. These lines of business continue to be attractive growth opportunities for us with strong margins and consistent performance. Colonial Life also continued to produce solid results with third quarter earnings of $68.7 million, an increase of 3% from a year ago. The benefit ratio remained relatively stable at 52.9% this quarter, compared to 52.6% in the year ago quarter, with higher mortality in the life line of business, but favorable experience in the cancer and critical illness and accident sickness and disability lines. Solid, consistent results once again, generating ROE in the 16%-17% range. Moving to Unum UK, results continue to be challenging with third quarter operating earnings at £17.3 million, compared to a year ago quarter of £21.5 million. Results in the group life line of business were negatively impacted by higher claim volumes and higher average claim sizes. On the other hand, results from the group disability line improved on a year-over-year basis due to favorable claim incidents and claim recovery rates. As we have discussed with you in recent quarters, results in Unum UK can be inherently more volatile than most of our other lines of business because of the size of the policies we write and the relative size of this block of business. In order to restore the profitability of this business, we will need to aggressively raise prices, particularly with our group life policies. We are working to do so with double-digit rate increases and expect to see improved results looking out over the next several quarters. Concluding my comments on margin, overall results in our closed block were in line with our expectations at $25.6 million this quarter. Results in the individual disability line of business were stronger than normal, with favorable risk experience as indicated by the interest adjusted loss ratio at 82.5% this quarter, compared to almost 85% in the year ago quarter. Long-term care results were slightly under our expectations with the interest adjusted benefit ratio at 91.3%. Our year-to-date results of 90% are slightly above our expected range. We experienced higher claim volatility this quarter with higher new claim incidents and a higher average claim size. We continue to watch this closely, but our experience to date has not changed our longer term views. As we look to our growth trajectory in Unum US, we continue to see positive momentum in our sales results again this quarter with 4% overall sales growth, driven by 10% growth in our group disability line and 5% growth in our supplemental and voluntary lines. The sales mix was also encouraging, with over 80% of this quarter's group product sales coming from the core market segments. Premium persistency remains at a strong level for Unum US at 90.7% for group long-term disability and 91% for group life on a year-to-date basis. With these positive trends, we continue to produce good premium growth of about 3.5% in our Unum US segment. A good result given today's competitive market conditions and continued weak employment trends. In the U.K., sales results for the quarter were down about 20% in local currency, with a sharp drop in group life sales, which were down 39%, offsetting a 6.6% increase in the group disability line. We're aggressively pushing price increases into the market, and clearly this is having a negative impact on group life sales. You'll also note that the persistency for our major group lines in the U.K. have declined this year, with group life persistency declining to 80% for 2012 to date from 88% in the first nine months of 2011. We're pleased with the rate of increases that we're beginning to realize in the group life line, but as we said previously, it will take several quarters to improve the profitability in this line. Finally, premium income increased 5.5% in Colonial Life in the third quarter, in line with the premium growth trends we've seen in recent quarters. New sales in total were down this quarter by 5.8%, while new sales in our core commercial market segment were down less than 2%. We experienced large declines in the large commercial market and in the public sector market. We didn't see any dramatic changes in the market in the quarter, just a continuation of decent sales trends within existing accounts, but challenging trends with new account sales. Moving on to the balance sheet and the investment portfolio. This is very much a story similar to what we've experienced in the past several quarters. A very good credit quality experience, but a very challenging environment for new money yields due to the low level of interest rates, as well as the tight corporate bond spreads available in the market. Briefly on credit quality, the net unrealized gain position on our fixed maturity securities portfolio stands at $7.3 billion at quarter end, and our watch list of potential problem credits remains very low. The net realized after-tax investment gain from our portfolio was slightly positive on the quarter. The low interest rate environment continues to present a challenge, though, and the overall portfolio yield at the end of the quarter was 6.54%, a reduction of five basis points from the prior quarter. Our strategy for managing through this environment is centered on being selective in our asset purchases. With tighter spreads in our core asset category of investment-grade corporate bonds, we found better value and yield in other asset categories such as private placements, commercial mortgage loans, and below investment-grade bonds. We also continue to benefit from the hedges we have in place for our long duration LTC portfolio that cover about a third of our cash flows. With selectivity comes a higher level of uninvested cash in our product portfolios. We did make progress in the third quarter by reducing the amount of uninvested cash to less than $300 million at quarter end from over $400 million for much of the first half of the year. The other important element of our strategy for dealing with low interest rates is to make adjustments to our discount rate assumptions, such as we did with our group long-term disability line this quarter, and look to offset that higher cost by adjusting pricing on new sales as well as renewal business. Moving on to our capital position, we continue to be very pleased with the company's overall capital. Statutory net income was $138 million for our traditional U.S. life insurance companies this quarter, consistent with the year-ago quarterly results, and our run rate continues to support our capital model that generates about $500 million of free cash flow per year. The weighted average risk-based capital for our traditional U.S. life insurance companies is approximately 407%, remaining slightly above our 2012 target range of 375%-400%. Cash and marketable securities in our holding companies totaled $762 million at the end of the third quarter, and we benefited from the debt issuance we completed in the quarter. We issued $250 million of 30-year debt at a coupon of 5.75%, taking advantage of today's low interest rates, strong investor demand for corporate bonds, and our own recent rating upgrades. With this issue, our leverage remains a very comfortable 25%, and our coverage ratios are very healthy. Our share repurchase activity in the third quarter totaled $100 million, which brings us to $400 million for 2012 to date. We expect to complete our planned $500 million of repurchases for the year in the fourth quarter. Closing with a comment on our outlook, we believe that growth in operating earnings per share for 2012 will be in the range of 3%-6%, based off full year 2011 operating earnings per share of $2.98. We plan to discuss our 2013 outlook for operating results and capital management plans on December 17th, when we'll host a meeting in New York. Details of that meeting will be released soon, but I'd ask you mark it on your calendars and join us that afternoon. Now let me turn the call back to Tom for his closing comments. Tom? Thanks, Rick. I'll close by saying again that we are generally pleased with our third quarter results. Unum US and Colonial Life continue to generate solid premium growth and margins, and we have continued to maintain a solid investment portfolio and strong capital position. This certainly remains a very challenging interest rate environment, but we are taking the actions necessary to effectively manage through a sustained period of low interest rates. In the one area not meeting our expectations, Unum UK, I feel good about the plan we have in place to gradually improve our performance in this business. While we remain focused on generating strong operating results, we are fortunate that our cash flow and capital position remain strong, allowing us to supplement our operating results with a consistent return of capital to our shareholders. Operator, this will complete our prepared remarks, and please, let's move to the question and answer session. Thank you. If you would like to ask a question, please signal by pressing the star key followed by the digit 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you have signaled for a question prior to hearing these instructions on today's call, please repeat the process now by pressing star 1 again to ensure our equipment has captured your signal. We will pause for just a moment to allow everyone an opportunity to signal for questions. We will take our first question from Jimmy Bhullar with JP Morgan. Thank you. I had a question first on long-term care. Obviously, you took a pretty large charge last year, and part of that was related to low interest rates. Given the decline in rates and just corporate bond yields being lower, what is your comfort with overall long-term care reserves, and at what point would you need to consider taking another charge? Then secondly, if you could talk about some of the things that you are doing in the U.K. market. You mentioned you are raising prices, but your persistency has declined, and I am assuming it is because of that. But does that imply that competitors are not following suit? Or maybe if you could talk about the competitive environment in the U.K. market as well. Will do so. Rick, do you want to pick up on Jimmy's first question on long-term care? Yeah, Jimmy, you had a specific question on long-term care around interest rates and the impact on that line. If I take you back to the year-end process we went through, we adjusted our reserves and based that on an outlook that we had at that point in time of a difficult environment, of a very low rate environment, looking out in the 3-5 year range and adjusted our interest rate assumptions and our discount assumptions accordingly. The world has gotten a little bit tougher in the investment grade market, but what I would tell you, as opposed to changing that outlook of a 3-5 year range, it probably has brought it in at the current moment to the shorter end of that range, and we'll have to continue to look on that. But I would also caution there's a lot of other elements you have to look at when you look at that line of business. We isolated that element at year end last year, but you also have to think about the things that we're doing in terms of price increases that we're taking, actions that we're taking in line, and continuing to do that. So for that particular element, we still feel fine with that assumption that we made at year end. We did look out over the horizon just a short bit in doing that, and it continues to be the case, but it is a broader line that we'll continue to watch and go through and measure and manage. Maybe, Rick, to that point, I think since you mentioned that we are actively managing that business even though it's in a closed block, it might be because I know it's on other people's minds as well. Kevin, if you could just take a minute and just talk about just some of the actions that we have underway, because we have really put quite a few resources behind being sure that even though it's closed, that we're actively managing that business. Thanks, Tom. Good morning, Jimmy. Yeah, in long-term care, maybe the most important thing is our rate increase process. That process is proceeding. As we've mentioned in prior quarters, it's not a one-time event. It's kind of a dynamic renewal process. We've filed in nearly every state at this point, and we're so far at least achieving our objectives with approvals. Some of those are full approvals, some are phased-in approvals, and some are partial approvals with a fairly wide range, I guess, of rate increases, but ranging from the teens to upwards of 50%. In total, though, those increases are very consistent with the assumptions that we rolled into our models at the end of last year and then in the first quarter, when we took the charge and closed the block, and we'd expect those premiums to emerge in 2013 and into 2014. Beyond the rate increase actions, we have made a number of actions in terms of shoring up management further, increasing our claim management control processes quite similar to what we do in long-term disability. I think from an actively managed standpoint, we have the right things in place. Good. Thanks, Kevin. Jimmy, your other question was on the U.K., and before I ask Kevin to pick up a bit, let me just, again, just come back to a couple comments I made. As you know, that business continues to be very profitable. It continues to generate over a 12% return. Frankly, the LTD business in that market continues to perform reasonably well. I think as has come out this morning very clearly is the issue there is group life. You may recall when we made some changes, actually a bit ago, in terms of the leadership team and the structure of how we're running that business, we did tuck that under Kevin's broad shoulders, actually, because some of the issues we're confronted with in the U.K. we find are very similar to ones that we went through in the U.S., and I'm specifically talking about the actions we had to take around repricing and repositioning the group life business. When you talk about persistency and the cause and effect between pricing actions and persistency, I'd say, Kevin, we're very familiar with how to sort of keep a good eye on how to balance those different things and maybe just speak a little bit about what we're doing in that marketplace. Thanks, Tom. I think this is kind of a straightforward problem and a straightforward solution. We've got some issues in our group life line of business, primarily driven by some previous underpricing, some deterioration in mortality, reflecting increased levels of incidents and higher average size claims. What we're doing is putting in place an aggressive renewal program, double-digit rate increases on average, with some rate increases upwards of 30%, depending upon the segment or the account. In that process, I would say it's still early in the game. It'll take us a renewal cycle to get all the way through that. I would expect some pressure on persistency, both from customers who don't want to accept the rate increases and/or from some purging of the block that we'll do similar to what we did in the United States back several years ago. As far as competitors go, I would expect in general that they will follow, but also in these kind of environments, just as happens in the U.S., sometimes companies take steps to back off of their renewal increases if they think that they're under persistency pressure or too great amount of persistency pressure. I would expect there to be a follow-on from competitors, but I wouldn't expect it to be sort of wholesale. The other things that we're doing there, in addition to rate increases, are we are changing our mix of business, much again like what we experienced in the U.S. Our larger case group life business does not perform nearly as well as our core market group life business, and so we'll be changing our mix of business, and we're also tightening up some underwriting guidelines by segment, and also reducing or eliminating some richer product features. So all in all, I think it's the same kind of process we went through in the U.S. where we had significant success. Thank you, Kevin. Thanks. Thanks, Jimmy. We'll go next to Suneet Kamath with UBS. Thanks. Good morning. Thanks, Suneet. My first question is on long-term care. I guess, Rick, in response to Jimmy's question, you spent some time talking about the interest rate exposure and the underlying assumptions there. I guess I wanted to ask the same question as it relates to the claims experience. I think in your prepared comments, you said the loss ratio kind of just north of 90% was a bit higher than your expectations. So I was just wondering, first, what are your expectations in terms of loss ratios in that business? And then, how many quarters of north of 90% would we need to see before you might have to think about taking a reserve charge, not necessarily for interest rates, but for higher claims? Rick, do you want to take that one? Okay, Suneet. It is a broader question, so I appreciate you bringing that back. What I would say what happened in the quarter and what's happened year to date really is much more about what's happening in the short term and volatility and claims experience. We do not see that necessarily as a trend today. What's reflected in our reserves are much longer-term trends. When you talk about this isn't about quarters looking at it's about years in terms of looking at those trend lines. I think it's hard to extrapolate off of anything in the quarter. You mentioned the expectations. I mean, we would expect actually loss ratios in this line to be more in the high 80s than in the low 90s. That's really where that's predicated from. But it's one that we continue to watch. It is a line that we've been focused on and continue to focus on. As Kevin's comments, it's about actively managing that block as well as we go through that. When you think about all our broader range of assumptions, we'll go through a process as we are now at year-end of looking across all of our lines of business, not just long-term care, and looking at all of the assumptions we have driven there. But this is a much longer-term process when you think about it and the claims experience that we've seen year to date, a little higher than we'd expect, but we don't necessarily see a trend there that would need to be reflected throughout the longer tail of the reserves. Got it. So high 80s versus low 90s, it doesn't seem like it's wildly out of your expectations, just slightly at the kind of higher end. That's right. This is a line which we'll see volatility, so I don't think we're overly concerned. We obviously don't like when results come in lower than our expectations, but it's nothing that causes us necessarily longer-term concern. I think your calibration about how far it's off is appropriate as well. Okay, thanks. My second question relates to the capital generation model. It's the slide that you typically use in your presentations. I'm just kind of wondering where we sit today with this because, it looks to me like, the U.K., the last time you did this slide, you're talking somewhere order of magnitude, 100 to 150 million of statutory net income. I'm not sure where we're running year to date, but my guess is that we're a bit below that. Then in terms of capital required to support growth, your slide shows plus or minus 50. Given the growth that you're seeing in the U.S., my guess is that might have some upward pressure. I guess my question is, as we start to think about next year, and I acknowledge that you're going to give us more guidance on this, but should we expect that $500 million number, given these moving parts that I just mentioned to possibly have some downward pressure? Sure. Let me answer that in some of the detail you had there, because I think it's a good question, and we will address that more as we get to the year-end process. I'd say that capital model is very much intact. Even when you look at the U.K., which you specifically asked, we had $100 to $150 million in dollars that we had there. If you look at the after-tax earnings on a U.S. GAAP basis, you're just slightly below that range. When you think from a statutory perspective, it runs a little bit differently than that. I think we'd probably be at the lower end of that range today, whereas we were probably at the upper end of that range as you look at it last year, but still it hasn't broke through that. What we'll actually be looking for, as we've seen over the last several halves, I guess, dividends coming out of our U.K. companies, which we've continued to take. So that piece of the model is still intact. We talk about our U.S. statutory earnings continuing to be very good across the line. Then in terms of capital consumption of the business, we are starting to see the business grow. We're happy about that in terms of the premium line. But I can tell you the capital, if you think about our product lines and those that are growing are not heavily capital consumptive. So when you think about that 50 is probably still pretty much intact, even though we're starting to see growth in the lines, which do require a lower amount of capital. So we think about the model a lot. I'm glad you're focused on that. I'd say it's still very much on track, and we'll give you some more detail to that as we get to our Investor Day in December. Great. That's helpful. Thank you. Thanks. We'll go next to Randy Binner with FBR. Hey, thanks. Good morning. This is Dan. Hi, Randy. on for Randy. Oh, good morning. Particularly as it relates to the sales environment, the sales trends in Colonial kind of slowed down a little bit and then also in U.S. and group life. Can you talk a little bit about if anything in the competitive environment's changed or maybe some tough comps or one-off sales from last quarter that slowed the trajectory down? Sure. Actually, maybe I'll ask, we'll break it in two pieces, actually. Maybe, Kevin, you want to talk a little bit about the Unum US sales trends? Again, I think we feel pretty good actually about where things stand and the sustainability of that. Yeah. Good morning. Group life sales, the third quarter in general is the smallest quarter of the year in terms of sales, so you're going to get a little bit of volatility. Also, it's particularly in the larger case end of the marketplace in the quarter. We didn't see anything particularly attractive, at least in terms of the way in which we approached disciplined pricing. Core sales were still up. No, I don't see anything really going on unusual in the group life marketplace. I just think you can get a little bit of that kind of volatility in the third quarter because it's the smallest one. I'd say, too, Kevin, your year-to-date sales are up about 9% actually across all lines. I think as you know, the beauty of our Unum US platform is we have a whole breadth of offerings in the marketplace, and the places actually we have targeted for strategic growth, we are seeing a fair amount of strategic growth. Yeah. A lot of that is just because we have to be. We have a good offering and we have a good connection with the marketplace. Year-to-date group life sales are up 7%, and in the core market they are up 8%. I think it is more just quarterly patterns more than anything else and maybe a little bit of lack of attractive large case. Randy, maybe you can speak a little bit about the Colonial sales results. I think as everyone knows, we really have two entrees into the voluntary marketplace. One is through the Unum US offering, which is primarily a brokerage model to come to the marketplace where that gives us a different, more diverse way to come to the market with a more integrated offering. The Colonial offering is a more limited offering, but yet one that gets certainly to a certain very important segments of the marketplace. Randy, you may just want to talk about some of the dynamics you are seeing there. Again, I would add, as I mentioned in my earlier comments, frankly, I am very pleased with the 5.5% premium growth we saw in the quarter and the continued ability to maintain very strong margins and returns, actually. The one place we do recognize we are a little behind perhaps where we would like to be is in sales. But I think, Randy, you can talk through some of the things we have got underway to try to improve those results. Sure, Tom, thanks. Overall, we continue to see the primary pressure in our sales on the large case side of things, as Rick pointed out, and also sales to new accounts. We are pleased on a year-to-date basis with our sales to existing accounts and very pleased with our strong persistency of our business that helped generate that 5.5% premium growth. We still are experiencing some economic headwinds in our core markets. Things have been well documented in terms of continued high unemployment and just general level of uncertainty for businesses. But we're not seeing any fundamental gaps in our capabilities, and we believe very strongly that we can overcome the market pressures with disciplined execution of our sales strategy. We're taking a number of actions to improve our sales results. We've recently combined our sales and marketing areas under new leadership. We feel that's going to enhance synergies and our speed to market. We're continuing to stay focused on growing our agency distribution system and enhancing their overall capabilities. We've rolled out a number of new products and services over the last few months, and through those combined actions, we feel very confident we can regain sales momentum going forward. Okay, thanks. That was very helpful commentary. Just a quick housekeeping item. With the U.K. tax change going into effect, is this the 28% kind of effective tax rate number kind of the right way to be thinking about it across the entire complex going forward? No, actually, those are one-time. So because of the tax legislation that went in in the U.K., that actually accelerated some of the tax benefits by releasing deferred tax liability. So you'd have to take the overall entity would be just up over 30% on a going-forward basis. Okay, great. Thanks. Thank you. We'll go next to Sean Dargan with Macquarie. Thank you. I'm just wondering about the interplay between the macro environment and employment and perhaps the better claim recovery you've seen in U.S. group disability. Is that a function of people finding work or feeling more secure that there's a job for them? Kevin, you want to pick up on that? Yeah. Good morning, Sean. It's awful hard to pinpoint it to anything sort of related to the economy. I don't think the employment picture in general has gotten all that much better. I do think it's a difficult economic environment to be on a fixed income, and so I think there's probably some motivation to recover. But I also think the diligence and hard work and efforts of our claims management people and establishing customer relationships, working with claimants, employers, and physicians, and working to accommodate them and help them get back to work are all factors as well. And we've had consistent, strong claim recovery performance over the last number of years, and it just continues. Thanks. And I have one follow-up question about the investment portfolio. Given the NAIC taking a different view of capital charges around mortgage-backed securities, I'm wondering if you think that would have any impact on your RBC. Yeah. No, I take that. Our mortgage-backed securities are actually very highly rated government-backed. A lot of the things that they've been talking about were more of the structured securities that they've looked at, and we actually don't have any of those in the portfolio. We don't see any impact from that. Okay, thanks. Thanks, Sean. We'll go next to Jeff Schumann with KBW. Thanks. Good morning. Good morning, Jeff. Good morning. I want to come back to the U.K. and try to get a little bit better perspective on what's happening now and how we got to this point. I think Kevin said this morning that you're still fairly early in this process of implementing rate increases. If we go back to 2010, a couple of things happened. Margins slipped a lot, yet group life premiums are up 18%. You made a management change, and I think one of the issues you mentioned was maybe taking a closer look at group life. In 2011, group life premiums were up another 15% local currency. Margins slipped some more. There was some talk about taking rates. In 2012, premiums were up another 11%, and we're hearing about starting a process of taking rates. Have you been taking rate the last couple of years, or is this a more recent phenomenon? I'm wondering how we get comfort looking at U.S. group life, where you have this very strong growth of 7%, and wanting to get some comfort that that's quality growth. Let me start that up and then maybe just ask Kevin to pick up. I think, certainly, Jeff, you raise a very valid point. As you look back over a couple of years, with the benefit of hindsight, I must say we probably would've gone and approached the group life business a little differently. I can assure you, though, that I think as Kevin said, the rate increase actions probably began more around the first of the year. We're into this rate action pretty substantially at this point. Could we have started that more aggressively maybe a year before that? I think, again, it's always an interesting benefit of hindsight look back, as you can probably conclude that part of what you struggle with when you're going through a period of time like that is trying to ascertain what's volatility and what's real results. I think at times with a smaller business, you tend to think that's a little more around volatility and therefore a little more hesitant to do the aggressive things with rate increases. I think, again, when you look back, you realize that wasn't volatility. Maybe there's a more fundamental issue with the margins there. I would certainly say that as we look back, maybe we could have been more aggressive sooner. Having said that, now that we are aggressive, we are being very aggressive, and we're using a very consistent model to what we used in the U.S. to go through the same kind of issue a number of years back. As you may recall, we were very disciplined about doing what had to be done to get the right rates and let the business leave if, in fact, we can't get those kinds of rates. I think, Kevin, that's what you talked about in your comments, actually. I think, again, looking back, maybe we could have done that sooner, but I think we have a very rigorous plan in place to make up for lost time, if you will. Yeah. I think that's right on the money, Tom. I think probably we were slow in adjusting to the fact that mortality was deteriorating and moving our prices up. But at this point in time, we're moving prices up more aggressively in greater volume as well across our renewal program. The other thing that I think affected results was that we had a somewhat substantial swing in mix of business towards larger case group life in 2009, 2010, 2011. What we're doing now is basically paring back on that, re-shifting our focus. So when we compare, Jeff, to the U.S., the growth we have in the U.S. is almost completely sort of core market growth. That's where it's coming from. A lot of our group life sales are successful across the board, but especially in the core marketplace. I think that's the shift that we'll make in the U.K., both raising prices and shifting to the core. Okay, that's helpful. Thank you. Good. Thank you, Jeff. We'll go next to Chris Giovanni with Goldman Sachs. Thanks so much. Good morning. Good morning, Chris. Question maybe for Kevin. Can you talk some about kind of the process right now for getting rate increases through on the LTC block? Because many of your competitors have talked recently about having a more difficult time getting rate increases through as insurance departments are now inundated with rate increases given the mass exodus of this product line. Yeah. Good morning, Chris. I think this line of business, it's natural that you're going to have some give and take process with regulators. You are talking about a product line that at least from an image standpoint, focuses on the elderly. That's not actually the case when you look at our book of business. A substantial part of our book of business is actually below the age of 60. That said, we're going to work through the process state by state. We've filed in virtually every state. There's a moratorium with approvals right now in New York. But the rest of the states, we're moving forward and we're either getting a full increase or we're getting a partial rate increase, or we're getting a compromised process around being able to phase it in over a multi-year period. I think it's a difficult problem for regulators in the sense that they know that the interest rate environment is low. They know that the industry is under pressure. They know that the rate increases are needed for effective liability management. At the same time, they want to be careful about pushing prices too high based on assumptions. And so you just go through that process, and I think we're doing very well right now. Okay. So no real change over the course of the past, 6 to 12 months in terms of approval process. No. Okay. Then maybe following up on Jeff's question, on the U.K. So I guess, with Peter now running the business over there, what's going to change versus what Jack was focused on? Because again, I thought his main focus was taking the practices that were done on the disability line in the U.S. and bringing those over to the U.K. to improve the profitability. Chris, if I could, let me start, again, remind everybody. When we made the changes, actually, Jack had been over there for a couple of years. Again, we had an understanding to bring him back at a certain point. I think as we look forward, just to set the tone for why the changes were made is that we were on a good pathway with Jack. But on the other hand, we wanted to get some stability at the CEO level as we thought about this as a couple of year process to rehabilitate that block of business, Chris. At the same time, as you know, we also had a significant need, as we talked about earlier, to really bolster our resources supporting our closed blocks. All things pointed to making a change at the time. I want to be sure we put that in the right perspective because some of those seeds were already sown with some price increases and things before Jack actually came back. Now, again, as I mentioned in my comments, actually at the time we made that change, we did recognize, at least I recognized that maybe getting this a little closer to Kevin's organization because maybe that would help accelerate the ability to make some of those changes and implement some of the things that had been done in the U.S., in the U.K. That was done a little more effectively by tucking it under Kevin's wing, which is another piece to what we did at that point. I'd say, Kevin, we're already beginning to see some of the benefits of having done that in terms of being able to bring greater resources to bear on what's obviously a challenge, but also one that frankly, we've successfully navigated through in the past. I wouldn't expect in general you're going to see a significant amount of change in what we're doing in the U.K. now versus previously under Jack. Other than that because the Group Life results continued to deteriorate during the middle and second half of this year, we've had to ramp up our focus there around mix of business and renewal pricing actions and new business pricing actions. I think probably we've ramped up a little bit the number of actions and type of actions that we need to take in Group Life. All of the activities that Jack was leading and involved in in terms of driving increased capabilities in terms of group income protection, claims management, and underwriting management, those continue. I do think as Tom said, we just have put it in a place where we can provide maybe a greater volume of supporting resources, whether it be in group income protection or group life or actuarial resources or whatever from the U.S. to the U.K. Okay. Then lastly, just quickly on the buybacks. I think 4Q, you've typically been pretty light in terms of share repurchase activity, and I believe some of that has been due maybe to the timing of the analyst meeting. So I guess with the pushback now to December, are you comfortable that there's enough liquidity and open periods that you can get that done? Then is this $500 million still sort of the run rate that we should be thinking about going forward in terms of the free cash flow and then i.e., the buyback opportunity. Right. Yep. Chris, when you think about the buybacks fourth quarter, I think you are absolutely right. If you look back over the last several years, our Investor Day was kind of a mid-February, so it was a couple of weeks from now. So our windows were really, what is that? You said February, November. Oh, I am sorry. Mid-November. And so actually, our windows were actually quite short, and it was difficult to buy back a fair bit of stock, at least in an open window type time frame. We do not have that constraint this year. I mentioned December 17th will be the date, put it on your calendars. And we actually have plenty of opportunity to buy back stock through the fourth quarter. The $500 million that you talked about with another $100 million in the fourth quarter, we will be on track for that. We will talk more about next year and the capital plans in December. But I think as I have reiterated talking on the capital model with Suneet as well, we still see the free cash flow in the company of around $500 million. In the current environment given opportunities that we have out there, we still think that buying back stock particularly at these prices is very opportunistic for the company. So I think everything you said is correct. Thanks so much. Thanks, Chris. We'll take our next question from John Nadel with Sterne Agee. Good morning, John. Hey, good morning, everybody. A couple of questions. Maybe just going back to U.S. Group Disability for a moment. I think it was mentioned that the 50 basis point discount rate reduction would typically impact quarterly results by about $6.5 million. I just wanted to make sure that's pre-tax number, correct? That is pre-tax, yes. Okay. If I think about the results this quarter, if everything had been sort of constant, right? Which it never is, of course, but if it had remained constant versus the second quarter, that 50 basis point reduction in the discount rate, that would typically cost, what, the benefit ratio about 120, 130 basis points? Something like that, yeah. Okay, so claim recovery is really the primary quarter-over-quarter improvement. I guess the question is, or it sounds like that was the case anyway, and maybe you can just confirm that and just help us understand how sustainable you think that might be. Sure. The different pieces of that. Actually, paid incidence was quite flat and has been. If you're looking on a sequential basis, claim recovery is quite good, as you mentioned, sequentially. Also the average claim size was down a little bit. In terms of how that persists, we'll have to continue to watch that. I think what you saw this quarter was a very good quarter, although there's nothing really in there that we'd say doesn't have the opportunity to continue to persist as we look out into further sequential quarters. We'll have to continue to watch that loss ratio. I think what you saw is a very good quarter. Yep. We took some good actions, I think, to reduce our claims discount rate by 50 basis points to reflect the environment. We'll have to see how that plays out. All right, that's helpful. Then just back to the U.K., just thinking about it from more of a 50,000-foot perspective. I think last quarter, maybe the quarter before, you were characterizing your expectations over the near term as being sort of a GBP 20 million to GBP 25 million of quarterly earnings. Obviously, this quarter, a little bit light of that, sounds like mostly on the group life side. How quickly do you think you recover to that range? Do you feel like results in the U.K. have found a trough? Yeah, John, I'd actually say we're still in that range. I think what we said last quarter is 20-25, but we might see some volatility around that. That's what we saw this quarter, and unfortunately Yeah it's to the downside, but I'd say that 20 is still probably a pretty good anchor number when you look at it. Okay. As we look to take price, we'll look to watch it, price and block management. It's not just about price, it's about risk selection and customers that we're continuing to work with. As we take that forward, we look to see it improve from there. Okay. The last question I have is just on the investment portfolio, on the residential mortgage-backed security allocation. It looks like over the last couple of quarters that the actual level of holdings there has been sort of consistently declining, maybe $100 million-$200 million a quarter. I'm wondering if that's a proactive move on your part or if that's more a function of prepayment activity. If it's the latter, can you give us some sense for how much that's contributing to current net investment income, but perhaps some incremental pressure we have to think about as we look out to 2013? Certainly. I'd like to think that everything we're doing is proactive, but in reality in that block is what we're doing is just not buying more residential mortgage-backed securities. We just don't see the value in terms of what we'd be taking in there. And these are actually ones that we've initiated a number of years ago that actually had good rates. I can't give you a good number offhand in terms of how much deterioration that has caused, because it's been effectively rotation out of those assets into others. But when you think about the general investment income pressure, we'll feel a little bit on that front. Yeah, John, this is Tom White. Just on the prepayments, to the extent we get prepayments, we include that in our definition of miscellaneous investment income. And actually, miscellaneous investment income for this quarter was very consistent with what we saw in the second quarter, and actually down probably $2 million or $3 million from a year ago. But we just haven't bought a mortgage-backed security in years, and so you've seen a gradual decline in that exposure for several years, as a matter of fact. Andrew? We'll take our next question from Steven Schwartz with Raymond James & Associates. Hey, good morning everybody. Morning. Just a few, I think, follow-ups from some comments. There was a mention that vis-à-vis the U.K., the need to get through a renewal cycle. If you can remind us how long a renewal cycle is in the U.K. Kevin? Given where we are right now, it will be about another year and a half. Another year and a half. Generally speaking, are we talking two years, three years? Two years, I would say, would be a typical one. Two years, yeah. Okay. All right, good. Just follow up on the LTC expected ratio discussion. Rick McKenney indicated that high 80s. Presumably what you are referring to is kind of today with today's rate online. As rate increases flow through, I assume that you would think that would come down over time? That would be an expectation over time, yes. Okay, just wanted to make sure on that. Then kind of a theoretical question, I guess. You did not discuss it in your script, at least I did not catch it, but it was in the release, a discussion of improvement in the loss ratio in the U.K., which is counterintuitive given the fact that earnings in the U.K. went down. I guess what I want to ask is how meaningful are those numbers that were in the press release, given the fact that you also have this issue in investment income with regards to the inflation adjustment factor, which can really screw up the ratios if that is not accounted for? It is a challenge. Tom, why don't you go ahead and walk through that? Steve, I think you described it well. But essentially what happens is we've got an RPI adjustment, an inflation adjustment. On roughly a third of our group disability business over there. When we have swings in inflation, that will flow through. I think in this quarter, the RPI came down a little bit. We buy index linked gilts in the investment portfolio. So if inflation comes down, you'll see a drop in investment income that we report, but also a drop in the benefit ratio, and they offset each other, so there's really no impact in the quarter. So you're right. When you look at just kind of the pure benefit ratio in that business, it can distort things a little bit, and there's probably some additional disclosure that we can look at to kind of help you see the underlying risk trends. But I think as we've tried to describe on the call, the underlying risk trends in group disability business actually got a little better. So that benefit ratio improved and on the group life side, it would've deteriorated. Now, the adjustment that we look at internally would've had our benefit ratio at about 76% in both the second and the third quarter. So the underlying benefit ratio, stripping out the RPI adjustment, again, was pretty stable. Again, a little bit of improvement on the disability side, but a little bit of deterioration on the group life side. Okay, that is good. Maybe something can be worked out for the December 17th, I think it was, today. Yeah. We are thinking about that, Steve. Thank you. All right. Thanks, Chris. Good. Thank you. We'll take our next question from Mark Finkelstein with Evercore Partners. Hi. Good morning. Mark. A couple follow-ups, actually. What is the dollar value of premium that you expect to get between 2013 and 2014 in LTC relative to the current annualized premium level on rate increases? Jeff? I'm sorry, go ahead. Rick, Kevin, you want to take that one? Yeah. Yeah. We got to let the approval process sort of play its way out, then we got to let the implementation process play its way out. Then, from there, as we implement it, we'll have to see what the persistency effects are, et cetera. I'll give you a number, but I wouldn't bank it. I would say right now, based on what we've seen so far, we're in about the $50 million-$60 million range in terms of annual premium effect. As we get more approvals and as we phase things in, that number will get bigger. But we'll just have to wait and see how it plays out in terms of persistency. Okay. That's an annualized number, I assume? Yes. Okay. I guess a broader question. If I look at operating expenses this quarter, they were fairly low. Obviously, the trend, if you go back a few years, has actually kind of gone down in terms of the operating expense ratio. But this quarter in particular seemed awfully low. I'm just curious if there was anything that was driving that and if this level is sustainable. Rick, you want to pick that up? I would. Actually, when you think about our operating expenses, we are a company that we do not talk an awful lot about our operating expense ratio, but our entire team, all of our associates are focused on efficiency and how we drive business through the process. Our operating expense ratio was low in the quarter. If you look at a number of our lines, that is action that we have taken over time to really be efficient. As we start to see growth come back in on the premium line, making sure we hold that, the overall expense level, and keep there. It is an ongoing process. It is something we spend an awful lot of time working on. I tell you from a quarterly perspective, there is nothing really in there that you would highlight that was a big adjustment, which would have influenced that operating expense ratio. It is something that we will continue to be that as a core driver, as part of how our company operates. Okay. All right. Thank you. Good. Thanks, Mark. Operator, any other questioners in the queue? We have no further questions at this time. I will turn it back to you for any additional or closing remarks. Good. Thank you. Thank you all for joining us today. As Rick said, we have our discussion of outlook coming up December 17th, so please do put that on the calendar, and more details will be coming out on that. Again, thanks for joining us for this morning's call, and this will complete our third quarter 2012 earnings call. Thank you for your participation. That does conclude today's conference.