Unum Group (UNM)

Investor update

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Nov 16, 2011

My name is Tom White, and I am Senior Vice President of Investor Relations for Unum, and we appreciate your attendance here at our annual investor meeting. I think we could expand it to banker, investment banker, credit analyst. I did not see any of my rating agency friends, but it is good to have everyone with us here this morning. I will dispense with the reading of the safe harbor statement, but I will ask you to note that and take a quick look at the agenda. We will run our meeting similarly to how we have in the past. We will start out with a corporate overview from our President and Chief Executive Officer, Tom Watjen. We will take a brief Q&A after that. Then we will move to the operating segment reviews. We will run that a little differently than we have in the past. We will focus first on the growth opportunities for our three businesses and each of those presidents of those operations will cover the growth opportunities. Then we will move to the risk management and the CFOs of the three businesses will cover some of the risk issues, some of the claims trends, and talk about some of the influences on our business in the last few quarters here. Then we will do a Q&A after that session. I would ask you to kind of keep your questions focused on the business operations at that point, because we will conclude with a financial overview with our CFO, Rick McKenney, and also Breege Farrell, who is our Chief Investment Officer, will talk about the investment portfolio. Then we will have plenty of time at the end for a Q&A for the whole management team. We will try to conclude around noon, and we will have lunch down on the third floor. No formal presentations at lunch, but our management team will be available, and we have some other members of the management team here who will not be presenting, but they will be available to you at the lunch. With that, why do I turn the program over to Tom Watjen? Tom? Well, thank you, Tom, and good morning, everybody. Let me add my welcome. It is certainly a pleasure to have everybody here. There is obviously a lot going on in this environment and obviously some important things going on with our company. So it is good that you took the time to spend this morning with us to have us put things in perspective. As you can imagine, I still feel very good about our business mix, our business strategy, and our financial foundation. I think that sets up for my point of view, and I think our team's point of view, a pretty good outlook for 2012. Do not get me wrong, the headwinds we face with the economy and low interest rates continue to be a challenge. But I think as we look ahead, we feel that we're pretty well positioned for 2012 and beyond to continue to build off the momentum that we've actually built up over the last several years. As Tom Watjen said, I want to really start with talking a little bit about our business, actually. As you know, really our focus has been and will continue to be working with employers to provide benefits to their employees in the workplace. We think that's a good business, and as you'll hear me talk about, actually, we think has some really interesting long-term growth potential trends attached to it, actually. Really, again, we think it's a business that actually has a great deal of connection with some of the political developments that are happening in this country right now. So that's the focus. It's been the focus for quite some time, will continue to be the focus is the workplace and providing very basic protection products in the market. As you know, we do that through three platforms, each three of which continues to have a leadership position in their markets. Even though we don't set market share goals for the company, it's nice that our disciplined approach to the market has still allowed us to be a leader amongst many of the products and services that we sell in the marketplace. Again, we think that leadership position truly is an asset as we think forward. I mentioned growth and discipline. Sometimes as you look at our history the last several years, it's hard to see that we actually are a growth company. I want to take a moment just to sort of share with you a few perspectives that I have on why I think we are a growth company. We're not trying to grow across all businesses and all products, but as you know, we've been very targeted about certain growth aspects of the business that we think actually present both good growth but also good profit margins and are manageable in these more challenging economic times. Just look very briefly, you hear more about this actually as we go into the operating reviews, but just look at the Unum US results, and this shows the growth rates going back to 2007 to the 12 months ending at the end of the third quarter. You can see, I think one of the things we've talked to you about very consistently is the fact that we think there's great growth in selling group products to small employers. That's the up 29%-ish result, and also good growth in selling voluntary benefits in the marketplace. That's the 41% growth rate. We continually have a large case practice, but again, that's very opportunistic, and as you can see, actually over that time frame, actually the sales in that particular segment of the business is actually down. So we're proud of this. This shows that the commitment we made to discipline growth is working. The places where we actually see growth and where we can write that business at a profitable basis, you can see we're very active. The places where we have to be very opportunistic, we're very much taking that opportunistic approach to the marketplace. If you flip to the U.K., the U.K. is a little more in transition. You will hear from our U.K. team here in just a few moments that much of the focus in the U.K. is getting the LTD business and the group disability business growing again, in part by actually expanding the marketplace. There has been a little less of an obvious pattern as you look at the growth characteristics in the U.K. But if you flip quickly to Colonial, again, a very consistent theme to what you saw in Unum US. Again, the commitment we had in Colonial was to grow our basic small employer marketplace, which again, was up about 11% over this period of time. Also, we saw some good growth opportunities selectively in the public sector, which is also up, but again, being very careful about growing the large case business. This strategy that we followed is working for us. Again, it is getting us to the pockets of the market, which we think have good growth prospects. But as you hear some of the operating reviews, that is also having a positive impact on our profitability and our margins and why, again, we think we are well positioned as we look at a more challenging 2012 and beyond. Now, interestingly enough, when you look through the morass of some of the difficult economic and financial and political issues right now, I still firmly believe there is a tremendous need for the sorts of things that we do. I am going to digress for a couple of slides, actually, just to talk about my long-term views of this marketplace because I truly believe that the benefits being provided in the workplace is a growth business. Again, we are going to probably take a couple of years until the economy begins to turn for us to see even more clear evidence of that. But I strongly believe this is a growth business. It starts with the fact whether you are talking about the U.S. or the U.K., frankly, and whatever measure you look at, let us face it, most consumers are in very fragile positions as a result of the financial crisis we have just been through. So they do not have the savings. They do not have the equity values in their homes. They do not have the pension funds to fall back on. So many consumers are sitting in very fragile positions right now. If you flip over in terms of the insurance often can be a source of protection for those that have those kinds of exposures. You look at the fact that whether you talk about the U.S. or the U.K., many consumers do not have basic disability and life insurance protection. Again, that is true both in the U.S. as well as the U.K. So, again, there is an underinsurance issue that is being dealt with here right now. The third piece to this puzzle too is the employer. From our point of view, the employer is the best, most efficient way to get information and low-cost product to many consumers. The statistics bear that out. If you look at the number of the disability contracts and life insurance contracts that are being purchased in the workplace, it is a significant percentage. Almost 90% of the disability insurance is purchased in the workplace in the U.S., and almost 40% of the life insurance is purchased in the workplace. The workplace has proven in the U.S. to be a very viable source of a sales distribution outlet for people that are well-positioned in those marketplaces. The same, by the way, is true in the U.K. If you look at the U.K., 56% of the disability insurance is purchased in the workplace, and 37% of life insurance is purchased in the workplace. I would add that even though we've been through the financial crisis, even though we've had the economic travails, even though the discussions about healthcare, we, in our business, see no indication that the employer does not want to continue to play a valuable role in providing access to benefits in the workplace. Obviously, sometimes those benefits, as we know, are paid for by the employer. Sometimes those benefits are paid for by the employee. Sometimes it's a little bit of both, but there's no evidence the employer wants to step away from that commitment to provide benefits in the workplace, which again, we think is a very encouraging sign as we think beyond some of the challenges we face economically the next couple of years. Last but not least, as we all know, every government we work with, whether it's the U.S. or the U.K., is facing some interesting deficit challenges. Just as a point of reference, the Social Security disability plan in the U.S. actually has grown from paying out $18 billion in 1970 to $124 billion here in 2009. So tough for the government to step into that role of providing that very basic protection for consumers when they're facing those kind of deficit issues. The same issues, by the way, exist in the U.K., where in fact, the working benefits, as they're called in the U.K., budget has actually grown from EUR 63 billion or GBP to upwards of GBP 87 billion right now. So again, the picture I guess I'm trying to paint here is one where you've got a consumer who's in a very fragile state, where many don't have the basic insurance protections that they need, that the workplace continues to be a very viable way to sell and market and distribute product. Frankly, there's no evidence the governments are going to step in and provide that service right now. That's a good thing for us as an industry and for a business. So again, if you look beyond the next couple of years, where again, we recognize there's tough economic challenges, there's tough interest rate challenges. These are the kinds of things that I think are driving us and giving us great confidence that the strategies that we've laid out for ourselves are, in fact, good strategies. Now, the other part of this is how does this all get caught up in some of the political dialogue? Excuse me. That's hard, obviously, to predict. But I must say we're very actively engaged in the political dialogue, both here in the U.S. and in the U.K. If you just look at the very simple message that we would be saying and delivering, for example, in the political world today, it's around the three points you see right here. A large portion of Americans, frankly, don't have the ability to sustain their households if, in fact, they lose their ability to work. That's an important point. Second point is only one in three consumers actually have disability insurance. The last piece is based on a study that we had done by Charles River. The fact that people actually have private disability insurance, probably last year, about a half a million families were prevented from going into poverty because they had their disability product to draw from. That saves the government about $5 billion a year. So again, a very strong connection between what our industry and our company does and some of the political debate that's happening in Washington right now, which again, gives us great comfort that despite a lot of political uncertainty out there, we feel pretty good that this industry and this business actually is frankly positioned pretty well to navigate pretty well and maybe even advance a little bit in the course of some of the political dialogue that's happening right now. Again, the same is exactly the same issue exists in the U.K. as well, where again, most consumers are living paycheck to paycheck. In fact, it's even a little more dramatic in the U.K., where as you can see from the statistic, the average employee in the U.K. can actually only live for a couple of months on their savings. As we said before, the U.K. market's actually more under-penetrated for disability insurance than it is in the U.S. So only one in 10 actually have disability insurance. Again, if you look at the value of that disability insurance in terms of what it does for protecting people from drawing from poverty programs, or it's called in the U.K. means-tested benefits, there's a fairly substantial savings to the government by more private activity in this particular marketplace. So again, I know the near term presents some interesting economic and financial challenges for all of us, but if you look beyond that, these themes are things that we think are very much ones to pick up and build from. I think you'll hear that in the course of some of the operating discussions that we'll talk about after my discussion. Now, the second piece of the story obviously is the financial foundation. So as I said before, I think we feel very good about the fact that our business mix is truly an asset. It goes without saying, I also think our financial foundation actually is an asset as well. I think you know the trends well. If you look at just the earnings per share pattern that we've seen here over the last five or six years, including the year-to-date results this year, again, we've seen good earnings per share growth, relatively consistent earnings per share growth. What's interesting though, of course is, and you know it well, those that follow our company, is the composition of that growth is obviously shifting a little bit. In the early part of this period of time, much of it came from operational improvements that we were making in the business. More recently, much of that earnings per share growth is coming because we have excess capital that we can deploy in share repurchase programs. I must say, I am jumping ahead a bit, but as we look at the outlook for 2012, it is going to be another tough year in terms of generating operating earnings growth. In terms of our EPS growth, we fully expect to see good solid EPS growth because again, we have been an active repurchaser of our shares at prices which we obviously think are very attractive right now. This is obviously an important theme. We are very proud of the fact we can continually show earnings per share growth, even despite the fact it is a tough environment for some of the reasons we will talk about as we go through the course of this morning with you. Now the other piece of the equation, obviously, is the part we have shared with you before, which is the distributable cash flow. If you look at the statutory earnings that we have had over time, as you can see, they have been relatively predictable. When we have a nice corridor of sort of $600 million-$650 million per year in statutory earnings, Rick McKenney will touch on this in some of his comments in a moment, but if you bring that 650-ish or $600 million-$650 million over into our distributable cash flow model, this gives us a fair amount of consistent capital that we can be using for things like dividend increases and share buybacks. Again, even though the economic outlook continues to be clouded, even though the interest rate environment continues to be challenging, this basic model in terms of distributable cash flow continues to be at the heart of our company's success, and frankly, at the heart of our company's future going forward. Now, the other part of it too is we feel good about the balance sheet, whether it is the risk-based capital position the company has, or as Brij will talk about in terms of the asset quality, we continue to be in a position we feel quite good about the strength of the balance sheet to support the business as we look ahead. Now, one thing that is worth stepping back again on a little bit here is that as good as we feel about the business, as good as we feel about the financial foundation of the company, we also recognize that this is a challenging environment. We have to continue to challenge ourselves to rethink things we do, rethink how we put capital to work. I just sort of draw your attention to the fact, if you look over the last six or seven years, I think hopefully you know this is a management team that has an action-oriented bias. Whether it is looking at businesses we should buy, whether it is looking at how we restructure businesses that we are in right now, whether it is discontinuing certain businesses, there is very much a bias in this management team to keep looking at the facts in terms of the outlook and what is happening in the environment. I just say that because, again, as we go to 2012, inevitably there are things that none of us can expect. I guess this has been a group that actually has been unafraid to make some tough decisions and to either put capital to work for shareholders or get out of businesses that we do not think can be ones that fit with our long-term strategy. This is, I think, an asset too, that we are very much a group that is not afraid to make some tough calls. I am sure we will talk today about some businesses that people have questions about, but no commitments today about those businesses. Just know we have a bias to action. That bias to action, obviously, we think has delivered some pretty good results over the last several years. None of us like to see a year-over-year negative comparison in terms of stock performance, but obviously on a relative basis, we continue to do well over the year-to-date results and even on some of the longer horizons as well. The things that we do, we recognize truly are paying good total returns for our shareholders, which obviously is very much a priority of this management team. I will just make a couple comments about the outlook, and again, we will get more deeply into this in some of the presentations which follow. Let me though start like I did last year, a little bit looking back to the past year and just with a little bit of an eye towards a critique of how we did. Again, there are a lot of things that worked very well for us, but there are some places, frankly, that we are a little disappointed. I want to be sure I touch on both of those. In terms of the things that worked, I touched on one of those already. The commitment to focus on growth in a disciplined way, finding pockets of opportunity to build and grow our business, that very much has worked very much as we expected. Again, we are seeing good quality growth in markets that have both good growth prospects but also have good margins as well as good returns. You will hear it from Brij too, we are obviously very pleased with how the investment portfolio has held up in this environment and how we have actually managed the interest rate challenges that exist in this environment. Again, there will be more to come on that in just a second. The fact that we have continued to generate that consistent operating cash flow and put that to work both with share buybacks and dividends, again, is something we very much counted on in 2011 and has played itself out very much as we had expected. Last but not least, it does not get a lot of attention these days, but the fact that this company and this industry can continue to be building its reputation and maintaining a strong reputation is incredibly important in times when obviously there has been a lot of criticism of business and financial institutions in general. I think those things have actually worked very well from my point of view, and obviously provide a springboard for even more good things in 2012 and beyond. As we look to the things that frankly maybe didn't quite meet our expectations, certainly a couple of businesses that we've talked about on the earnings calls have certainly been a little bit below our expectations. I would point out, though, that these are our two highest ROE businesses. Even though we talk about not meeting expectations that we set for ourselves, they're still generating very high returns. We fully expect those returns to stay high and to improve actually going forward. The other thing that we talked about last year was the fact that if you looked at the whole portfolio of product lines that we're in right now, there are certain pieces of the business that frankly are not meeting some of our ROE targets, and most specifically in the Unum US supplemental and voluntary segment. As you know, there are three product lines in there. Two of those product lines actually saw an improvement in ROE in 2011. One didn't. Obviously that's going to be an area of focus as we think about 2012 and beyond. Last but not least, this is a very competitive and challenging environment with the economy, with the competitive dynamics, and with the interest rate environment. Even though I think we've done all we can do to position ourselves for this environment, that's a never-ending sort of journey, as we all know, to be sure that you take account of the things that are happening in and around you and make the changes necessary to position yourself for the future. Again, I think you're going to hear from each of our presenters. We have a good grasp of the risks that are in the business. I think we have good plans underway to deal with the issues that are out there that are confronting us. I won't go into the outlook in detail. I think you'll hear that from each of the business presenters. Just to reinforce the point I had said earlier, when you look at the composition of growth for 2012 I'd focus your attention on a couple lines here. From operations, you're going to see premiums relatively flat in 2012, again, because of some of the headwinds we're seeing in each of the businesses. We'll talk about those headwinds. You're also going to see relatively modest operating earnings growth. Having said that, capital management will continue to be a big piece of the earnings story for 2012. Again, we're still saying with our 6%-12% earnings per share growth in 2012, but again, the composition of it's a little more skewed to capital management than it is to operating improvement because of the environment. As I said, each of our presenters will go through in more detail some of the things that are happening in those businesses and really profile more than ever, just some of the risk factors that we face in our business. But again, I am very proud of this outlook actually, because again, it reflects a consistency that we have actually, I think, strived to put in place five or six years ago. We have had that consistency in terms of performance. We have stayed the course, we have delivered on the commitments, and again, we will go into each of these details in a little more as we go through the morning session. I guess as I close, a couple things. Again, as you can sense from me, I think we are in some good businesses. Our business mix really is an asset right now. By being in the protection business and not having some of the more volatile interest rate and equity market exposures that some other companies have, that truly is a significant asset of our business. As I said before, the other good thing that comes from this is that we really do think there is growth prospects in this business as we look out a couple, three years, given the dynamics of the consumer, given the dynamics of what is happening with individuals' need for protection, given the role the employer continues to play in that whole equation, and the fact that the government cannot step up and actually fill that void right now. The private sector has the chance to fill that void, and we think we are in a very interesting position to take advantage of that. You sense, too, that we are committed to disciplined growth. Every one of our businesses could grow more rapidly if they chose to lower their standards in terms of underwriting standards and profitability and margins, but we are not going to do that. That maintenance of discipline and being sure that we actually manage to certain profit levels has paid off very well for us. And again, as you saw from one of my previous exhibits, we are seeing very nice growth in the segments of the marketplace that we have actually chosen to focus our energies on, and those are good, sustainable growth rates that we think carry over very nicely into 2012 and beyond. Again, the financial foundation of this business is an asset. I think hopefully, we have shown to you that we are willing to use that financial base to continue to create value for our shareholders. I think, again, as we look to 2012, you are going to sense a real cautiousness, which gets to my next point, actually, where we are pretty realistic about the outlook. We just do not see a lot of good things happening in 2012. As we think about capital management, there is no doubt we have that roughly half a billion dollars that comes from distributable cash flow, want to continue to put to work to support some of the things we have done in the past. We are probably going to be a little more cautious about drawing down some of our excess capital in 2012 just because of that outlook, and I think Rick McKenney will touch on that in some of his comments in just a second. But last but not least, if you think of the five or six, seven years that this management team has been in front of you, we have delivered on our commitments. And so I think we try to create realistic expectations of the street, very clear about the things that we are trying to do, and I think try to deliver on those commitments. As my exhibit earlier showed, those deliverables have led to some very good value for our shareholders, and we are confident the things we are going to talk about today are going to create even further value for our shareholders in 2012. With that, again, I was supposed to go quick because we have a lot to go through behind me. Actually, Kevin, I will ask you and the team maybe to come on up to the podium. As you are doing so, as Tom said, let us see if there is a question or two that I can answer now before passing it on to Kevin and the team. There will be more time for Q&A at the back end of this morning, too. If you do not get your question now, we will have plenty of time to get to that later. As you guys are coming up, any questions from the group just to get things started? Yes. Good evening, Mike. Yeah, Mike, you. Thanks. It's Randy Binner from FBR. I guess the caution on capital deployment felt a little bit new from a commentary perspective. If you could elaborate on that a little bit more and just what is it specifically that's bad about the 2012 outlook that gives you that kind of newer caution? Yeah. If I gave you something new, I didn't mean to. I think Rick will probably get into that in more detail. I think what I'm trying to say is I think just as a macro level, we just don't see any improvement in the employment picture. We just are going to assume interest rates remain relatively low, and I think that caution's woven its way through everything we think about in terms of how we structure the operations of the business, but also how we think about redeploying that capital. I think last year, I think we all sat here today with a little more optimism about the economy and interest rates and things like that, which I think gave us more comfort perhaps to begin to draw down that excess capital. I think I'll probably leave Rick to answer that in more depth in his comments, if that's all right. Okay. Any other sort of last questions? Otherwise, what we'll do, and again, there'll be plenty of time at the end of the session to go into a little more Q&A. As you know, Kevin McCarthy is the president of our Unum US operations, but what many may not know is Kevin's also running the internal operating committee, which is the vehicle from which we bring all of our businesses together, not just to help run those businesses better, but also look for ways to improve the efficiency across all of our businesses. Kevin's going to lead this panel. Kevin? Great. Thanks, Tom. Morning, everyone. Let me just quickly introduce the panel here. Roger Martin, CFO for Unum US. Jack McGarry, CEO, Unum UK. Peter O'Donnell, CFO at Unum UK. Randy Horne, CEO at Colonial, and David Parker, the CFO at Colonial. The way we're going to approach this panel is that the three CEOs from the businesses are going to talk a little bit about strategic performance and direction, operating performance, financial performance, and give you a sense of outlook. Then we're going to take a step back, and the CFOs are going to talk a little bit about some of the risks that face our business, some of the headwinds, and how manageable we think those headwinds are and what actions we're taking to mitigate any of the pressure on our business performance. All right. So just in terms of Unum US, I think the key things that I'd like to have you focus on taking away this morning are, first of all, we continue to be extremely disciplined about the way we approach the business. We think that we're doing very well in the face of these economic headwinds, but we recognize that we need to be continued with discipline around the way in which we focus our sales performance, the way in which we underwrite the business, the way in which we price the business, manage claims performance, et cetera. That said, we think that our strategy still seems to be showing up. You'll see some of that in terms of our core market growth rates, our voluntary growth rates, the degree to which our core group and voluntary benefits are integrated and sold as packages. And I think evidence continues to emerge in the marketplace that our view of a defined contribution type strategy for employee benefits is paying off, and the investments that we're making in our distribution system and service structures are paying off as well. They're well-positioned. From a business mix standpoint, maybe one of the most fundamental elements of our discipline strategy is to manage our business mix. We've talked about this a lot in the past. At first, if you think about in terms of earned premium, back in 2003, 48% of our business was on the disability side. In 2011, 44% of our earned premium. That's a fairly modest change, but you have to keep in mind that we did all of that in terms of repositioning our in-force structure, moving away from the large case business and repricing a lot of our business. A lot of the persistency effects, and rate increase effects are dampening that change rate. But it clearly shows up in terms of increased operating earnings. It's much more visible here if we look at sales premium by segment. Back in 2003, 56% of our business was disability sales. In 2011 year to date, 38% of our business is disability sales. So still a very strong disability company, still a leader in that field, but a much more balanced and diversified sales portfolio. Then if you take it one step further and think about it strategically, back in 2006, 59% of our business was in our core group and voluntary business. In 2011, that's 72% of our business. Our objectives in our core and strategic segments, core group and voluntary, are to grow at 1.5 to 2 times the market growth rate. During the course of 2011, in the group business, the market's growing at slightly below zero, slightly negative. Our growth rate during the course of the first half of this year has been a very solid 9% in group and 5% in voluntary. So very solid performance growing where we want to grow, growing where we want to strategically invest and position ourselves, and very solid performance in terms of growing where we think we can generate the right kind of profitability. That shows up in terms of a couple of operating metrics. First, the continual improvement over many quarters and years of our benefit ratio, and at the same time, continuous improvement in our pre-tax operating earnings, and return on equity. It also shows up in terms of our customer relationship management. We have continuous improvement in a number of customer satisfaction, likelihood to recommend, likelihood to renew measures, and it clearly shows up on the financial side as well in terms of solid and continuous improvement in group persistency and very stable persistency in our voluntary business, while at the same time growing our strategic sales. If you look at that growth rate on a rolling four-quarter basis from 2007 through 2011 through third quarter of 2011, you grow from $350 million of sales for the rolling four quarters at the end of third quarter 2007 to around $500 million for the rolling four quarters in third quarter 2011. So very solid strategic growth. As we've generated that growth, we've continued to focus on operating efficiency as well by a number of measures, operating expense ratios, but also maybe a very easy metric for us, pre-tax operating earnings on a per employee or a per insured person basis. Continuous growth and improvement over the last five years. So in terms of looking forward, given that solid foundation, how do we continue to build upon that foundation? I'll point you to maybe three or four key things. First, in terms of risk management discipline. We continue to manage volatility through the tools that we've deployed over the last five years. A very strong performance in terms of renewal implementation, placing rate increases, making adjustments as we did recently in the discount rate, all in order to manage volatility and enable us to continue to deliver the kind of earnings performance that we've been able to deliver in the recent years. I'd also point to expanding our product portfolio, continuing to diversify our product portfolio, expanding our voluntary benefit offerings. We continue to experience growth in packaging as well. Every year, greater and greater percentage of our employees buy not only multiple lines of group business from us, but also package group business with an increasing amount of voluntary inside of those employee benefit packages. Recently, we began piloting the introduction of a dental product, and we'll continue to expand and introduce that product into our portfolio during 2012. On the distribution side, we have a very strong reputation with our brokerage distribution system, but we continue to look for ways to expand our reach in distribution. We have healthcare partnerships that we're beginning to develop as we watch the evolution of what's happening with healthcare reform and now benefit administration partnerships as we think through how are employers going to change the way in which they procure employee benefits in a health insurance exchange and a health insurance environment. So we continue to expand our distribution reach and our distribution partnerships. Finally, we continue to invest in technology, leveraging technology globally where we can across our entire enterprise, across all three of our businesses to try to make sure that we can lower unit costs and improve quality and efficiency in delivery. We will continue to, at the same time, look at business segments within our businesses to make sure that each segment and sub-segment of our business operates the way we want it to. Is it strategically where we want to be? Can we manage the risks the way we want to? Can those segments grow and generate growth for us? Can we operate them effectively, efficiently, and competitively? If you think about a forward outlook, we continue to look at these four major categories as ways that we can continue to grow our top line and our bottom line. From an outlook perspective, just focusing on Unum US, in 2012, we would expect about a 5%-7% growth rate in terms of sales. That is down a little bit from what I would call a normal expectation of maybe something closer to 8%-12%, primarily driven by the difficult economic environment and the fact that we are placing mid-single-digit rate increases on our in-force portfolio to make sure that we manage that volatility and risk that we talked about. On the earned premium side, pretty small growth, 1%-3%. Again, that reflects stable persistency, but it also reflects a laggard economy in terms of wage inflation, and what we call natural or normal growth from employment growth. Finally, pretty modest earnings growth, 0%-3% versus maybe a more normal environment of 4%-6%. That is driven primarily by the adjustments that we made in discount rates and LTD, and that we will be making in individual disability income as well, which dampen our ability to grow earnings 2012 over 2011. All in all, I think a really well-positioned, strategic business that we are running in Unum US, generating solid and continued growth in earnings, and strong customer relationships and well-positioned for growth as the economy turns in the future. That is quick and dirty in terms of the Unum US story. Let me turn it over to Jack McGarry to talk about the U.K. Thank you, Kevin. In the U.K., clearly our key messages are very similar to the U.S. We believe in 2011 that we stabilized the business and established the foundations for future growth. As Tom's slides show, our top line had been shrinking for several years. 2011 was the first time that we saw signs of an uptick in the top line. We face economic headwinds that are a real challenge. They challenge our bottom line, and we believe we have risk management actions in place that will be able to mitigate the effects. It is more difficult to mitigate the effects from a growth perspective. Going forward, we are going to face growth headwinds, although we do believe we have good plans in place to get growth in this business in a profitable way despite the economic challenges. We remain confident in our strategy to expand the U.K. income protection market through new product offerings and education. Just a quick recap on our U.K. strategy. Two key focuses for us. The first is expanding the income protection market. It is an under-penetrated market that we are looking to increase penetration on. We are looking to bring new employers into the market and explore complementary offerings. We are looking to strengthen our leadership position, a key focus on maintaining margins in the income protection market. We have strengthened our claims proposition, which should lead to better stability in claims results as well as improved our value proposition in the marketplace with employers, brokers, as well as claimants. Finally, we continue to explore product offerings. I will give you an example. In the U.K., statutory sick pay is a mandatory offering for employers over a certain size. Yet in the U.K., there is no short-term disability market at all. If you think about the U.S. under 100 lives, 200 lives, most people in the U.S. insure their short-term disability. We are looking at bringing some of those market dynamics to the U.K. We are committed to being a well-managed company, looking at superior financial controls and risk management, having improved metrics and analysis, and again, a focus on profitability. We are also investing in our people, because in the U.K., we have a fair number of expats in the U.K. currently. We are investing heavily in our talent, both bringing in new people as well as developing the people we have, so that as those expats go back to the States, having brought best practices from the States to the U.K., that they are able to be replaced with local talent. Why are we still talking about growth in this environment? The driver of that is on this chart here. If you look at the U.K., there are about 24 million employees in the U.K. 6 million work for the public sector, which is largely self-insured. 6 million work for our uninsured employers. 6 million employees work for employers that have Unum income protection schemes in force. 6 million work for our competition that have income protection schemes in force. Of the 6 million that work for us with income protection schemes in force, we only insure 900,000 of them. The same is true of our competitors. If we were in the States, that is about one in seven. The comparable number in the State is four in seven. The dynamics are the same, the needs are the same in the U.K., yet the marketplace has spent the last 20 years trading the 900,000 between carriers rather than trying to go after the 5.1 million that are currently uninsured. That is where our focus is. We have a coordinated strategy to do that. It starts with a promotional campaign. There was a big public relations campaign that happened in the first half of the year. We started a social media and television advertising campaign in the second half that actually rolled out during October. Are there any Downton Abbey fans in the room? That is must-see TV, by the way, in the U.K., where we rolled out a promotional ad. I assume most of you guys have not seen it, so I thought I would take a second to show you what we did do. Hello. If you cannot work because of long-term illness or injury, it can feel like the rug being pulled out from under you. Savings only go so far, so it is good to have a Backup Plan, like income protection. You get it through work, which means you still get paid monthly. Find out more at backupplan.com. Unum, because everyone needs a Backup Plan. That showed on the most popular TV show on Sunday nights in the U.K. for the month of October. We are very pleased with the results of that. We showed two ads during that campaign. On YouTube, they have had about a half a million views. If you look at the ad, it is focused on driving people to backupplan.com. More than 60,000 people have gone to backupplan.com based on one month of showing in that. The click-through rate from Backup Plan to our websites is 43%. If you look at what they are saying, they are saying to rank-and-file employees, you can get this through their employer. We had three telephone calls from employers in the last week saying, "My employees have come in asking about income protection. Can you tell me where I can get some information about it?" The initial purpose is coming through. It takes more than that, though, to really make this work. It is a coordinated strategy. On the product front, we need to make the coverage affordable. We are targeting a GBP 200 quid price tag to cover the rest of those employees. We present that as it is the price of a pint of ale on your way home from work Friday night. We are doing shared funding so that employers and employees can split that, and we are expanding the suite of offerings, again, around short-term disability, looking at ill health, early retirement plans. The distribution mechanism is aligned. We are using our existing distribution. One of the great things about this is that we are not doing this alone. Not only are we looking at it, but the distribution mechanism that we go through, employee benefit consultants, are under pressure for revenues too, and so they are looking for sources for growth. And they have caught on to this as a great opportunity for them as well. So there is alignment in the marketplace. We are also going to be looking at alternative ways of reaching the small to midsize employer, which is under-serviced by the current distribution system, and we are aligning incentives with it. And again, the key message to this is that we are pricing to maintain margins. So when we make a plan that is more affordable, we are doing it by changing the plan design, not by changing the profitability. From a financial result, as Tom said, we had experienced pressure, largely competitive pressure in the U.K. over the last several years. We have begun to turn that around. Premiums have stabilized in 2011 and begin to move up largely as a result of pricing discipline, which we will talk a little bit more about later in the risk management section. Our pre-tax margins have stabilized. We had a tough third quarter. We were very happy with our results going into the third quarter, and we have been very happy with the results coming out of the third quarter. So it does look like it was a blip of volatility in results. But very solid profitability, even with that third quarter in it. We have a 27% pre-tax margin, a 19% return on equity, and growing earned premium. So we do believe that we have turned the corner. Our outlook going forward on the backs of that expansion campaign is to have 6%-10% sales growth, 0%-3% premium growth, and 0%-3% earnings growth, and to maintain an 18%-20% return on equity. So with that, I will turn it over to Randy. Well, thank you, Jack, and good morning, everyone. Let me start out with some of the key themes for our business. I will move through this relatively quickly, but I would like to point a few things out. Colonial Life does remain extremely committed to disciplined growth in our target markets, with our primary focus continuing to be on those customer segments that are interested in our turnkey approach to product enrollment and benefits communication. That is the Colonial Life value proposition in a nutshell, and we feel we can most effectively reach those target markets through our agency distribution model, and they work both directly on the sales front, but also they partner and work with brokers also. We have spent a lot of time on our agency development programs and training regimens, and we feel like that is really enhancing the reach and effectiveness of our agency distribution system. As employers continue to shift more and more of the benefits responsibility to employees, we feel our value proposition, again, around filling gaps in the financial safety net, but also providing good benefits education through face-to-face benefit counseling is more important than ever. Our financial foundation and outlook continues to be very, very strong. Some of the key differentiators that we see for Colonial Life, and I will get into some detail on the slides that follow on these, but it starts with our strategic focus on those target markets where we can be most successful, and that is the core commercial and public sector markets. Growing distribution continues to be a key theme and a differentiator for us, and we feel there is a tremendous opportunity to keep growing that distribution. That also gives us significant firepower on the enrollment side and the ability to do more benefits counseling. Our risk management and profitability is firmly embedded in our model and our approach to the business. Again, as I said, our face-to-face benefit counseling is a very key part of our value proposition, and we think gives a strategic advantage in the marketplace. Taking a little deeper look at our target market focus. Again, our focus is on market segments that are most receptive to our model, that are less competitive intense, and that intensity in general in the voluntary environment is rapidly increasing. But these are markets we feel we can maintain strong profitability as well. Those bubbles you see in the green are where we are primarily focused. That is the commercial market, less than 1,000 employees. But most of our agents on any given day are in the small end of that market, working, say, in the less than 250 employee part of that market. But we are also focused on the public sector, as Tom Watjen mentioned. Focus there is at the state and local level, but that also includes the educator market in the K-12 segment. There are good opportunities for Colonial Life in that 1,000 plus. That is the yellow bubble you see there. Again, where our value proposition lines up with what the employer is looking for. But we are very selective. We pick our spots very carefully there. We continue to grow our agency system. As I mentioned earlier, we have also retooled the agency development program so that we can get to both reps and managers up and going much more quickly and improve their success rate going forward. Very pleased with the early results from those agency development programs. We are continuing to see a good recruiting pipeline, which is so important to any agency distribution system. That is both at the rep level and the district manager level also. You can see a nice increase continuing in our producing offices and also in our new rep contracts that after following several years of 20%-plus increases, we still have a nice steady 6% increase here in 2011. Our goal, very simply, is to keep expanding our agency footprint, and we think there is significant opportunity to do that. Our business model is very stable from a risk management standpoint. Very well diversified from both a product and a market perspective. The types of benefits we sell are very manageable in terms of risk management and predictable levels of benefit costs. We sell standard rated products, or manual rated is also used, and they are priced with a very conservative view of interest rates, as you can see, over a long period of time. No short-term pressure from the current interest rate environment. We continue to focus on employee paid benefits sold at the work site. that is what Colonial Life is all about. Value proposition, as I mentioned earlier, yes, we continue to fill gaps in the financial safety net of working Americans. You can see an example here for small employers and how that gap has continued to increase on the health insurance side. This shows deductibles of $2,000 or more and how rapidly those deductibles have gone up over the last many years. Again, that comes right into our wheelhouse, and we are here to help employees with that shift in responsibility and to help fill those gaps through a variety of our products. All of our research continues to strongly support the need to understand benefits. That need is greater than ever. Most employers readily admit that their current communication programs really do not fit that need very well. We are here to provide that face-to-face benefit counseling that we think is so important to improving employee understanding and ultimately employee engagement. Looking at our financial performance over the last several years, we have had consistent premium growth in the 6%-7% range. We have had solid pre-tax operating earning growth during this time period, although the growth rate has flattened over the last couple of years as our benefit ratio has ticked up. David Parker will talk more about that here in just a few minutes. We have maintained strong ROEs in the 17% range. As we move to 2012 outlook, given some modest improvement in the economy, continuing to grow our agency distribution system, successful execution of our other growth initiatives, we have the opportunity we feel to be in that 6%-10% increase rate for sales. Premium growth in the 4%-5% range again in 2012. Earnings in that flat to 3% area. Again, that assumes our benefit ratio that we saw in the third quarter continues into 2012 and also reflects some pressure coming from our portfolio yield rate. Maintaining strong ROEs in the 16%-17% range. Again, certainly some challenges out there as the other speakers have talked about, but we think there are also very significant opportunities going forward for Colonial Life. With that, I will turn it back over to Kevin. Thanks, Randy. I am going to shift gears a little bit here and talk about risk management, and in particular, talk about some of the headwinds that have been embedded within some of our outlook projections. This is not a good news slide. The right-hand side I think is very straightforward. Continued high underemployment in both the U.S. and the U.K. and continued lack of GDP growth, both of which put pressure in terms of top line growth in the shorter term. On the left-hand side, a little bit different story. Declining interest rates definitely puts pressure on earnings, at least in the short run, both in terms of dampened net investment income and a need to make, in a couple of our product lines, adjustments in our discount rates, which then in turn affect pre-tax operating earnings in the fourth quarter 2011 and into 2012. On the other hand, what I'd say about these elements here is that they're very manageable within the context of our business. We don't nearly have the kind of pressure that a number of other insurance product lines and insurance companies have. Very manageable in terms of the ability to take price actions. The lower left-hand side on the wage inflation side, again, we talk about normal growth and the opportunity for normal growth, and that's dampened to some extent by lack of wage inflation. You can see it significantly in the U.S. and in the U.K. The U.S. line here is interesting because it's the Employment Cost Index, so it includes both wages and the cost of employee benefits. When you think about a fairly significant continued inflation rate in health insurance in the 5%-10% range, and yet still the Employment Cost Index declining in the United States. All of these pressures face our business, create headwinds, and yet, hopefully what you've seen in the conversation up to now is very, very strong financial performance, very, very strong discipline, very strong focus on operational discipline and strategic growth opportunity. From here, we're going to ask the CFOs to describe for you is, in each of the businesses, how we're dealing with some of these pressure points, how manageable and within scope they are, and what kind of actions we're taking and what we expect the outcomes to be. With that, I'll turn it over to Roger Martin. Thanks, Kevin, and good morning, everybody. I'm going to cover three topics this morning. First, we'll talk about our long-term care business. Secondly, we'll talk about our IDI businesses, both recently issued and the closed block. Excuse me. Then finally, I'll close with some comments on our long-term disability business. Starting with long-term care, first let me cover our individual long-term care business. As you all know, we filed a rate increase recently in all 50 states and the District of Columbia. The rate increase covers approximately $240 million of in-force premium on about 130,000 policyholders insured. We expect that premium to emerge over the 2012, 2013 timeframe, and we expect it to be in the range of $26 million-$28 million of additional premium. To date, we've achieved 91% of the asked for rate increases on those states where approvals have been given. Overall, we're about 61% of our overall goal and still have three out of the top six largest premium states outstanding that we continue to work with. Implementation has begun. In October, we mailed the first 10,000 letters to our policyholders with rate increases. We've heard back from 4,000 of them. Of those 4,000, 98% have agreed to accept the rate increase, with the remainder either buying down their coverage or lapsing their policy altogether. Turning to group long-term care, we are preparing to file new rates along with a new rating algorithm. From a new rates perspective, we have completed a comprehensive study over the last year of our key assumptions, including voluntary lapse, mortality, incidents, terminations, and obviously reflecting the low interest rate environment. In doing that, we've factored in both our internal experience as well as a recently published Society of Actuaries industry study. The new rating algorithm is sort of the innovative approach here that we're introducing. What we're introducing is a rating algorithm that allows us to modify our new business rates as interest rates move. It will likely be tied to the treasury rate, and we'll have the opportunity to move our premium rates approximately every six months, depending upon the move in the interest rates. That will help, combined with our hedging strategy, that will help really insulate us in terms of interest rate fluctuations on this business. As you all know, the complexities and inherent risks in the long-term care business has always dictated for us a pretty significant focus of financial, actuarial, and business support on this business. Recently, however, as I'm sure you can imagine, the focus has intensified given the low interest rate environment, the emerging trends that we're seeing across the industry and in our own business with respect to loss trends and the low level of lapse has caused us really to increase focus on this business over the last year or so. Turning to our individual disability businesses. On the top half of the page, you see claim trends for both our recently issued IDI business as well as our closed block individual business. From an incidence perspective, these are actual to expected incidence and recovery rates, by the way. From an incidence perspective, you can see flat to declining trends in both our recently issued and closed block business. I will note to each of you to remember, though, that the expecteds here are different for recently issued and IDI. For example, the absolute incidence rate in our recently issued business is about one half the rate that we experience on a closed block IDI business. So materially different level of incidence levels. Turning to recoveries, the actual to expected recovery trends have been relatively stable over the last six years or so. The IDI recently issued business is smaller and therefore a little more volatile and did benefit from some one-time actions in the 2005 to 2007 time period, but since then has been relatively stable. The result in the lower left-hand corner is the reported interest-adjusted loss ratios. You can see stable interest-adjusted loss ratios for our closed block disability and declining interest-adjusted loss ratios in our recently issued business. However, as we're looking at the outlook of this business going forward, we have decided, as we look to this prolonged period of low interest rates, we've decided to lower the discount rate on new claims for our recently issued individual disability business by 40 basis points. If necessary to file new rates on our new pricing for the individual disability recently issued business going forward. On the closed block, we manage that spread, the difference between the portfolio rate and the average discount rate, at an aggregate block basis, given that it is a closed block. We expect very little new cash to invest, slightly under $200 million on a $10 billion portfolio, and therefore do not anticipate any material issues with respect to moving the discount rates around or the spread between the portfolio yield and the discount rate. Finally, turning to our long-term disability business in the U.S. While it is clear that we continue to face headwinds related to wage inflation and job creation, we have seen success, as Kevin McCarthy had mentioned, in sales growth and persistency. Our sales growth in our group disability business on a year-to-date basis is up 8%. It is up 11% in our core segment. From a persistency perspective, group disability persistency is hovering around 90%. That is one point greater than where it was at year-end 2010. Turning to the upper right-hand chart, you can see the LTD claims performance. As we have noted over the last several quarters, we have seen volatility in our LTD incidence rate, including a slight uptick in the most recently reported third quarter. However, if you look at the long term reported trends here, you can see that the actual to expected paid incidence rate has been relatively stable and below 100%, where 100% represents our pricing expectations. Recovery performance has remained strong and continues to improve through this economic period. Turning to the lower left-hand corner, you can see here the spread between our portfolio yield and our liability discount rate. As a reminder, we did lower the discount rate 25 basis points in the third quarter on new claims, but our spread remains very strong at 98 basis points. As a matter of fact, that widened two basis points in the third quarter. Again, though, as we look forward and we anticipate this prolonged low interest rate environment, we have decided to adjust our group disability pricing. We are looking at placing increases in the 5% range, mid-single digit range, for both our new business and our renewals. We have confidence, given our track record and history, of being able to deliver on those renewals and on those new business price increases in a way that will allow us to maintain the sales growth and the earned premium growth and the persistency that we have been achieving historically, as well as what is built into our outlook for 2012. With that, I will turn it over to Peter O'Donnell to talk about the U.K. Thanks, Roger Martin, and good morning. Just to manage your expectations, no videos from me, so I am going to follow Jack McGarry. But I will try and show my European roots by referencing a French historical character, so you will have to wait for that for a minute. Let me just talk first of all, building on what Roger Martin says. I think you are going to see some common themes here. Let us talk about pricing, first of all. Jack McGarry referenced sustained top-line pressure, which we saw at Unum UK through 2008, 2009, and 2010. 2011 saw us turn a corner. We managed to place rate into the market, plus we managed to get some growth in earned premiums. How do we go about that? Well, we talked last year about pricing discipline. There were three aspects to that program. One was the renewal program. Basically, towards the end of 2010, we went through and priced all our business with improved rate and then placed that into the market. Secondly was salesforce remuneration. We changed the remuneration process for the U.K., moving them not to be just rewarded on persistency, i.e., how much business they renewed, but also to be rewarded on the rate that persistency was renewed at. Thirdly, MI. We brought weekly and monthly MI to the management team. We meet weekly and fortnightly and monthly and daily, if it means on certain cases, to look at those cases where they are priced and decide whether or not we are going to move on rate. I think it was challenging and it has been challenging, but I think you can see from the persistency chart on the top that we are actually seeing some momentum. In Q1, competitors filled their boots. They took business from us. We felt it was poorly priced. They are welcome to that business. However, we think they have seen some sense as the year has moved on, and actually you can see that chart come through in our persistency. Our persistency is improving. I think the other aspect I would say where we have seen the challenge is around new business. New business has performed below our expectations in the first half of the year, but again, we are seeing gathering momentum on new business, and we are beginning to see a good pipeline, and we are beginning to hit our plans on that. The other key thing that we saw in Q3 was one of our major competitors announced that they were going to be placing 5%-15% rate increases into the market. That was a key indicator for us that things were changing in our market. It is not over. I think it will still be challenging moving forward. We are still seeing some, what we would consider irrational pricing, particularly amongst large schemes. However, we do think that we changed the trajectory of the market during the first half of 2011. Looking forward, 2012 is going to have a different challenge. Roger referred to the interest rate environment and new money rates and long-term yields, and if you look at the long-term yields for 10-year bonds, they have come down significantly towards the second half of this year. We will be reflecting that change in pricing. We believe our competitors should reflect that change in price as well, and we are planning to put through mid to high single-digit increases on our income protection book to reflect the interest rate environment that we are facing. Again, we do not believe that should change the competitive landscape because we think everybody should be doing that. We are certainly going to be making that noise to the market through our media and advertising as well. Turning to claims, this is where I am going to get my French historical reference in. You will notice we have got three asterisks. Asterix, for those of you who do not know, is a French hero, a comedic hero. Actually, the last asterisk on the recoveries count and value should not exist. If we could get rid of one French hero, that would be very helpful on your charts. Thanks very much. We have got the Q3 volatility, and I have shown two charts here which hopefully demonstrate what we talked about on the call. The first is on admitted claims. We baselined our admitted claims at Q1 2010, and we've shown you there the counts and values. You can see in Q3 2011 that actually that's spiked. Both, we had higher average number of counts and higher average value per count. That is very unusual for us. The second thing that was unusual to us, if you go down to the second chart, was declines, where we saw our decline counts as okay, but basically the average value of our declines was much lower than our normal averages. The combination of those three things was why we saw the spike in our inceptions and therefore why our benefit ratio went up. The major part of that spike actually occurred in August. Since August, we've seen that trajectory return through September and October to more normal levels. All our indicators are telling us this was volatility. Looking forward, I've shown on the chart at the bottom a more longer-term trend on recoveries, because we tend to actually try and manage our claims over a three to five-year period to see really what's happening. What we've been doing in the first half of 2011 is investing very significantly in our claims function. We brought in a lot more headcounts. We've increased from 107 CMSs, which is our claims management specialist, to 116. We almost doubled the number of medical staff by nurses and doctors and psychiatrists coming in, and we reduced the spans of control. That was all happening during the first half. We think we're seeing now, just at the end of 2011, some benefit from that. The recovery performance actually you can see through 2010 and 2011, is actually on the up. Our plan is to maintain that momentum. What are we going to do with those staff? Obviously, they're going to be managing the claim book much better, but there are two key areas, two key initiatives which we're rolling out in tandem with the sales and marketing function. The first is direct contact. At the moment, we would have direct contact through the employer with the claimant. We want to change that. The minute they go on claim, our CMSs are talking to the claimant, managing their expectations upfront about how long that claim will last, what their expectations are, what support they need, and that will change the dynamic and trajectory of our claims recoveries moving forward. The second is the tail of the book, where we would like to invest some of our resources in looking at the older claims. They're the ones that take more work, more time. As the claims function really didn't have the resources to do that during 2008 and 2009, and actually, we brought a lot of resources and specialism into that, and we're basically replicating the U.S. model where they've been doing that for a couple of years now and have seen some reasonably good pickups in the performance there. The other element which we're doing is building all the MI and processes from the U.S. into the U.K. Basically, they were up and running during Q2 and Q3. We're really still at the start of this journey. We've invested in the claims function, and we would hope to see the payback of that through 2012 and 2013. The final area I'm going to talk about is operating efficiency. The U.K. management took some very strong actions during 2008, 2009, and 2010 to respond to the falling premium income. You can see there that expense ratios have basically expenses have fallen in line with premiums. We want to maintain that very strong discipline. However, we are investing in a couple of areas. Jack's talked about the marketing campaign, and you can see we are seeing a modest increase in our expense ratio in 2011 from that. The second area is on headcount, where you can see the headcount has slightly increased. That's all about managing that claims function. We believe that's essential to managing the environment. We do believe there are areas of growth within the U.K. because of all the things Jack talked about. That marketing campaign is going to open that up to us. We do believe that the claims, having a world-class claim function in the U.K., will pay off in terms of bottom line. The third area which we referred to, Kevin working on the operating committee, we're also working with the group to look at opportunities where we can get synergies from working, doing the best thing once in the right place. We would hope to see some of that come through in 2012 as well. I'm going to hand over to David. Well, there we go. Thank you, Peter, and good morning. I'm really going to make a couple brief comments on the interest rate environment and then discuss the key drivers of the Colonial Life benefit ratio trend. The interest rate environment within Colonial Life, if you look at it over the near term, that rate volatility has a limited impact on the Colonial Life performance, given our product portfolio is primarily short-term benefits on an individual platform. We price our products with a conservative interest rate assumption over the long term so that we can withstand these short-term fluctuations. From a balance sheet perspective, we maintain a healthy 150 basis point margin between our reserve discount rate and the current portfolio yield. From a new product introduction perspective within the accident, sickness, and disability line over the past few years, it's created some upward trend in the benefit ratio, while also impacting positively our sales growth. Our Medical Bridge products are meeting market demands given the health insurance environment and are priced with a higher benefit ratio than accident disability products. Our most recent accident product was introduced in the first quarter of 2010 and was priced to be more competitive, and the benefit ratio will run higher than prior accident products. These products will represent about 35% of our premium within this accident, sickness, and disability line of business within the next 2-3 years, and that will impact our benefit ratio approximately one percentage point. However, ongoing product and risk management actions, along with continued focus on our expense management, will mitigate this upward trend in the benefit ratio. As an example, if you look on the next slide with the cancer and critical illness line of business, it has contributed to our overall benefit trends in recent periods. However, that pressure is primarily from an older block that has not been marketed since 2001 and represents only 3% of premium within this line of business. We are taking rate actions on this block on a regular basis and also evaluating ways to provide policyholders with more affordable coverage options. Performance of the currently marketed cancer product is in line with expectations, and this product represents about 50% of our in-force premium within the line of business and will grow another 5-10 percentage points over the next three to four years. In addition, critical illness is a product that continues to gain market acceptance, and it also has a more stable risk profile and therefore a lower benefit ratio. We expect these products to be approximately 25% of premium within the line of business over the next several years. As a result of these actions and these general trends, the total company benefit ratio should be positively impacted by about 25 basis points by the actions in this line of business. If you look over the recent years, over the past five years in fact, earnings growth has been nearly double that of premium growth, and this margin expansion has been driven by the downward trend of the benefit ratio. That trend has been influenced by product management, pricing, and underwriting actions, but more importantly, by new accident disability products that were introduced that perform better than expectations in pricing. As just discussed, product mix shifts and new product introductions are moving the benefit ratio up. However, we are mitigating that impact by taking very specific actions such as ongoing pricing changes within disability through risk classification updates, rate actions on the older cancer products, and sales incentive changes to align product level profitability. Continuous improvement in our operating efficiency also helps mitigate the profit margin impact. Our expense ratio is down 100 basis points since 2009, and we expect ongoing improvement there. Looking forward, earnings growth will be driven by top-line growth and strong expense management as the upward benefit ratio trend stabilizes in the near term. I will hand it back to Kevin to do kind of a wrap-up on risk management section. Thanks, David. Hopefully from the discussion that we have been having here this morning, you get a sense of both the strength that we have in terms of operating performance and discipline, the strength that we have in terms of strategic positioning and preparedness for future growth, and particularly the strength that we have in terms of a focus and discipline around risk management, paying attention to all the levers within our business and making sure that we are willing to take actions whenever necessary to make sure that we can continue to generate reasonable top-line growth and bottom-line growth. I think my takeaway in looking at the entire presentation here is that I think at an operating level, we are on top of our business, we are well positioned for the future, and we are going to continue to generate the earnings performance that you have come to expect from us. With that, let me open it up for a few minutes of questions. There is one right here. Mark? Hi, good morning. Mark Finkelstein, Evercore. First question is, you did not really address long-term care reserves, and I guess by now you have an outlook on 2012. You would know it probably the cash flow testing. Whatever exams you would have done, you probably know the answer to. Can you give us an update on where we are at with that? Roger? Yeah, thank you. Excuse me. Our practice is to review reserve adequacies for all of our lines of business during the fourth quarter. Long-term care will obviously be a part of that process. From our comments this morning and comments we have made throughout the year, including our third quarter conference call, I think you are pretty well familiar with the challenges that we have outlined with this business. Lapse rates remain very low, which causes us to build reserves faster on this product, and that hits the income statement. Loss trends, particularly in 2011, have been volatile. And with the low interest rate environment, that places more pressure on this business. We are clearly going to take all of those Take things into consideration as we complete our reserve adequacy and cash flow testing for the fourth quarter. We will have more to report about that when we complete that work at the end of the year. We don't have an answer on that yet, essentially. That's correct. Okay. Actually, there's an interesting slide that you have in here. I think it's slide 53. I guess what surprised me, I just want to make sure I'm interpreting this correctly. Through this whole crisis, your paid incidence has not been above pricing. You've actually- That's right. throughout the whole process, but your recoveries are clearly better than pricing. Does that suggest that the loss ratio that we are showing right now is favorable relative to your own pricing and your own expectations? You want to try to reconcile, Roger, between incurred loss ratio versus GAAP? Yes, absolutely. So what you see here is our GAAP reported loss ratio. And what you are seeing is the benefits of the recovery rates being above our pricing expectations. Those are on claims that were incurred over a long historical period of time, right? So as we think about pricing, we think about pricing for today's premiums and today's lives, and the claims that we will incur today that will impact kind of the reserves going forward. I think the way to respond to that is to the extent that these long-term, above-expectation recovery rates continue, then we should continue to see favorable results relative to our pricing expected loss ratios going forward. And we do not count on that. Obviously, when we price the business today, we price it at our pricing expectations. Are you not seeing anything that changes those recovery patterns as of now? We are not, no. Okay, great. Thanks. Ed? Thank you. Ed Spehar from BofA Merrill. Question on the U.K. I think you referred to rate increases in 2011. The trends have been better in terms of competitors following. If that's the case, then the expectation of rate increases in 2012 to offset interest rate declines, you would think competitors would react as well. Yet you have 0% to 3% earnings growth in your outlook, especially when you consider that the third quarter was well off of the normal trend, and you've identified that as just a blip. Why wouldn't all of these factors suggest better growth in 2012 versus 2011? Thanks for the question. Yeah. Taking the first point, we are seeing some competitors respond to rate increases. I would hope that because a number of our competitors have other products that will be affected by the interest rate environments other than plain annuity providers, that they will look at the interest rate environment and respond across their product portfolio. But that's an aspiration. I don't think we know that's true yet, so we'll have to wait and see. In terms of why it doesn't all come through in 2012, effectively what's happening there is, and Rick McKenney will refer to this a little bit, we've got two things going on. One is it takes us a while to get the rate through the book. So we actually earn the premium over two years, not in one year. And the interest rate environments in terms of when we're investing the money, we're investing money next year, which we'll have to take in at lower rates. So it's the combination of the money that you're actually investing and how long it takes you to get rate through. We would expect it to take us about two years to get the full rate through to offset the interest rate reduction in the new money rates. So that's the sort of the simple answer. And I think, as I said, Rick McKenney will talk a bit more about those dynamics in his section. Yeah. Very I would say just stating that a little different way. We expect the positive impacts of the rate increases to be offset by a reducing discount rate on reserves. Very similar to the pattern we have in the U.S. The outlook takes into account some change in the discount rate next year versus this year? Yes. Absolutely. I think you showed a chart in here. Did you tell us what 100 basis points is? You would need 6% price increase for 100 basis points? Yes. Should we be assuming that discount rates are coming down by at least 100 basis points? The 6% is on kind of a block issue of new business. The discount rate is on a portfolio, so they are not really necessarily comparable. Discount rate changes in the U.K. would be on the whole portfolio reserves. Yes not just on. Yes, that's right. That's different than the U.S. then, right? Yes. Can you give us some sense of the impact that you factored in for just that for next year? The discount rate's coming down. Can I get back to you on that? I'll just get the exact number. I just want to get the exact number on that before I quote it. Okay. It would seem like that could be a meaningful number then in terms of earnings headwind. Yeah. It's around about $10 million of earnings headwind that we're covering. Okay, thanks. Oh, wait. Okay. Couldn't see by the poll. Hi, Colin Devine, Citi. Kevin, three questions. First, starting, I guess, a couple of years ago with Social Security, when you changed your claims process you went to if Social Security approves a claim, you approve the claim. Can you give us a bit of a look back on that, how that has played out? How much Social Security offsets are reducing your claims? That's question one, or what you're paying out. Two, with respect to the long-term care block, am I correct that the average age of your block is only about 52, so it's considerably younger than the industry, which should give you more time to get rate hikes through and the benefit of that? What sort of actual incidents do you have on the long-term care block? I would think it's pretty low. Finally, for both new issue IDI and long-term care, what are the ROEs on those blocks today and what are you targeting over the next three years? Okay, let me try to tick them off one at a time here. On the offset side, we have had continued solid performance in terms of offsets. We are running well above 100% in terms of actual to expected offset performance within LTD as a result of our focus on Social Security. We have benefited from, I think, a fairly liberal period of time in terms of Social Security approvals in comparison to maybe back in the 1990s. That has flowed through into earnings and claims performance and lower loss ratios for us on the first one. Second one, your average age, I do not know if it is 52 or not in total because it is quite different between group and individual. Group is, I think, in the high 40s. 43. Age 43. Individual is probably in the 60s somewhere. 65. 65. I think probably that is where you come up with the 52. There is quite a significant difference in terms of average age, much longer period of time for us to get rate increase impacts in terms of group long-term care. Group long-term care also has slightly different lapse rates because it is tied to the employer's contribution, the employer's involvement versus individual. In terms of incidence rates are really low. Most of the movement in the long-term care loss ratio has been driven by build up of active life reserves anticipating mortality, morbidity, and interest rate pressures. ROEs? IDI ROEs. IDI ROEs, if you think about the recently issued business, we are looking at ROEs that are sort of in the low double digits. Think about them in sort of the 11%-13% range. Then in terms of the closed block disability, that business went through a gross premium valuation back in 2004. The assumptions remain appropriate for that. Therefore, the returns that we achieve on that business tend to be low single-digit ROEs. Long-term care. Just the ROE on long-term care. I think that is the other missing piece here. The ROE on long-term care, you think about in terms of high single digits, and right now different between individual long-term care and group long-term care. Individual long-term care being in the low single digits and group long-term care being in the 15%+ range. Right here. Hi, Randy Binner with FBR. Just a couple in the U.S. First with IDI, is there any kind of update on potential strategic solutions there? I feel like that was something that was maybe talked about more in the past, but is there anything that can be done with IDI? Yeah, we manage the IDI business as what we call one of our value businesses. We look for sort of moderate growth, primarily because it occupies a fair amount of capital. It is also a very targeted business around executive carve-out kind of business. To the extent that we can, we package it up with group. But I think for the most part, that business, I think, maintains a fairly small and unique niche part of our portfolio. The distribution system also is kind of a niche part of our distribution system. It is not as broad as our group brokerage and voluntary distribution system. In terms of product changes for the future, I think we are sort of strategically evaluating where do we go with IDI from here? Do we maintain sort of that approach to the product as it is currently designed, or do we maybe start to think about broadening the definition of what our individual portfolio looks like? I guess I should have said the closed block in particular. If there was anything that can be done with the closed block in particular. Remember when we segmented the block back in 2004, we put a reinsurance contract in place, which was effectively a cumulative stop loss reinsurance arrangement that capped our total benefit exposure on that book of business. That remains in place. In 2007, 2008, somewhere around there, we did the IDI closed block securitization, and the purpose there was to free up as much capital as we could that was sitting behind that business and that was very successful. Today, in terms of other options, we've capped the risk. We've taken out as much capital as we can out of the business. We'll continue to look for other opportunities to remove more capital from that business or find ways to further enhance the reinsurance. But right now in the marketplace, there's really not a lot of business out there. One more in the U.S., if I could. It sounds like there's more price increases coming in the group disability area. If you said it and I missed it, I apologize, but do you anticipate competitors following along with that? Are they there already? Are they going to catch up with you? Just kind of higher level commentary on where pricing is in U.S. DI, group DI. You would expect that all of our competitors are experiencing the same pressures on discount rates and interest rates that we are. A number of competitors over the last year have mentioned in one form or another that they need to move rates up and expand their renewal programs. We've seen some evidence of that. I think on the third quarter call, I mentioned that in the small and mid-size market, I thought we saw some level of hardening there. But I'm not going to get sort of wild and crazy in terms of predicting what competitors are going to do. I expect that they're facing the same incidence volatility, and interest rates that we are, and that they would act on it. Hub. Okay, got you. Hi, yeah. Steven Schwartz, Raymond James. Yes, sir. Follow-up first on the Social Security offsets. You mentioned, Kevin, that there was a relatively liberal period. I think it was The New York Times, maybe it was Wall Street Journal, there was an article about some judge, I think, down in West Virginia. Kentucky who was approving everything. Do you see that changing? Given where deficits are, budget problems, do you see that changing? It's hard to tell. Social Security has got a lot of work to do in terms of modernization of its systems and its processes. There's a wide variability by region of the country and by Social Security office as to how they handle and process disability claims. I think the political pressures swing both ways in terms of Social Security efficiency on the one hand, Social Security approval rates on the other. I think there are a number of bills either being considered or in the process of being introduced around changing the administrative law judge process. But it's way too early to sort of predict how that's going to go, and I think our focus is on just continuing to do the right thing by our claimant beneficiaries in terms of making sure that they get access to Social Security benefits if they deserve them. Because it affects not just what they receive from us in terms of LTD, but it affects their Medicare eligibility and their future Social Security retirement. But I wouldn't want to predict what's going to happen with Social Security from here. On Group LTC. On that, maybe I don't understand how the pricing of this works. I haven't bought it, and I understand how the individual works. Suppose I'm a 57-year-old guy at Raymond James. I bought a product five years earlier. I was 52. What am I going to see as this comes through? In terms of your rates? In terms of rate increase. Right. As somebody who's already got a Unum policy, am I going to see a rate increase? Can Raymond James say, "No, we're going to go to somebody else. We're going to go to Met? Yep. How is that all going to work? The group long-term care rating structure is very similar to the individual long-term care rating structure in that it is level premium, age-based premiums. As a Raymond James employee at age 52, if you bought the policy then, that is the premium that you would expect to pay for the remainder of your life, unless the insurer files for a rate increase similar to the individual long-term care line of business. It has to go in to file rate increases in all the states and get approvals in those states. As those states provide approvals to do those rate increases, you need justification. You just can't say, "Okay, I'm going to go out and raise rates." You've got to show that your experience is not emerging as your pricing would have expected. Then once you get that approval for that rate increase, you can then contact the policyholders and the employer and let them know that there is a rate increase coming through. So very similar to other individual guaranteed renewable products. Okay. On our intranet, I've been paying X for five years. Suddenly, I'm going to pay 1.3 to 1.5 times X, assuming the state of Illinois allows your rate increase. My HR department's going to tell me, does my HR department then go to MetLife or somebody else and go, "Hey, what are you doing here? They absolutely could. Just like any other coverage, they could choose to shop that around. I think the difficulty with long-term care from an individual perspective or an employer perspective, trying to go out and shop that coverage, is it is issue aged based. Over that period of time, you've aged five years or seven years or 10 years, and the rates for somebody 10 years older are going to be higher at that point anyway. So that individual or the employee needs to compare what is the increased premium that I would have to pay or my employees would have to pay staying with my existing carrier to going to a new carrier at new issue age rates. Okay. Thank you. Yeah. On the group side, we would go through a renewal process discussion with the employer as well. In all likelihood, much like we do on individual when we adjust rates, we also give the consumer the option to buy down the benefits as opposed to accept the rate increase. Right. Absolutely. One last question. Somebody has got a microphone back there. Yep. Yeah. Chris Giovanni, Goldman Sachs. Hey, Chris. Question on the U.K. The governor of the Bank of England was out today talking about, I guess, a markedly weaker economic growth in the U.K. as we go forward. So wanted to see why the expectations of sort of loss experience abating from here and then sort of the 6%-10% sales growth, how can that be achieved in that backdrop? Yeah. We have not seen a big impact from economic pressures in the U.K. on our loss experience. Our insured base is significantly different than the economy at large. It's largely white collar, management level. We just haven't seen it to date. To the extent we did see it, we would continue to react to it in pricing. Another mitigating factor is the investments we're making in our claims operation and the new processes we are putting in place. Should be a good offset to that going forward as well. We've seen significant deterioration in the U.K. economy already without impacting our results in an appreciable way. We would expect that the impact going forward would be manageable as well. Just for Kevin McCarthy, if we look at the lowering of the discount rate on the group disability as well as the IDI book, it looks like that slows earnings by 2%-3% as we move forward here. As we look at your guidance for growth last year versus this year, is the remaining delta just pressure on interest rates from an investment income standpoint, or where do we pick up the additional sort of 2-3 points? Yeah. The additional pressure is lack of top line from that laggard sort of normal growth compared to what we were thinking was going to happen last year. I think last year we came into this same kind of day and thought we'd be at the 1%-2% sort of normal growth rate. Instead, year to date, I think we're at negative 0.4. We're now sort of much more conservative projecting that forward in terms of top-line effect. That dampens earnings, and then lower net investment income as a result of the low reinvestment environment. Thank you. Great. All right. Thank you all very much. We'll take, I guess, a 5-minute sort of stretch break. Don't get too far away while we transition to Rick and Breege. Thank you very much. Give you a minute. Oh, no. Oh, okay. Thought I was back at the safe harbor statement. Tom, safe harbor statement? Okay. It came back up. Okay, thank you. Let me introduce myself, Rick McKenney, the CFO of Unum. I'm going to take you through the financial overview today. I'm going to do it in a couple of different parts, talk about some trends that we see in our business today. I'm going to talk about the outlook. Breege Farrell, our Chief Investment Officer, is going to come and talk in some detail about the credit and our investment portfolio. Then I'm going to spend some time on interest rates and capital management and wrap it up with a Q&A. Let me start out with some key messages. If we went back a year to our Investor Day last year, we're dealing with a little bit different environment today. Certainly, the economic headwinds, we would not have expected to persist as they have. The employment picture is still pretty tough, as was mentioned a couple of times, and with low interest rates. I think it's important to note that as we go into that, our results have actually been very consistent through that period of time. As we talk about the company today, it's important to also know what we don't have in our portfolio. The overall insurance industry is having some challenges against it, but we have very limited exposure to what's going on in Europe today. Our credit exposure looks very good. That Breege will take you through. We have virtually no equity market exposure in our business. Then when we go through interest rates, I'll take you through in some detail, very manageable view in terms of what we can do with regards to interest rates, our portfolios on multiple fronts in terms of how we manage through them. Through that period of time, most importantly, I think we've actually maintained a very good capital position. We've maintained strength, and at the same time, we view that strength to respond to a pretty dynamic environment. We've been able to buy back our shares at a discount as an action and overall, I think has served us very well. Despite actually having that capital strength, our return on equity is still quite high, and I'll take you through that in a little bit of detail, but we're still generating overall good return on equity with those positions that we believe are excess capital. Finally, most importantly, you heard from our business members today, we are investing for growth of the business. As the economy turns, making sure that we're well-positioned across the board to deal with that growth, we're still putting money directly into our businesses at the same time and returning that capital to shareholders. Let me take you through a little bit of a view of 2011 shape on a variety of fronts, how our earnings look. As I mentioned, our EPS is on track 6%-12%. We would have mentioned that on our third quarter call. Despite these many challenges that we have in front of us, the earnings generation, capital generation of the business is still quite good. As you go through and talk about the risk experience that we saw in the third quarter, I think our team did a good job of taking you through some of those details. We did see a little bit of volatility. We are in the risk business. But I think we see some of those settling down as we get here towards the back end of the year. You will see volatility in our business, but still continuing very good returns across the board. When we look at what we've got for the overall return of shareholders, a very stable revenue base. I'll take you through that. Some good solid risk results and also the commitment to expense management in conjunction with risk management continues to be our hallmark. Let me take you through on the financial front, starting with the earnings. You've seen this chart a number of times, continuing to generate good earnings growth across the board. Year to date, we've seen 7% earnings growth in the business, so we still see a very good trajectory. I think importantly, we always mention this is we went through the credit crisis and still saw these earnings trajectories grow within the business. It gets back to our stable results that we've seen and the protection businesses that we write. You also see through the last 12 months, capital redeployment, as we mentioned last year at Investor Day, has been an important part of the earnings growth that we've seen today, the EPS growth that we've seen. So that stable environment with good capital generation has been, certainly over the last 18 months, how we continue to generate growth in the company. Taking you through on the sales front, you heard a little bit about this, but when you look across the board, our Unum US, and I'm breaking this into our growth segments, our Unum US core and voluntary business has seen some growth, good growth over the last several years, despite what we've seen in the employment picture. We'll continue to look to invest in the growth in these two businesses. We see it as a very important part, as Tom mentioned earlier, and it's serving a great need in the U.S. On the upper right-hand side, a different story in Unum UK that you've seen. We saw some very good growth if you go back to 2009. But I think what I'd highlight is if you look at where we are today and the run rates that we're at today, our sales run rates right around that 2008 level. Still we're seeing good sales growth. We had a couple of years where sales grew a little bit faster than you expect. Colonial Life, right around that 5% premium growth, a little bit more challenging growth on the sales side. Importantly, even within the Colonial Life business, there's really three subsegments, and the core subsegment we have continues to grow very nicely. I want to take a couple pages to take you through premiums. We talk often about sales. Getting back to premiums, you'll see as we aggregate across the board, premium's pretty flat. I think you need to disaggregate that a little bit to understand where the premiums are growing within our business. First, on the Unum US side of the group benefits, what you would see going back to 2006 is the rundown of the large case business. You've seen that start to flatten out here as we've got into 2010, 2011. We'll see that running at about the same level. That's really the story in terms of the premium challenges we've had in our business on that front. On the voluntary side, you'll see very good growth. The premiums continue to grow in that business. We think that is where the markets are going to continue to grow, and we'll be part of that growth trend. On both of these, you'd see persistency levels that have been very stable. Talk a lot about sales, but it's equally as important in terms of what we're able to keep from a business perspective. You'll see that on the group benefit side as well as on the voluntary side, very good and stable persistency levels. A little bit different story when you go to the U.K. We have seen premiums come down over the last several years. That's really a price story. It's not necessarily as much about the amount of business that we have on the books. The team there has worked very hard to turn that corner on that front, and so we've started to see that premium line turn around. You've seen persistency through that period of time, very high. In 2010, it's come back in a little bit, but I think we're in a range of persistency that we think is a good balance between our sales and premium levels and what we're keeping on the books. On the right-hand side, very solid, above 75% persistency in Colonial Life, and a premium that is very consistently growing right around that 5% range at very good profit levels. Turning to the next piece, which is the benefit ratio trends of what's happening on the loss side. You've heard some of the details about this, but I think if you go back over the last several years, starting first with Colonial Life, you'd see we were at a 52% level. We saw very good years through the 2007 through 2010. Back up in that 52.5% range that we saw in the third quarter. But it's still very profitable business. I wouldn't think that that trend. We expect that trend will flatten out from here for a variety of reasons. Still, once again, we talked about the returns on this business are very good, very high and very stable. This yellow bar indicates what's happened in the U.K. over the last several years. Once again, through that 2007-2010 period of time, we really were seeing losses that were unsustainable, loss ratios that were unsustainable. I think we articulated that pretty well at the time. We are back a little bit higher in the U.K. than we expected, in the low 70s. That is something that we are continuing to deal with from a pricing perspective, the team is dealing with there. But still very good returns. As we mentioned, these are ROEs that we are still seeing in the high teens to 20% type returns. When you go to the U.S., two lines here. The top one is our long-term disability line of business. Loss ratio that year to date is down around 85%, just below. Combined with our life businesses, as well as voluntary in the 75% range, a good consistent trend line that we have seen on the way down. It is stabilizing now where it is today, but generating good returns overall for the business. That takes us to what we are seeing from a total return on equity. Start first with our core lines of business. You can see our core lines of business generating right around a 13% return on equity overall for the business. Next slide, I will disaggregate this a little bit. When you look actually with our total core, with the excess capital that we are holding with the holding company, as well as blended in with our closed individual disability blocks, still generating an 11% return. When you take out some of that excess capital, which we are still holding today, you are still seeing very good returns for our business overall. When you take it down by product line, here on slide 75, there are a couple of segments here on the left-hand side. We have three major segments of our business that are generating over 15% return on equity. Very strong returns we have seen over that period of time. The next line on our group disability line, over 13%, or right around 13%, still above our overall aggregate level. Good returns on that line. When you go to supplementary and voluntary, good businesses within there, but also within there depressing those returns somewhat is our long-term care business. On the far right, you see the closed disability block at 2%. Overall, we have a balance of return on equities within our business, generating right around a combined level of around that 11% and the core business closer to 13%. With that, I am going to take a pause here and turn it over to Breege Farrell, our Chief Investment Officer. Breege has been with us for the last six months. I will let her take a deep dive on credit. I will come back on interest rates and capital shortly thereafter. Breege? Thank you. Thanks, Rick, and welcome to our guests. The next few minutes and not too many slides, I am going to spend time talking about our investment portfolio. It is kind of a neat thing to be doing right now. This morning when I was talking to my youngest, she said, "What are you going to be talking about today?" I said, "Investments and what we are doing in the markets and how it is going." Even though she is 10, she said, "Oh my gosh, that is like the worst thing happening in the world." I said, "No, actually, I got a greater risk of boring you because we do not have that much exciting going on." That is because we do have an extremely stable, strong portfolio, which is generating some very good net interest income for us and will continue to do so for the foreseeable future. It is kind of an ironic thing to be standing here with everything going on in the markets and have a blessedly boring story to tell you. Before I dive into that, though, I do want to underscore for those of you who may not have heard it, and I am new here, so you may all know it better than I do. We are a credit shop, and you will see that underlying most of what I talk about, and you have heard it mentioned by others. That is a significant underpinning of why things are fairly stable right now. That is our core expertise, and it for the foreseeable future is where you will probably see us investing. We are going to start with looking at the net interest income over several years. As you can see, this tells you the story of a stable, not too rapidly changing income stream. The things I think you should take away from this though, are looking back several years into the 2007, 2008, 2009 period. This is where the benefits of being in the portfolio we hold really showed up because you did not see the kind of losses that you would see from portfolios that were much more diversified into different types of asset classes. More recently, if you look at what is going on, you see that stability continues to hold in. That is a function, again, of not being in some of the things that are more problematic right now, and also the fact that our yields on the overall portfolio are holding up fairly well. This slide shows you the yields over a decade, and as you can see, they have slowly trended down, mostly as a function of interest rates in general. You will notice that in the last three periods where we are showing you two years and then the four quarters through September, the overall portfolio yields are holding up much better than you would expect, given what is going on with Treasury yields. Rick will go into this in a little more detail later, but the primary reason behind this is the fact that our portfolio tends to run off fairly slowly, and he is going to look at it by business line. You will see that our investable cash flow each year is a very small percent of our portfolio, so it takes quite a number of years before a low-interest rate environment brings that overall yield down. Another benefit we have is that we have a hedge program that we put on, I believe in 2008. A five-year hedge, which is protecting us somewhat from interest rates and will continue to do so through the end of 2013. The next slide is a fairly standard group of charts that any investor would show you, particularly in the fixed income markets. The first one is the default experience. I do not expect anyone to get terribly excited about the low default rates we are seeing currently. The entire market is seeing low default rates. As you can see, looking back at the period of much higher defaults, 2008 and 2009, we had significantly better performance than the market. This again, is singularly attributable to the kind of investments we hold. We tend to be in sectors as well as types of securities, even within the fixed income market, where we have most of our investments, which did not experience much defaults. We can certainly go into that in more detail later if you would like. The quality of the portfolio, which we measure by the weighted average rating score, something a lot of people track. You can see we hover right in there about the mid A3 level. It has trended down very slightly over the last couple of years. The reason for that is that we had a much larger percent of our holdings in triple A MBS and government agency portfolios. The rest of our investments, which are primarily corporates, we have held at the same quality level. As those get repaid, it is having a slight impact. We have run this out several years, and it takes a long time to make too much difference, but we watch that closely. Our watchlist is the other thing that we look at. As you can see, you cannot ask for sort of a better story. I guess the only thing I would say is that whenever I look at the watchlist of investors, I always ask the question, well, okay, did your watchlist decline because you wrote it off or you sold it? Or did your watchlist decline because actually there was not a problem? We have studied that, and in fact, if you were to go back a couple of years and look at what was put on the watchlist during the financial crisis, a significant amount and well over half was never turned into a loss position in our portfolio. It just simply came off the watchlist as there was a recovery and less panic in the market. The next slide gives you an overall look at where we are invested. As I said, credit is us. That is what we do. That is our strong suit. You can see the predominant investment for us is in investment-grade corporates, just under 60%. If you added together the things that we consider the hardcore credit asset classes, so investment-grade corporates, private placements, high-yield bonds, and commercial mortgage loans, it would get up to 80% of our total portfolio. This is what we do, and it is not atypical for insurance companies, but even relative to other insurance companies, we would have a much greater percentage of our total assets in those sectors. The portfolio mix, which is shown on the right side, is predominantly in the sweet spot of the single A, triple B, which gets you to that A3 average. That would be what you would expect to see given our corporate investments, as those predominantly do come in in the triple B space and the lower single A space. The little box at the bottom for those of you who, it is a little hard to see on the slide, but it shows you that we are more weighted to the two upper tranches of that triple B space versus the lower one. We do not have a box, but that would also be true in our high-yield portfolios. If you were to look at the mix, it would be much, much more heavily double B weighted versus a single B weighting. I am going to move on to another measure, which we get this chart from Moody's. This is kind of interesting. I did not see this as often before the financial crisis where investors and insurance company money managers were looking at risk assets as a percent of equity. It used to be a percent of assets, then suddenly when things got so bad that people actually had some real problems, they started looking at it as a percent of equity or percent of capital. Moody's has produced this chart, which demonstrates looking at the broad peer group where we stand, and you can see that we are in the lower percentage weighting of high-risk assets. It is important to ask when you are looking at this, what is in there? Because generally these measures would include anything that is not an investment-grade bond or investment. It would have equity, it would have alternatives, it would have high-yield bonds, a big mix. For us, it would be predominantly high-yield bonds. This slide allows us to give you a little bit of an insight into how we invest. Some of this is driven by our liabilities. They tend to be somewhat longer, and that skews the sectors that we pick. We do go for some of the sectors, the classic one being utilities, where you would get the longer issuers to match our liabilities. Away from that, what this predominantly reflects is our outlook. You will see the overweight in the utilities, in the consumer non-cyclicals, energy, capital goods, that kind of thing. We like asset-rich type companies. We like companies that tend to be less volatile with recessions, and that is true in our U.S., and U.K., and European investments. We have for several years been significantly underweight financials or consumer cyclicals for obvious reasons. You know as well as I do, this is a very tough time, and we are not looking for significant growth. We stick where we think you will have a little bit more safety. The next slide, actually the next two slides, we are going to dive a little bit deeper into the commercial loan portfolio and then into the Eurozone, because those are topics of interest that we get questions on. The commercial loan portfolio is not a huge percentage of our book, but it is still important to us. The regional one, which is on the right, shows you that we are pretty diversified across the country. The pie chart on the left shows you where we prefer to be, and it is predominantly office and industrial space versus retail or apartments. And again, this is reflective of the fact that we view the retail and apartment space as much more volatile with the economy in general, and the office and industrial space being somewhat longer-term leases, a little easier to peg, and a little safer place to be. I would tell you that within all of those categories, we are fairly conservative investors in the sense that we would only do loans, generally speaking, to established real estate in partnerships or investors, but we wouldn't take on construction risk or that kind of thing. Then lastly, maybe this is the most exciting part, is the geographic investment exposure. As you can see from the chart, we are predominantly in the U.S. Three quarters of our investments are in the U.S. Looking at the Eurozone specifically, just under 10% is in the U.K. This makes a lot of sense because obviously we have a big U.K. business, so that's where you'd expect to see some assets. The chart on the right breaks down into corporate sovereign and financials, where those assets are. The U.K. investments would mirror the U.S. investments. We predominantly are in corporates, very little in financials. We do have more government exposure in the U.K., and that's primarily driven by our U.K. gilt portfolio, which matches our inflation-sensitive product there, which we don't have that in the U.S. Then looking away from the U.K., the other Eurozone, excluding the PIGS, is very similar. So France, Germany, we would have predominantly corporates, fairly low government, and financial exposure. Then when you delve into the PIG countries specifically, we have only corporate exposure, and that's been true for a while. We didn't have sovereign exposure or any direct bank exposure. And within that, if you dove in, we would predominantly be in either utilities, national telephone companies, that kind of thing, or in companies where you don't have the bulk of the revenues being generated from the country. So we consider that to be very manageable exposure and something we're obviously very happy to have right now given everything that's going on. Then other international, which is 11%, would be Australia, New Zealand, Brazil. We have stuff for very small percentages all over the world. So I think I've given you the picture. Like I said, we're almost boring in the sense that credit is us. We like it that way. We don't plan to take any or make any major changes in the portfolio. So you're not likely to see us going into any large way into alternatives or equities away from our core expertise and where we think it's safest to be, which is the U.S. and developed world, stronger countries. And we continue to like the corporate market. And we continue to watch the risk assets very carefully. We monitor that watchlist, but so far things are going fairly well. And the fact that we are so U.S.-based is helpful because, as you all know, U.S. companies are in a fairly strong position and not quick to change that because they're as worried about the economy as we are. And we expect that the investment portfolio will continue to contribute that net interest income. And where we get a long-term lower interest rate environment, if we do, which is still a little bit hard to call, but if we got a very long-term lower interest rate environment, we expect we would be able to make some changes in the business, which Rick McKenney will talk more about. Thank you. Thanks, Brij. Let me take you directly from the credit side of the investment portfolio and talk a little bit about interest rates and our exposure there. I think the most important thing when you look at our interest rates, this is a challenge across the insurance space, financial institutions at large with the low interest rates we are seeing today. We can certainly manage through that in the near term. Even over the longer term, our products actually have characteristics which allow us to manage this business for a longer-term impact of sustained lower rates. Four reasons. Let me take you through those four reasons. I will do it quickly with bullet points, then I will give you examples of each. One is the limited amount of cash flow that we have to put to work behind our business. As Breege Farrell said, we invest and hold for the long term, so we do not have a tremendous amount of cash flow to put to work relative to the size of our portfolio. Throughout the credit crisis, we were net investors in this market, so we allowed our margins to build up over the last several years. I will take you through some examples of that. That certainly provides us some near-term cushion as we go through a more challenging interest rate environment. Third, when you look at our interest rate exposures, we do have hedges on. We wish we had more and that they lasted for longer, but those hedges, certainly in the near term, help us out across multiple of our product lines, and I will take you through that. Lastly, and most importantly, when you think over the longer term, we can price for this. You heard that from Kevin McCarthy and from the team talking about putting those prices through. It does not happen overnight. You have got to push them through the market. But when you think of the longer term, we can price for this and bring it through our book of business. I think that is probably the most important thing. Let us take these apart in a little bit more detail. First is when you look at our overall portfolio on the next slide, we have about $43 billion in assets. Out of that $43 billion, we have new money to invest of about $2.9 billion last year. It is a little bit higher than we had this year. We had about $2.5 billion this year. But when you break that down, you are looking at about $10 million per investable day. For the business that we are in, it is very manageable. It allows us to be very choosy, and we will show that to you on the next page. When you think of backing specific product lines, two that I would note, long-term care is one that is asset intensive. When you look at the $650 million we have to invest in a year, about a third of that is hedged at high rates today. Think about those high rates that we have those hedged at today and one-third of the book coming in at those higher rates. If you blend in some more challenge lower rates on the next two-thirds of the investments, we certainly over the next couple of years can achieve our targets on that front. On the Unum US LTD business, about $670 million. As we mentioned on the pricing side, I think the important thing here is hitting our targets, being choosy. Also, a couple of asset classes that fit well with this are going to be our mortgage loans we put behind this and some of our private placements, which have a very similar tenor. That is how we will hit our targets on the LTD side. Then the next three things to note, first would be the closed block, which we talked about. Effectively there, think about cash flows in, paying claims out, so very little cash flow, about $170 million to put to work there. $100 million in the individual disability recently issued, so low levels of cash flow required there. Then Unum UK at $400 million. A lot higher this year, just given some of the maturities that we have there, and so we will have to continue to work through that. Peter and Jack talked about some of the pricing actions that we will take to account for some of that. When you think about the cash flows we have to put to work today, Bree and her team certainly can manage this in being very choosy, getting good assets over a period of time. When you think about that, I would show you the next slide on page 91, which shows what has happened really over the last three years in terms of what we have gotten for purchase yield. Even third quarter of this year, you are still looking at pretty close to a 6% type purchase yield that we have had. Part of that, back in fourth quarter of 2008, in the depths of the credit crisis, we were bringing in assets, good assets, good single A type assets at very high rates. Going forward, this will be a little bit more challenging, but I would go back very quickly to us being choosy and getting good assets. Even as we have been here over the last month or month and a half in some of these, we are still able to get some pretty good assets to meet some of our returns. I would certainly say, though, that it is more challenging as rates have dropped dramatically from the end of the second quarter. Then the example is the margins that I mentioned that we have. This is our Unum LTD block that we have right now sitting at around 100 basis point margin. What this chart does is rolls out over the next several years in terms of maturities coming off and cash flows coming in relative to our discount rates. Yes, it is harder to get the yields in our portfolio, though we'll show over this period of time, it actually remains remarkably stable. But at the same time, those discount rates are coming down. This isn't because of changes we made in the last quarter. This is just a blending of discount rates that are coming down over time. We're actually going to see on the block we have today, this margin increase to 140 basis points given what we expect today. Now you have to add into that new business and new levels of discount rates, which are going to come in lower, which will blend that down in aggregate. But this is what we have on the books today, and so we feel very good about the margins we've built up and that those margins can sustain themselves as we look out over the next five years. The next piece to talk about is actually in our lines of business, and this gets back to the pricing. So on a qualitative basis, you actually can see across two grids. One, on the left-hand side, our interest rate dependency, how dependent are these products in terms of interest rates we bring into the margins overall. And across the bottom, the repricing flexibility. So when you look at this, these are many of our major product lines. As David Parker mentioned, in Colonial Life, as well as in our group life business in the U.S., these businesses don't depend tremendously on the movements in the interest rates. So although they can't be repriced very quickly, they don't have a tremendous amount of interest rate dependency. As I mentioned on the last page, the closed disability block, which is in the lower right-hand corner, we can't reprice that business. But the interest rate dependency where claims are paying off, or I should say new cash flows are paying off claims, we feel pretty good about. So that's kind of a big chunk of our overall portfolio. The next piece I put out there is our long-term disability blocks that we have both in the U.S. and the U.K. You would have heard both of those businesses talk about the repricing flexibility. So over the longer term, we have the ability to do that. So they would be high. And their interest rate dependency is pretty high. So when you look at that over time, we do need good interest rates behind that block of business to ultimately pay off the claims. Then the next category is our long-term care or individual disability recently issued. And this is the challenge when you look out there. Long-term care does have a high rate of interest rate dependency. The repricing flexibility, although we've gone through two rounds of repricing and we'll continue to push on that where appropriate, it is a little bit more challenging and does require more on that front. That is clearly the challenge. But I think if you go back to the last three examples in terms of why we feel okay about that's how we're going to battle back on the LTC. It's as we put bonds behind it, making sure they have the right spreads and continuing to do that. Let's put that into quantitative terms, and talk about what the world will look like for us over the next 5 years in doing some sensitivity analysis, particularly to what we see from the interest rate environment today. I'll take you to slide 94. If you look on the left-hand side, you'd see a normalized growth rate of around 6%. Last year at Investor Day, we would've told you normalized is around 5%-8%, so all we're doing is reflecting effectively over the next 5 years that next year's going to be a little bit slower, but we'd expect that to come back over the 5-year horizon. If we took the forward yield curve at 9/30, which we've put on there today, actually put the flat curve, you'd see about a 1% decrease in the growth rate of the business. That gets back to the overall interest rate sensitivity we have in the business. If you took 9/30 flat, which is a 10-year treasury of 192, a little bit lower than where we are today, you'd see over the same year, 5-year horizon, it would going down to about 4%. It is impactful to us. However, it's very manageable, so it's really about a reduced earnings rate trend as opposed to any real interest rate problems created from an overall earnings perspective. That's on the interest rate side. Let me importantly turn very quickly to the capital management side. When you look at capital management overall, it continues to be something that we've done very well. We actually look at a very sound capital base. We chose to actually build up our capital levels through some of the tougher times. Since that period of time, we've actually been able to use some of that excess capital to buy back our shares at very attractive rates. We continue to look out there for attractive opportunities from an M&A perspective. We certainly want to put money right back into our business and get some of those high returns we mentioned. But we have shown our capacity to go out there and buy back stock, to redeploy our capital, both through share repurchase and through dividends over the last several years. When you look at that, take it across a couple of dimensions. First is on our risk-based capital. When you look at our risk-based capital today at the end of the third quarter, right around 400%. If you went back to 2002, it's about double the levels we would've seen back in that time period. 400% for our mix of business is actually a very strong number. If you look at the holding company cash flows, if I took you back to last year, and we've highlighted here what we actually did some pre-financing of debt, right around $1 billion of cash and securities at the holding company. We've seen that come back in a little bit this year, but that gets back to our capital deployment, which I'll show you in the next page. But the orange line is important, which is one year fixed coverage of interest and dividends, and we're still maintaining about 2.5 times that level at our holding company. And we think that's a good place to be given some of the challenges that continue in the marketplace. On the leverage front, a very stable 21%-22%. The blip you saw last year was that pre-financing that we did of a security that actually we refunded in February of this year. Still holding, we think, very low leverage, right around 20%-21%, gives us a lot of flexibility there, and utilizing this leverage when we see the need to do so. I mentioned the debts maturity that we actually retired earlier in this year. I think the key thing to note here is on slide 100, that we go out to 2015 until we see our next maturity. Nothing refinancing, and given some of the rates we see out there, that may actually be a positive thing today. Certainly from a rollover perspective, we actually don't see anything out there until 2015. You can see the debt stack that we have out there is actually very well laddered. It takes you back to the page that Tom mentioned, capital generation model and our statutory earnings. This year we continue to see very good earnings, over $600 million, $600 million-$650 million that we talked about. Despite some of the challenges in the market and the world around us, this capital generation model stays very much intact. We still have good statutory cash flows both here in the U.S. as well as out of our U.K. business. We're using money for the holding company. Our actual use for growth in the business is pretty flat, as you look at it today, as we would expect. That $500 million per year model stays intact, and we'll talk about that in terms of how we see it in the outlook. But as you take that model, I think it's important to actually go back over the last several years and show what we did with that model. You take over the last 3 years, going back to the beginning of 2009, we've generated a significant amount of capital, as we talked about. We've used that capital on a couple of fronts. One is we bought back almost $1 billion of stock at very attractive prices through that period of time. We've paid out dividends at an ever-increasing rate, to about $309 million. Then we put $250 million in the pension, given where interest rates have gone as well. We've taken that capital, put it to work, and at the same time, if you look at the right-hand side, we've also built up the capital within the company. From an RBC or in our U.S. subsidiaries, capital's gone up over $600 million. Our holding company levels have gone up for over $100 million. You'll see a good balance here of good capital generation, utilizing that capital and returning it to our shareholders, and continuing to maintain very sound capital levels at the overall. Let's talk about what we're going to do next year. Last year, you will recall I brought a slide out which talked about our excess capital levels and where we see them trending down over time. Actually, there was a question earlier. I don't think anything has changed on that front. We looked out over a multi-year timeframe. We talked about our RBC levels coming down to a level of 350%. We talked about our HoldCo securities coming down to a level more like 2 times to 1 time over a period of time. But I could tell you relative to last year, we have done some of that this year. As we look out next year, we probably won't actually bring down these excess capital levels. You'll see that as we go through our projection. Randy had the question earlier. I do not think anything has actually changed. It is just as we look out to the risks around the world today, we think now is not the time to be actually pulling down those excess capital levels. At the same time, we will utilize and we will redeploy the capital that we are generating on an ongoing basis. To do that, let me remind you of the actions we have taken through 2008. I kind of showed it in aggregate in the capital generation model. Going back over the last several years, we have certainly been willing to buy back our shares at a discount. We have done so actively over the course of late last year as well through the rest of this year. At the same time, we are also increasing our dividend at a very steady rate. We think giving back our capital to our shareholders as we generate it continues to be a very important thing. As I take you through that operating mechanism, let us look at the capital outlook this year. We expect to end this year, as we have said all year, in the 375%-400% range, leverage right around 21%-22%, right in that area, and then ending the year with holding company capital of $600 million to $800 million, or roughly up to about 3 times our annual needs. As we look forward to next year, as opposed to bringing these levels down, we actually expect that we will maintain them in the 375-400, reflecting the environment around us. Leverage will go up a little bit, and this is really a result of some of the accounting changes that are going through as of 1/1, and then the holding company cash and marketable securities still maintaining a very healthy level. As we go through that, we feel good about our capital generation. We expect we will still buy a fair bit of stock in 2012. As we go through that period of time, we will maintain a very healthy capital level reflective of the environment around us. Let me take that to the overall outlook and give you some of the points key to our outlook and what we are looking at next year. We have talked to you about the DAC impact that we have coming down. Next year will look very similar other than that to what it did this year. We are not expecting a tremendous amount of natural growth in the business. We probably were expecting more going into this year than we are expecting going into next year. We do expect to buy back $500 million of stock in 2012. Then we will see our tax rate come down a little bit as some of our low-income housing tax credits we purchased over the last several years get funded, and we will bring the tax rate down a little bit. I think the bottom line is we expect a year very similar to this year in terms of our earnings per share growth in the 6%-12% range, driven more so this year by capital. As we go forward, we will look for the core earnings growth. On slide 108, just as a quick housekeeping item, to give you some of the details around the DAC changes. Just as a reminder, actually, as part of that implementation, everyone will be recasting last year's results. We give you a by-segment view. The growth rates that we talk about in the business are off of those recast views. I think that should help you in terms of looking at what we see as the underlying fundamentals in each of our business lines. You can see a very small impact to earnings and then the $400 million-$600 million of assets impact that we see overall. This gives you a little bit more detail on that front. As I wrap up around the outlook, I think it is important to say, as you look at our outlook for the end of this year, we expect very much to be in our earnings per share range of 6%-12%, as we have said. Our return on equity will be right around that 11% level, as we would have expected. Premiums, right in the middle of our range, probably a little bit slower than we expected, but right around 1%. We actually think that we are very consistent with what we would have seen in Investor Day, despite all the changes that have occurred in the world around us over the last year. In 2012, you have seen a couple of times we are expecting earnings growth in our business units to be a little bit slower this year in the low single digit type level, down to around 0%. Our closed block, as you wrap that in, still about 0%-3% earnings growth fundamental. I would mention that part of the slowdown of the earnings growth is also the amount of capital that we are pulling out of the business and taking investable assets out to actually buy back our shares, actually depressing that somewhat. You can see that coming through in the earnings per share, where we still see that growing about 6%-12% with some of the capital management that we are doing and ending the year 2012, right around 11%-12% return on equity. I wrap it up the same way that Tom began the day. When you look at our business, we have very good fundamental trends in the business in terms of the demographic shifts that we have both here in the U.S. and the U.K. The disciplined growth is going to be key. You have heard that throughout our comments. We certainly are reflective of the environment that we are in today and our pricing for such. The financial foundation is strong today. We are not going to deplete that. We think that having a strong financial foundation gives us a lot of flexibility as we get into 2012. And then we also have a very realistic outlook for the future. As we go through that, we think we are reflecting what we see on the horizon and putting it through all of our financial results. Then finally, as Tom mentioned, we have a track record of meeting these commitments. You would have seen that in our 2011 results we are putting together this year, and we will look for that again in 2012. With that, I will stop and turn it over to questions and answer for myself, Breege, or Tom as well. We will wait for the microphone. Donna Halverstadt from Goldman Sachs. Back here. Hi, Donna. I feel like there is a little bit of disconnect in my perception of two different sets of comments. On the one hand, we had Tom's we have a bias to action speech, and then on the other hand, we have Rick's comments about 2012 is not the year to drive down to 350% RBC and one times HoldCo coverage. I was wondering if we could just have a bit more color on the we have an action to bias speech and what the message really was there. Yeah, no, I think very much what Tom was talking about, we have a bias to action, but a bias to action doesn't necessarily mean that you change your capital position from a strong position in a pretty difficult world. I don't see those inconsistent at all. I think it's very consistent. Sometimes the best action is actually to stay in path. Our bias is to action, but in this environment, I think it's going to be buying back $500 million of stock. Let's be clear, that's still a very big number in this environment where our shares are trading at a discount. That is still action-oriented, but we may not go as far down as we would have thought going back a year or so. Just as a quick follow up. I don't know, Tom, do you want to add anything? Any sort of additional action we should be thinking about on the business side beyond the strategies already discussed in detail? Well, actually, let me just pick up on what Rick said, actually. If you think of that list of bias to action actions, it did represent share buybacks, dividend increases, and things like that, but it also represented looking at lines of business and deciding are all those lines of business appropriate for the new world? Are there pricing actions that need to be taken in those lines of business? So I think, Rick, it is not just the share buybacks and the dividends, but if you look at that whole litany of things we put in that list, there are things we have to decide on as we go to 2012. Do they fit with the new world? So I think that is where the bias to action is very much a part of that message. Good chance, Paul. Thanks. Ryan Krueger with Daling. Rick, on the 2012 EPS guidance of 6%-12% growth, should we think of that off of a recast base for 2011? So with 2011 adjusted for the DAC impact? You should. Okay. You should. That's why I brought that comment out with some of those details. Okay. It's about, if you look at the DAC impact, it's 1%, roughly, somewhere in that range. I still consider that fairly immaterial and will be somewhere within that larger range of 6%-12%. Okay, and then on statutory cash flow testing, when you run the year-end test, if you come up with a deficiency in one product, are you allowed to, or is it Unum's practice to allow redundancies in other products to offset, or do you treat each product kind of as a standalone? Yeah, we certainly treat each product as a standalone. I'm looking at other people in terms of that. We certainly have looked at these products on a standalone basis in the past and are, I believe, required to do so. Go ahead, Juan. Yeah. Rick, you can aggregate across any of those. Yeah. I'm getting a different response, which is you can aggregate it. When I think about the cash flow testing, we have about six legal entities we look at. So within those legal entities, you are able to aggregate across that. Is long-term care one of them? No, it's actually in multiple entities. In three different entities. Yes, Bob. Just following up on what you just said, Tom, on long-term care, the message before I think had been, we don't really like individual that much, but group was a product line that you like a lot. You're now raising rates 30%-50%, taking very strong action and getting approval. Whether the product is saleable or not is not clear. Do you have the foot on the gas pedal, the brake, or is this just open for review, as you suggested? Yeah, I think, Bob, it's in the latter category. It's open for review. I think Roger Martin mentioned in his comments, as you look at the long-term care business, obviously, we've always been very close to it and testing ourselves in terms of the logic of staying in the business. If so, in what form? Does it fit with our commitment to the employer? Those are things we've looked at on a fairly regular basis. There's no doubt, I think as Roger said in his comments, the most recent drop in interest rates and some other things, I think, has accelerated that review. I think that's where, when I go back to the bias to action, we're not afraid to look at those kind of things with a new set of glasses as the environment changes. I'm not going to speculate now on the kinds of things that may come from that, but you should assume that's one of the areas we're looking at very carefully. Thank you. Hi. On buybacks, you've been somewhat opportunistic in the past. You've done more when the stock's gone down. Assuming if the stock price is around this level, should we assume that you'd front-end more of the buybacks in 2012 as you get the dividends from the subsidiaries, or are you planning on spreading them out throughout the year? Yeah, no, I would just stay consistent on what we've said is as prices are low, we will buy more, and as prices go up, we'll buy less. I probably wouldn't give you more than that. I think it will come in unevenly over time. I'd also remind you, we have different windows in terms of which we can buy which impact us relative to free trading within the market. Thus far, aside from an ASR that we did earlier in the year, we've been in the open market and buying back our shares. And then, obviously, your name's been mentioned in terms of M&A in the press. What's your view on M&A? Because you have been buying back at a decent pace. Does that imply that there aren't deals out there, or because as we talk to other companies, it seems like a lot of companies are interested in the group of benefits markets. There just aren't as many sellers out there. Are you looking for deals? Where would you look geographically? Would you be willing to expand beyond markets you're in, and what you're seeing in terms of the environment out there? Yeah. I always start the answer to this question with, we like our three businesses. Hopefully, you took away from the three discussions that we had about each of our businesses. We have some pretty good growth opportunities, even within those businesses. Having said that, we also have been very active in looking at transactions that could complement the businesses that we're in, either from a product and distribution point of view or from a geographic point of view. There's not that much to look at, to be honest with you. But I think we're looking at everything that's out there, that's available, that frankly fits the general characteristics we're looking at. Having said that, given the fact that you haven't seen us do anything, hopefully you sense we're being very disciplined about doing that because we measure any transaction like that against our ongoing business plan and the ability to put the capital we have to work in a way we're doing it by buybacks, which is a great leverage, as you know, in the EPS growth and some of the returns in the business. So we're looking. We think we're in the flow of most of the things that are relevant to our space, but again, incredibly disciplined. I'm not always sure that we're going to be the best buyer because we're frankly a pretty careful buyer in terms of I'm not willing to overpay and again, measuring any transaction against the ongoing business plan that Rick laid out. So that's a pretty high hurdle, actually. And then on long-term care, I think you mentioned in the previous comments that 91% or 90% plus the people where you've applied for rate hikes have accepted higher prices instead of maybe lowering their benefits. That's a lot different than what we've seen from other companies that have done rate increases in the past. Is that somewhat of a negative sign in terms of potential loss development down the road? Yeah. You have to look at that on a couple of different fronts. One is that those stats are about right in terms of 90% have accepted the rate hikes. I would note that our rate hikes are probably lower than what you've seen from others in the marketplace. So as we get into that, our rate hikes, the first two are not as much of a shock rate, so people would be more willing to accept that. But I wouldn't translate necessarily into any kind of loss development down the line. You guys microphone to Ed or Steve? Thank you, Rick McKenney. Steven Schwartz, Raymond James. Just to follow up on Ryan Krueger's question. So if an LTC reserve charge first, I'm assuming this is on a stat basis. Okay, if you've got LTC in three different companies, two companies may be on the aggregate, the capital adequacy is fine even with the LTC. One may not be. You take the reserve charge in that one. Yes, you would. Okay, that's- That is speculative, but yes. I am just- Formally, yes, you would. Okay. On a GAAP basis, it is going to run through DAC first, is that correct? That's right. Well, first of all, you'd look at the overall business, and then part of your net reserves you look at is on a DAC basis. So you'd be writing off your DAC first. Okay. So, all right. What should we think about the guidance that you gave if a charge were to happen in the fourth quarter? Does that change anything, or you just ignore it and keep on going on and on? No, I think very much we're going to keep going. I talked about the capital generation model. We see that very much intact as we continue to go forward. And so you're talking about something that is a little bit speculative, and I wouldn't go there. But we look at our business very much the same way as we go into 2012. Okay. So that 6 to 12 would be off of whatever it was without it. That's kind of what I'm getting at. I wouldn't answer that. All right. Bree, do you know off the top of your head what your financial exposure is in France? Oh, gosh. Let me see. No, I'd have to- We can get that quite quickly. give you exactly. Do you have it, Mark, because that's your day job. Give me a few minutes. Actually, give it to. I guess. Go ahead, Mark. We have time. Go ahead, Mark. Out of curiosity, is there any impact on the 6%-12% earnings growth from any additional hit, either in earnings or from additional contributions into the pension plan? Yeah, we wouldn't have done much on the pension plan in terms of the expectation around what the earnings trajectory would be around that. There's still a long way to go in terms of as we get towards the year-end. It is very point sensitive in terms of where the year-end ends up from both the equity market and total return of our portfolio and the discount rates we've assumed. Okay, so this does not incorporate any additional- Any change or additional funding into the pension, the underfunded piece of the pension plan? That is correct. Okay. I would mention that earlier in the year, our pension was up around 96%. It is kind of through six months. Our pension is pretty well funded, notwithstanding some of the challenges it has seen over the last couple of months. Right. Then I guess just thinking a little bit more about the RBC 325-400, the excess at the HoldCo over the level. We heard a fairly strong presentation on the quality of the investment portfolio. We heard a lot about the underlying businesses and a view on that. I guess when you think about not taking the excess down in 2012, I understand that the world is very uncertain right now. Is it more a question about a change in the investment portfolio? Is it more a change in the liability structure/the underlying businesses? When you think through all the different risks, what is it that you're thinking about most deeply? Yeah. I wouldn't isolate any one risk. I think Bree did a good job taking it through the investment portfolio. I don't have worries about our investment portfolio. I think our credit is very sound on that front. Then you go through all the other pieces. I wouldn't isolate anything. I think you have to be reflective of the world that we're in today. Buying back $500 million of stock next year is still a pretty good pace of stock buyback, and we think that's fine through 2012. We like having our capital at stronger levels in these periods of time. It gives us tremendous flexibility to buy back more stock at some point in the future or M&A or whatever it might be. I think now is still the time to have good capital strength and good financial flexibility. Thank you. Rick, we got an answer on that. Yeah. The total exposure on 9/30 in France was $561 million. I would imagine the question which you'd ask after that, which is the one we were asking, which was what is the exposure to French banks. Within that, at that time, there were exposure to three French banks which totaled about $40 million. Although I will tell you that we sold that down once we took a look at who held the most exposure to Greece. 4.0? 4.0. 4.0, yeah. Roughly it was like EUR 10 million BNP Paribas, EUR 20 million in Credit Agricole, that kind of thing. So it would be lower now. I can't tell you it's totally zero, but it would be much lower now. Then just to give you an idea, I know we don't usually give individual credits, but to give you an idea of the consistency with our theme of that EUR 500 million, about over EUR 100 million would be France Telecom. We have some large exposures to the utilities, to Lafarge, names that you would know that would be very internationally based. Doesn't mean that if France should default, if we get to that point, we wouldn't see some problems, but it's the banks we're most worried about. Ed. Hey, Rick, just following up on the buybacks. At last year's event, you said your initial guidance was $500 million, wasn't it? I'm sorry. The buyback last year. Yes. When you gave guidance, wasn't the assumption $500 million? It was, correct. Okay. Through the first 9 months, I think you have done $620 million. Correct Assuming you do less but something in the fourth quarter, possibly, you are doing more than what you had said you would do last year, and the environment has gotten worse as we have progressed through this year. I guess, when you talk about 500 and conservatism because the world looks a little scary, it has gotten scarier throughout this year, yet you have done more than the initial guidance. Are we sort of splitting hairs here a little too much focused on is it 500, is it 750? Is there a tendency to be more on the low end when you first come out with buyback guidance? Potentially. When you look at it, I can only look backwards in terms of answering that. I think when you look through the course of the year, we actually bought at a pretty good clip. When we saw prices come down in the August timeframe, we bought more, and then bought less when we saw some of the challenges around the world. I think that when we put 500, that is certainly a marker. If the world gets dramatically better on January 1st, we have the opportunity to buy more. But I think what we are saying, as we sit here today, we do not necessarily see that being the case. 500 gets back to fundamental capital generation. As we generate it, we are going to buy back stock with it, and we will sit here with good financial flexibility. I guess one follow-up. This is not a Unum only issue, but I think a lot of us struggle with segment ROEs when we hear them from all the companies. One of the things that jumps out, and I think this came up maybe last year, is if the Group LTC business is a 15%+ ROE business, why would you be going for 30%-50% rate increases? It is just hard from this side looking at a business if it was actually generating those types of returns, why you would need to raise rates so much. Yeah, no, I think when you look at it gets back to it's not just the rates. It's as Roger took it through, it's also mitigating some of the risks going forward, particularly around interest rates. I think if we can do it in a structure where we can mitigate those rates, then price is a flex point around that. Thanks. Thanks. Chris Giovanni, Goldman Sachs. An extension on Ed's question in terms of potential for upside in the $500 million. What would you need to see to upsize it? Is it your share price moving lower? Is it something on the macro side, improving loss trends? What would take the 500 up? Well, I think it would be all those different things. I think we've been very opportunistic in buying back our shares at very good prices. So, if there's weakness in the markets at large and not relevant to us, we would take advantage of that. I think, as I say, the world turns back in a different direction radically, we'll take that into account. This is something we really look at on a day-by-day basis. As we sit here today, we're looking at 500 is a very reasonable thing as we look forward to next year. That could change a month from now, it could change 3 months from now. It may not change. But we think as we generate those set earnings, giving it back to shareholders through share repurchase is the action steps we want to take. Okay. Then on your slide on page 94 where you show earnings growth on sort of a normalized versus a flat interest rate environment. Yes. You show in the flat rate environment a 4%. I assume that's operating earnings growth on dollar, not per share. What's the difference between that and the 0%-3% that we're seeing this year in sort of the low rate environment? The normalized piece, you're talking about specifically? The four, if we stay in this rate environment, 2%, 10 year, you're showing 4% earnings growth, yet this year we're seeing zero to three, which is lower than that sort of flat 4% growth. Yeah, no, and I think when you look out over a period of time, I think when you look at this as an earnings chart. What we would have said last year is our normalized is 5%-8%. Think of premium growth in the 3% range, benefit ratio is pretty stable from that in a normalized environment, natural growth, interest rates going out there. There's a lot of factors in there. What this is more meant to show is the delta given the interest rate environment. Given if the interest rate environment stays at that forward curve or at a flat environment, this is relative to our longer term expectations. This would be subtractions we weren't expecting in that normalized environment. Does that help? Yes. Thank you. Okay. If there are no more questions, Tom? Okay. Well, thank you everybody. We will reconvene downstairs on the third floor. I cannot remember the room we are in but we will have lunch down on the third floor and there will be someone down to guide us. Appreciate everyone's attendance and for those who joined us through the webcast, we will be signing off now. Thank you, everybody.

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