AGM 2012

May 24, 2012

Slides

To the 2012 annual meeting of the Unum Insurance company. I'm Bill Ryan, I'm the Chairman of the Board, and I have a script here that I'm certainly going to follow to make sure that the meeting is done in an appropriate manner. Knowing me, I'll probably go off on a tangent or two once in a while, so bear with me if I do that. As many of you know, we've rotated these meetings over the years between Portland, Chattanooga, and Columbia, South Carolina. It's nice to be here in Portland for this meeting. I live down the road, so it's really nice to be here today with you because it's an easy commute for me from that standpoint. In the audience today are many of our management people, and thank you for your hard work in putting the company in the good position it's in. Also, friends of the company, people who worked for the company in the past and retired, it's great to see all of you, and then also a number of shareholders who are also here. I'd like to first start by telling you and showing you who the people are who we as directors deal with every day, our co-directors. First what I'd like to do is introduce the directors, ask each of them just to stand briefly as I mention their name, and then sit down. Certainly, there's Mike Caulfield. Mike. Pam Godwin. Ron Goldsberry. Kevin Kabat. Tom Kinser. Gloria Larson. Pat MacMillan. Ed Muhl. Mike Passarella, and Tom Watjen, our CEO. It's a pleasure to introduce the directors. We work together all year long, and we've worked together for several years as directors. The important thing you should know is this is a board who cares about shareholder value. They want to return as much money to the shareholders as we can, and that's only done by making money every year and then trying to do strategically the things that'll position you well for the future. I'm really happy to be working here with these directors. It's a very hard-working group, and we're happy to have them all here today. It's nice that at a meeting like this, they're all here. Certainly, there are other annual meetings of companies where not all the directors are able to come. If you look at the attendance of our directors' meetings, you can see that almost every meeting is attended 100%. It's really nice. A lot of former employees here, friends of myself and others of you, and I can't introduce all of them, but there's one I do want to introduce to you because he's the former Chairman of the Board, Larry Pugh. Larry, if you'd just stand up briefly. Thank you, Larry. I do have to make a couple of comments about Larry. Larry was the Chair of the Board at a very difficult time in our history. Larry's hard work, intelligence, and skill in handling both the investor community and our shareholders and our managers, really got us through those difficult times. We're really happy, Larry, for all you've done, and thank you for coming here today. We appreciate it. In terms of today's agenda, we're going to proceed with two parts of the meeting. There's a business session. There are a number of things that we want to get approvals for today. Also at the end, there will be a presentation from our CEO and Chief Financial Officer. At the same time, obviously, we will have an open period for questions that shareholders may have of myself, our senior managers or our CEO. So we are looking forward to doing that. To make sure we all are in sync on this, there are rules of this annual meeting which are on a card that you either got on the way in or it was on your seat. Rules are very straightforward, nothing fancy about the rules, so we hope you will read that and you will know the rules for this meeting. On or about April 12, 2012, the company furnished its proxy materials to shareholders of record as of March 26. As shareholders, you no doubt received that material. As of the record date, you should know that there are 285,812,401 shares of common stock of the company outstanding. The number of shares represented at this meeting in person or by proxy is 251,912,211 shares, or 88% of the shares are represented at the meeting. Pretty high percentage, so it is nice to have that many shareholders caring about the company and voting. Therefore, we certainly have a quorum, and it is present, and I will call the meeting to order. I am going to preside at the meeting as Chairman of the Board. We have Susan Roth here, who is the Secretary of the Meeting, and Bo Bishop is our General Counsel and will serve as Parliamentarian. Bo, where are you so that everybody knows? Thank you. Bo is in the back. We will now proceed with the business set forth in the notice of the annual meeting and described in the proxy statement. The polls for voting in person at this meeting opened this morning at 9:30 A.M. Shareholders who are in the room have the option of voting by ballot. If you wish to do so and have not received a ballot, please raise your hand now and we will make sure we put a ballot in your hand. Is there anybody who is going to be voting during this meeting? Not seeing any. All of us have previously voted by proxy or by the mails or by computer, so our votes will certainly be counted. The Inspector of Election has performed an initial count of all the votes cast by proxy for this meeting, and I am going to announce the preliminary vote results at this time based on the initial count. Final vote results, there will be some last-minute changes, not much, will be reported on a Form 8-K, which we expect to file by May 31. The first item of business is the election of Pamela Godwin, Thomas Kinser, Pat MacMillan, and Ed Muhl. If you notice, four Directors were a little nervous in the first row. Those are the four. Just so you know, they are sitting up a little bit taller than they probably normally would. Each nominee, though, received a number of votes for his or her election, representing more than a majority of the votes cast with respect to the nominee. Therefore, each nominee is now elected. Over 90% in each category of election of individual, the votes were received. They received over 90% of the votes. Thank you, and we're going to work forward for another year. That's great. The second item of business is the advisory vote to approve executive compensation, commonly known as say on pay. As you know, in the last few years, it's been thought that shareholders should have an advisory opinion of how the pay policies of the company do exist. This item seeks the advisory approval of the compensation of the company's named executive officers, say on pay. The Inspector of Election reports that 70.8% of the shares were voted for approval of the named executive officer compensation. The say on pay vote, the vote that says, "We think the directors are doing a good job at administering the pay policies of the company," was approved by a 70% margin. We're very pleased with that margin of election. The third item of business is the approval of the Unum Group Stock Incentive Plan for 2012. I think it was 2007, we went to our shareholders and asked that they approve stock in the company so that we can issue stock options along the way to executives because of their performance. Those stock options have pretty much been used up. Now we're back in front of our shareholders this year asking for approval of the Unum Stock Incentive Plan for 2012. The Inspector of Election reports that 72.8% of the shares were voted for this plan. Therefore, the Unum Stock Incentive Plan for 2012 has also been approved. You certainly read today in business journals and newspapers that there are a number of companies that are putting forth their incentive programs and stock option plans, and they're not getting approved. Shareholders are not pleased with that. Again, we, as directors, and you as shareholders and managers and workers of the company should know it's really a very nice meeting to have the shareholders feel that you're doing a good job and you should get rewarded for it, and decisions are being made in the right way. That's been very positive from an election process. Fourth item of business is the ratification of the appointment of Ernst & Young LLP as the company's independent registered public accounting firm for 2012. There are representatives of Ernst & Young here in the audience today. Before I announce the votes for Ernst & Young, are there anybody who has any questions of Ernst & Young that they want to ask at this time? Seeing no questions, let me report to you that the Inspector of Election reports that 99.7% of the shares were voted for the ratification of Ernst & Young. Obviously, they're going to get a big head after seeing these high numbers, and we'll have to deal with them for a period of time, but we'll humble them very quickly. Don't worry about it. Therefore, the appointment of Ernst & Young LLP as the company's independent registered public accounting firm is ratified. The business portion of the meeting has now been completed. The votes have been approved, and we move forward with really presenting to you a management view of the company as we go forth. Before I turn this over to Tom and Rick, I just want to, again, say thank you to the shareholders who are here today for approving these plans. There was a lot of work and energy that went into looking at the plans. I have to tell you, we did talk openly and candidly with many of our owners to get their input into these plans. It looks like that work of talking to our shareholders, getting their input, hiring some consultants to give us the expertise we needed to make the good decisions that were made today certainly have been rewarded with the votes as we've seen them. Thank you for all of you who participated in that process. It certainly was a very important one from our standpoint. With that, now let me turn the podium over to Tom Watjen, our President and CEO. Tom? Thank you, Bill, and good morning, everybody. I thought he stayed pretty well on script, didn't you? Actually, he didn't get us too far off the field. Let me add my welcome, actually, to all our shareholders, to all our employees. But also, as Bill referenced, there's a number of leaders that have served very important functions over the past many years with our company. I think those of us that are currently in leadership positions of the company feel a great deal of responsibility for building off the legacy that you've all created. I want to thank those that actually helped contribute to building the company we have today for being here with us today. I can tell you, we feel a true sense of responsibility to be sure that we build from that momentum that you've helped create. A special thanks to you, Larry. You obviously served at a time when we desperately needed some leadership. Thank you. You were a true mentor to me over a very difficult period of time. Again, thank you for being here with us this morning. As the chairman said, what we're going to do is just divide a little bit of the presentation here between Rick McKenney and myself. I'm just going to make a very few brief comments just about the strategy and direction of the company, and then turn things over to Rick to actually provide a more detailed presentation of our financial results. But I thought before commenting on a company, it might be timely, especially given the volatility that we're seeing in the marketplace, especially around financial stocks and the performance of our stocks. If I actually made a few comments on that before I actually talked about the company and the direction of the business. Clearly, general economic and financial concerns, including uncertainty surrounding interest rates, have had a significant impact on the perception of our sector and our company's stock performance. While we continue to hold up relatively well in comparison to our peers, that's certainly not consolation to any of us. We face some of the same general headwinds faced by others in the sector, but I do believe that we are in a much different position. I'm confident that if we continue to do the things I know we're capable of doing, the market will eventually recognize this, and our shareholders' patience will be rewarded. Now turning to our company. In many respects, our playbook hasn't changed much from last year. Our focused, disciplined approach to the business has served us well, and there's no reason to change that now. As I said a moment ago, we certainly face our challenges, but this management team, with the support of our board, remains committed to doing whatever's required to assure that we retain our unique position in the marketplace. The basic principles which guide us and have served us well remain. We remain focused on what I believe are good businesses, the business of providing very basic financial protection to working Americans and those in the U.K. Protection that has never been more needed than it is today, when so many consumers are living paycheck to paycheck and lack the financial resources needed to support themselves and their families if they become disabled and are unable to work, or worse yet, lose a loved one. We meet that need through the workplace, which has consistently proven to be the best place to get to most consumers. Our customers look to us for many things, including helping to educate their employees on the basic risks that can often undermine the financial health and wellbeing of an employee and their family. We provide simple, cost-effective products that can protect against these very real risks. Often, these needs would not be met if they weren't provided in the workplace. We believe that there are tremendous opportunities for us in this marketplace, and we take seriously our role in helping to raise the awareness of the role our company and industry can play in protecting the livelihoods of working families. We are also in financially sound, more manageable businesses, which, if we maintain our discipline and consistently execute our plans, are capable of producing attractive returns and generating excess capital, which is not being to support the business, but as we've shown in the past, we're prepared to return to our shareholders. Over the past four years, we have raised our common dividend by over 70% and repurchased over 20% of our stock, an unmatched record in our sector. Lastly, we can do this in a responsible way, certainly responsible to you as shareholders, but also to customers, where we are experiencing some of our best customer and broker satisfaction results in the company's history. Responsible to our markets, where, as I said earlier, we're taking a leading role in promoting the value of our industry, both here in the U.S. and in the U.K., to both policymakers as well as the market in general. Responsible to our regulators, to our communities, and to the environment. Responsible, though most importantly, to our people to create an attractive, positive work environment which allows us to attract and retain the absolute best people in our industry. This is our competitive advantage, and I want to thank all of our people for the outstanding contributions they have made over the past year. Remaining focused on our customers and delivering on our commitments, and if we hadn't had that happen today, we wouldn't be where we are today as a company. Looking ahead, this is certainly no time to relax. Like everyone, but especially those operating within the financial service sectors, we continue to be tested. We are confident, however, in the direction that we have set for the company and our ability to effectively operate in this or any environment, frankly. We know what we need to do. We have approximately 75% of our capital supporting our three operating businesses, Unum US, Colonial, and Unum UK, which combined generate returns on equity of between 14% and 15%, well above the market. There are certainly opportunities for improvement throughout all of our operating businesses, but even in this difficult environment, we expect our operating businesses to generate above average rates of return. In addition, we have around 25% of our capital in businesses that we have discontinued writing, or what we refer to as closed block, which generate a return on equity of between 3% and 4%. While these returns will never reach the levels we expected when this business was originally written, in some cases, decades ago, we will continue to seek ways to improve the results in this segment, and that certainly will be a focus of this management team. While I don't like the present stock price or valuation, I do like the position we have in our markets and the path we have set for the company. This franchise remains strong and capable of generating solid financial results, which Rick McKenney, our Chief Financial Officer, will now report. Thank you, Tom. Thank you, Tom, and good morning, everyone. I'd like to add my welcome to all of those here in the room, our Board of Directors, as well as those that are listening along with the webcast today, which is being broadcast as we speak. I'd like to take this opportunity this morning to share with you a view of where the company stands today from a financial perspective. As I do that, I will talk about our current financial position in the context of what we've achieved over the last few years and give some details backing up what Tom has just discussed. Starting out, when you look at the profile of our company, you see a strong, stable company that is well-sized to compete effectively in our markets. Whether looking at our $10 billion revenue base or our $1.3 billion in pre-tax earnings, we feel good about where we stand today as a business. We have a strong franchise in what we see are attractive markets backed up with financial foundation, and despite the challenging environment, we're performing very well. As we positioned our business in front of these markets, we've maintained stable levels of revenues and grown our operating earnings. While doing this, we've been building on a strong capital position that provides us with a great deal of financial flexibility. Our positioning goes well beyond financial performance. We've also received some great recognition from outside of our firm across the board, such as being a preferred place to work in our sector and in our geographies. We think broadly when we think about performance, and as a result, we see positive momentum in the strength of our brands today. When we think about our businesses, we think of leadership positions. Here you get a sense of where we choose to compete and lead. As a focal point, Unum is a company that serves employers and their employees at the workplace. We do this through a number of employee benefit product lines, primarily focused on group products, disability, group life, and voluntary benefits. Unquestionably, we're a leader in the group disability marketplace, both in the U.S. and also in the U.K., where we have a substantial market position. While we're first thought of as a group disability company, you can see from the chart that we actually hold leading market positions in a number of different product lines across the employee benefits space. These market positions have held for many years and provide us with a solid foundation from which to grow our businesses. As you can see, we have a very tight focus around the strategy of serving employers and their employees at the worksite, both here in the U.S. and in the U.K. We've maintained discipline in our growth efforts with a strong focus on margins and consistency of results. Turning to our financial results, let me start by just reminding everyone of what our performance looked like in 2011 and also in the context of the last several years. We certainly have not been immune to the challenges facing both our industry and the broader economy in recent years. As you can see from this chart, our operating EPS over the last five years has seen nice steady growth. If you look at it over this period of time, improvements have been made in our loss ratios and effective capital management. This was achieved through the financial crisis and more recently, in a challenging interest rate environment, and without the benefit of natural premium growth, which we would normally expect with a better employment picture. To put a little more context around our EPS growth, let me point out that not only have we had strong growth in our own right, but also outpaced our peer group over the same period. This chart shows our own operating EPS growth compared to the industry over that same period of time. You can see that the challenges that we have faced as a company actually had a much bigger impact on most of our peers, and as a result, we've had exceptionally strong performance relative to that peer group. There are three drivers I'd like to highlight behind our relative outperformance. First, it comes down to the characteristics of the markets we choose to compete in. The products we offer are less exposed to the volatility of the world around us and have no exposure to the equity markets and an interest rate exposure that can be managed with pricing. From an operational standpoint, the most important is our unwavering commitment to underwriting and pricing discipline. As I mentioned earlier, we are pleased to hold leading market positions in each of our core product lines, but we don't chase market share at the expense of profitability. Today, a number of our competitors in the group benefit space are implementing price increases to improve the profitability of their businesses. This only reaffirms our commitment to remain disciplined with respect to pricing, underwriting, and mix selection. We will continue to focus on generating the type of profitable growth that has benefited our shareholders over the last several years. When you wrap this together with our active capital management, we have a business model that we believe will continue to drive solid shareholder value. This also translates to our return on equity. As we think about each of our businesses today, our focus on profitability remains as strong as ever. This slide illustrates the returns being generated by each of our businesses. You will note that each of our core businesses today generates a very healthy double-digit ROE. While we are pleased with the profitability of each of our core businesses, we do feel there is room for improvement in these results. We are taking actions to improve the ROE of each of our businesses, and we feel good about our prospects for doing so, particularly as we start to get a little more lift from an improving economy. The exception to this strong ROE story is our closed block business, which generates a low single-digit ROE and ties up about a quarter of our capital. We have been involved with the long-term care business for some time, and as a result of a strategic evaluation in 2011, we determined that the business no longer met the risk and profitability objectives of the company, particularly in a prolonged low interest rate environment. As a result, we decided to exit this long-term care business to move this business into our closed block, similar to the way we did it with an individual disability block back in 2004. Going forward, we will actively manage both the long-term care business and the individual disability business as they run off over time, and we will seek solutions to enhance the profitability and capital efficiency of those closed blocks. Nevertheless, I would point out that even with this low returning block of business in the mix, we continue to generate an overall return on equity for the company of around 11%, which we think is good in this environment and compares favorably to our peer group. I would also note that we continue to generate a strong return on capital, even as our capital base has continued to grow in recent years to reflect the ongoing risks and uncertainty of this environment. This chart reflects the combined risk-based capital ratio of our traditional U.S. insurance subsidiaries. As you can see, our RBC ratio has moved steadily higher in recent years, and we ended the first quarter of this year with a risk-based capital ratio of 406%, the highest level the company has seen. This capital provides us with the financial flexibility to respond to any challenges or opportunities that may come our way. In addition to our stable earnings, a key contributor to the buildup of capital you see here has been a very modest level of losses on our investment portfolio. On the right side of it is the asset distribution of our $40 billion plus investment portfolio. You can see that the portfolio is generally well diversified with the majority of our assets in investment-grade corporate bonds. This portfolio mix hasn't changed in recent years, and our seasoned team of investment professionals has done an excellent job of managing this portfolio through a very difficult time. As a result of this prudent management of our investment portfolio, we've been able to avoid many of the investments that caused sizable losses for many in our world. While our capital position has benefited from a minimal level of realized investment losses, the cornerstone of our capital generation has been our consistent, steady trend of statutory earnings. You can see it's illustrated here on the left side of the slide, and in 2011, we generated $650 million of statutory after-tax earnings, and this trend of statutory earnings flow continues to be a key driver of free cash flow from our insurance subsidiaries. A simple way to think about the capital generation is on the right-hand part of the slide. Strong statutory net income, both in the U.S. and the U.K., is well in excess of our internal growth needs and the holding company needs of about $250 million annually. This leaves us with an excess position of $500 million of free cash flow that can be deployed for the benefit of our shareholders. That can come in the form of investing back in our businesses, in acquisitions, or in returning it to shareholders through dividends and share repurchases. Not only have we produced stable and steady, consistent financial results and improving profitability in recent years, we've continued to return capital to our shareholders through both dividend increases and share repurchases. This is an overview of our capital management activity in recent years and clearly illustrates our history of returning capital to shareholders through a combination of both share buybacks and dividend increases. As you can see, we've been very active with share repurchase in recent years and have repurchased more than 20% of our outstanding shares over this period. This represents approximately $1.7 billion of capital that has been returned to our shareholders through share repurchases since 2007. Likewise, we have implemented a number of increases to our dividends as well. With the 24% dividend increase just approved by our board of directors earlier this month, our cumulative dividend increase over the past four years comes to nearly 74%. You can see this is an area we have demonstrated a track record of creating value for our shareholders. In addition, this is another area we compare favorably to our industry peers. The chart on the left shows our history of dividend growth through 2007, specifically referencing the index growth of a dividend compared to the average dividend for the industry. As you can see, by consistently raising the dividend, we've outpaced the industry in dividend growth over the past few years, and this steady growth is something we think investors find important and one we will look at as a good way to return a portion of our earnings to shareholders. Similarly, the chart on the right shows our history of share repurchases compared to our industry peers over the same period of time. As you can see, we have clearly exceeded the industry average here as well. We think this is a great result, particularly in light of the challenging economic conditions we experienced over this time. I would point out that in 2012, our outlook calls for an additional $500 million of share purchases over the course of this year. These actions reflect our confidence that the business model we have in place will produce steady, consistent results. As such, returning capital to our shareholders will continue to be a steady source of value creation. Finally, let me emphasize the actions we have taken in recent years, both with respect to our operating performance as well as our capital deployment, are actions that we feel have created value for shareholders over the longer term, and you can see the results. The blue line here represents Unum's performance relative to our peers and the S&P 500. Despite our sector being challenged in 2012, Unum has outperformed peers over the past five years by consistently executing on a strategy focused on disciplined, profitable growth and prudent capital deployment. With that, I'd like to turn back to Tom for closing remarks. Thank you. Thank you, Rick. Rick obviously covered an enormous amount there, but it's very critical to our company's past performance, but also to setting our sights on the future. Actually, in closing, we continue to believe as a result of the things that Rick just went through, that we will continue to be able to create solid relative value for our shareholders. Let me just touch on a few reasons why I believe that. It certainly starts with because we actually feel we're in good positions in good businesses. Businesses where we think there's continued need for the products and services that we sell. We've also been able to maintain a solid financial foundation while generating capital from our operations. The result is we continue to have significant financial flexibility, which is a significant asset in this environment. We'll continue to manage that, obviously, in the best interest of our shareholders. Our priority has been and will remain on continuing to return capital to our shareholders through a consistent program of share repurchases and dividend adjustments. Consistency is a very important distinction here, as we have increased our dividend each of the past four years and repurchased approximately $500 million of stock in each of those years as well. Again, consistency is a very important part of our game plan operationally, but it's also a very important part of our game plan in terms of capital being returned to shareholders. As we said when we reported our first quarter results, we continue to face challenges, but thanks to our people, we have a track record of addressing issues as they emerge, remaining disciplined, and delivering on our commitments. Times like these test managements and companies, but also the resolve of its shareholders, and I want to thank you again for your support. I sincerely believe that your patience will be rewarded. Now let me turn things back over to our Chairman, Bill Ryan, to conclude the formal portion of this meeting and invite questions from our shareholders. Bill? Thanks, Tom. Rick, thank you for the presentation. Tom, I have to tell you, as a former CEO, you'll never like your stock price. It will always be too low. That's a good sign that every CEO feels like their company is worth more than it is traded at today. Let me take my quick sense of what was just presented. Through the hard work of many of you in this room and a conservative approach, Unum has gotten itself into a very good place. Compared to our peers, as you saw, we really compare very well. The problem we have now is we have an economy in our country that's still struggling, and we also have an industry that's struggling even more. So we're in a good place because of our results and our techniques and our conservative approach. The industry isn't rewarding us because it would be foolish to reward anybody, almost, in this environment. So hang in there, because I think there will be a time where we will get rewarded and maybe even Tom Watjen will like the stock price someday. It isn't today, but it's probably down the road a piece. The reason that'll happen is we're going to continue to be conservative. We're going to continue to work hard, and we're not going to change our plans. We think our plans are solid, and we're in a good place for the future. The future ahead of us looks like it has potential to put us at the top of our peers or close to the top of our peers and certainly reward our shareholders with a good stock price. So we're getting there. It's a tough time for everybody today, but we'll get through it. I have to tell you the quick story. I was on a plane ride. I hope this individual is not in the room. I don't see him. I was on a plane ride going to New York the other day, and I'm sitting next to a young man, and you're on a plane for an hour, and you just say, "Hello, how are you?" Next thing you know, it's, "Well, what do you do?" So I said to him, "So what do you do? Do you work in Portland?" He goes, "Oh, yeah, I work for Unum." I go, "Really? Oh, I've heard of that company. They're a pretty good company, aren't they?" He goes, "Yeah, I've worked there for six or seven years." He loved the company. He thought it was great, and he told me about how terrific it was. He was getting some promotions and liked the people he was working with. Little did he know who he was sitting next to. I never told him. He walked out of the plane, said, "Gee, that guy seemed really interested in Unum. That's really nice." So I think the word is out, and I think our employees, like our shareholders, are feeling pretty good about where we are. So we've now concluded the formal part of the meeting. The last segment of the meeting is really for me to ask you as shareholders or employees and so forth