Earnings Call: Q4 2010

Feb 3, 2011

Good day, and welcome to the Unum Group fourth quarter 2010 earnings results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Senior Vice President, Investor Relations, Mr. Tom White. Please go ahead, sir. Great. Thank you, Glenn. Good morning, everyone, and welcome to Unum's fourth quarter 2010 analyst and investor conference call. Our remarks this morning will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the sections titled "Cautionary Statement Regarding Forward-Looking Statements and Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2009, and also in any subsequently filed Forms 10-Q. Our SEC filings can be found in the investors section of our website at www.unum.com. Also remind you that statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on our website in the investors section. Participating in this morning's conference call are Rick McKenney, Executive Vice President and CFO, and our business segment presidents, Kevin McCarthy, Randy Horn, and Jack McGarry. Now I'll turn the call to Unum's President and CEO, Tom Watjen. Tom? Thank you, Tom, and good morning. Notwithstanding the shortfall we experienced in the Colonial Life segment, I'm pleased with our fourth quarter operating and financial results. Unum U.S. posted another strong quarter with solid risk experience, and we're seeing encouraging signs of stability and progress in our Unum U.K. operations. The shortfall this quarter in results at Colonial Life relative to our expectations is clearly disappointing. But given its growth prospects, strong profit margins, and healthy cash flows, we continue to maintain a very positive outlook for this business. Rick will provide more detail on Colonial Life's fourth quarter experience and outlook in his commentary. Now let me make a few comments about the quarter. First, while we reported flat operating earnings per share of $0.66, our largest business, Unum U.S., continued to produce strong financial results with stable risk results. Second, our financial results and strong investment performance has allowed us to build a very solid capital position. Our weighted average risk-based capital ratio ended 2010 at approximately 398%, which is at the upper end of our target range, and our holding company cash and marketable securities position exceeds $1.2 billion, which is over four times the annual needs of servicing both our interest and our common stock dividends. With the strength of our capital position and the confidence in our future, our board has authorized an additional $1 billion for share repurchases over the next 18 months. Third, while we saw very little change in the competitive environment this quarter, we did see some marginal improvement in the economic environment. After several quarters of declining natural growth of our business, that was less of a drain this past quarter, and we expect to see some continued benefit coming from a slightly better employment outlook and perhaps from future wage inflation. Fourth, we continue to see good growth in our target markets, especially the voluntary benefit marketplace. Our Unum U.S. voluntary benefit business sales grew 10% in the fourth quarter and 15.6% for the full year. In Colonial Life, commercial sales grew 5.3% for the quarter and 8.2% for the full year. We expect growth in these markets will continue, and with it, you will continue to see our mix of business continue to shift to higher growth, more stable margin businesses. Finally, our investment portfolio remains in excellent shape. Our credit quality remains strong, and although new money rates remain challenging, we are managing very effectively through this low interest rate environment. In summary, as we wrap up what was a strong 2010, our outlook going into 2011 is a very positive one, which I think was frankly reflected in some of the decision by AM Best last week to upgrade our financial strength rating. We have a solid business plan in place and a commitment to maintaining our disciplined approach to our markets. The consistent, predictable operating cash flows we expect to generate will continue to provide us with tremendous financial flexibility. That financial flexibility remains an asset both to support our business needs, allow us to capitalize on opportunities in the marketplace, and also take steps like we announced yesterday to return excess capital to our shareholders. This will continue to be our playbook in 2011, and we have great confidence we will continue to create value for our shareholders. Now I will ask Tom White to provide an overview of our operating results this quarter. Tom? Great. Thanks, Tom. Net income for the fourth quarter was $225.8 million, or $0.61 per diluted common share, compared to net income of $199.4 million or $0.60 per diluted common share last year. Included in the results for the fourth quarter of 2010 are net realized after-tax investment gains of $17.2 million, or $0.05 per diluted common share, compared to net realized after-tax losses of $18.9 million, or $0.06 per diluted common share last year. Net realized after-tax investment gains for the fourth quarter of 2010 include an after-tax gain of $16.1 million resulting from changes in the fair value of an embedded derivative in a modified coinsurance contract, compared to an after-tax gain of $22.7 million in the fourth quarter of 2009. Also included in net realized after-tax investment gains for the fourth quarter are net realized after-tax investment gains of $1.1 million related to sales and write-downs of investments compared to net after-tax losses of $41.6 million in the fourth quarter 2009. Excluding these items, after-tax operating income was $208.6 million for this quarter, or $0.66 per diluted common share, compared to $218.3 million or $0.66 per diluted common share in the year ago quarter. Turning to the operating segments, in total, Unum US operating income increased 1.5% to $206.1 million in the fourth quarter. Within Unum US, the group disability line reported another solid quarter, with income up 6.1% to $77 million, driven by strong persistency and improved risk experience on a year-over-year basis. Within the group life and AD&D line, operating income increased 11.5% to $53.2 million in the fourth quarter. A solid improvement in premium income, driven by strong premium persistency, helped to offset a slight uptick in the benefit ratio this quarter. In the supplemental and voluntary line, fourth quarter income fell 8.2% to $75.9 million from a record high of $82.7 million a year ago. The year-over-year decline was driven primarily by higher active life reserves in long-term care and an acceleration of amortization resulting from lower persistency for certain issue years and certain product lines. Moving to Unum UK, operating income in this segment decreased 21.5% to $48.1 million in the fourth quarter of 2010. Operating income declined 18.9% in local currency. While premium income in local currency was down 2.1% in the fourth quarter, it has shown signs of greater stability as we manage through the competitive market environment. The benefit ratio of 71.7% was above the unusually low benefit ratio of the year ago quarter, but adjusting for the impact of higher inflation on claim reserves associated with inflation index linked group policies, the benefit ratio for the fourth quarter of 2010 would have been under 70%. Concluding our core operations, Colonial Life experienced an 11% decline in operating income compared to the year ago period, largely due to unfavorable risk experience in the accident, sickness and disability line. Rick will elaborate on this in his analysis of the quarter. The individual disability closed block operating income was $10.3 million in the fourth quarter of 2010 compared to $5.8 million in the year ago quarter. The interest-adjusted loss ratio was higher at 84.7% this quarter compared to 81.6% in the year ago quarter, but was down from the 85.5% in the third quarter of 2010. Premium income declined 3.4%, and net investment income was essentially flat year-over-year. The corporate and other segment reported an operating loss of $17.3 million compared to a loss of $16.6 million in the year ago quarter. Net investment income was higher, reflecting higher levels of invested assets and higher miscellaneous net investment income. While interest expense increased to $36 million this quarter compared to $31.1 million in the fourth quarter of 2009, reflecting the debt issuance from September of 2010. With that review of our operating results, I will turn the call over to Rick McKenney for further analysis of this quarter's results. Thank you, Tom. I will touch on three topics for the quarter. The key profitability drivers of our business lines, a snapshot of the investment portfolio, and a view of our capital position and actions. Starting on risk experience for our primary business lines. First, within our Unum U.S. operations, risk experience remained generally stable this quarter. Our group disability performance remains quite strong, with the benefit ratio dropping to 84.2% for the fourth quarter and 84.4% for the full year. New claim incidents remain somewhat volatile and is up slightly this quarter, but is within the range of experience we have seen over the past few quarters. At the same time, claim recovery experience remains favorable. Looking forward, we believe we will see similarly consistent experience in the group disability benefit ratio with longer term improvement in profitability driven by the ongoing balance of our business mix to more core market and voluntary benefits. The group life and AD&D mortality experience was slightly elevated with a benefit ratio of 70.3% in the fourth quarter of 2010 compared to 69.9% in the year ago quarter. Looking within the voluntary and supplementary lines, voluntary benefits margins improved relative to last year as risk experience was also generally stable and premium income increased by 7.3%. We did see lower margins out of our recently issued individual disability business as well as long-term care. The increase in the benefit ratio for the long-term care line reflects the ongoing increase in active life reserves caused by higher persistency. Incidence and recovery trends within the LTC business were consistent and within our expectations and past results. We are in the early stages of our ILTC rate increase filings that we announced back in November. So far, we have received 13 state approvals with an average rate increase of 18%. What we are seeing is consistent with our expectations and our experience the last time we went through this process. Moving to our Unum U.K. results. As we expected, we did see some movement up in our benefit ratio in the fourth quarter to 71.7%. This compares to 66.9% in the third quarter and the unusually favorable benefit ratio of 59.6% in last year's fourth quarter. We did see unfavorable mortality experience within our group disability line and higher benefits in the group life line. But after adjusting for the impact of higher inflation on claim reserves associated with the inflation index link policies, the benefit ratio for the fourth quarter of 2010 would have been under 70%. We are encouraged as well by the progress we are seeing in many of the operating initiatives that Jack McGarry and his team have been implementing. We are seeing positive early signs in our Unum UK claims management process, most of which parallel the changes implemented in our U.S. operations a few years ago. I will end on Unum UK by noting that our pre-tax margin exceeded 30% and ROE exceeded 22% this year, a very healthy level of profitability. Finally, results in the Colonial Life segment were below our expectations this quarter, primarily driven by adverse trends in the accident, sickness, and disability line of business. Based on what we saw in the fourth quarter, we added $7.5 million of reserves to our ASD claim reserves that were related to second and third quarter claims. Going forward, we expect that the Colonial Life benefit ratio, which was 50.7% in the fourth quarter, once adjusted for the $7.5 million reserve addition, and 49.7% for the full year of 2010, will likely be in a range of 50%-52%, consistent with our expectations of an increasing loss ratio. Our outlook for Colonial Life remains very positive, and we expect to continue to see Colonial Life drive strong profit margins and cash flows. Now moving to the premium line, the challenges continue to exist in today's economic and business environment. At Unum US, in the fourth quarter, we began to see very modest improvement in the natural growth that we have discussed with you over the past several quarters. Our estimate is that natural growth was generally flat in the fourth quarter and represented a headwind of approximately 1% for full year 2010. This was better than the negative 3% we saw in 2009. But with high unemployment and low wage inflation within our in-force customer base, the environment is still dampening our ability to grow our top line. We do see continued success within Unum US in the voluntary benefits marketplace, where sales increased 10% in the fourth quarter and 15.6% for the full year. In addition, we were able to grow our new customer base with case sales in group and voluntary benefits up 8% in the fourth quarter. Within Unum UK, we continue to see greater stabilization of our premium income, an important operating trend as we work to restore our historical strong performance. Competitive market conditions persist and economic trends remain challenging in the U.K. Despite that, we are encouraged by the near term actions we discussed back in November, specifically around pricing that are beginning to take hold. Just as I discussed with our claims management processes, we have implemented similar best practices from our Unum US experience by adjusting compensation to include a heavier emphasis on improving the profitability of their blocks of business through disciplined renewal and new sales activities. Although reported sales were down, excluding the year ago sales related to the exit of a competitor from the U.K. group risk market, our fourth quarter 2010 sales increased by 35% in local currency. Finally, growth metrics in Colonial Life remain very positive. Sales in the fourth quarter increased by 1.3%, and for the full year, were up 4.4%. Fourth quarter results remain solid in the commercial market, where sales increased 5.3% in the quarter and 8.2% for the year. With these positive sales results and good persistency, we have generated premium growth at Colonial Life of 6.3% for the fourth quarter and 6% for the full year. Recruiting trends continue to be positive with new contracts up 22% this quarter. New account growth also remains encouraging, up 4.5% this quarter and 13.6% for the year. But our average new case size is lower by about 5%, driven by the economy and the tendency for our newer agents to have their initial success in the smaller end of the market. As you shift to the balance sheet in the investment portfolio, we continue to see excellent results, both in terms of maintaining a strong credit profile and our ability to manage within today's low interest rates and new money investment yields. During the fourth quarter, treasury yields increased, driving the net unrealized gain position in our fixed maturity securities portfolio to $3.5 billion at quarter end from $5.1 billion at the end of the third quarter. For the full year, we had net gains on sales and write downs of investments of $3.6 million before tax, and the level 1 through 3 securities on our bond portfolio watch list is one seventh the size it was a year ago. In 2010, we did a good job of navigating the low interest rate environment and investing in asset classes where we saw relative value at the time. Our portfolio yields held up very well with our aggregate portfolio yield of 6.71%, comparing well to our yield of a year ago, which was 6.74%. The yields on our investment portfolios backing our various product lines showed similar stability. An example of this is in our long term disability business, where the aggregate discount rate came down faster than the portfolio yields, and we saw this margin expand from 92 basis points to 99 basis points. With solid financial and investment results this quarter, book value per share continues to grow. Company's book value per share was $28.25 as of December 31st, an increase of 10.3% relative to a year ago. Moving to capital, our statutory earnings continue to be solid. Net income on a statutory basis for our traditional U.S. life insurance subsidiaries in the fourth quarter was $158.5 million and $628.8 million for the full year. This healthy level of earnings continues to drive an excellent overall capital position for the company, giving us great financial flexibility. Risk-based capital ratio for our traditional U.S. life insurance companies was approximately 398% at year-end, at the upper end of our target range. Holding company cash and marketable securities remains at very strong levels as well, totaling $1.2 billion at year-end. All of these characteristics were noted in our recent upgrade from AM Best. Given that strong position and the ongoing cash flow generation characteristics of our business that we discussed at our November Investor Day, we announced an additional $1 billion to our share repurchase authorization. This authorization is in addition to the $144 million remaining on our previous authorization, and now extends for 18 months. While our share repurchase activity slowed in the fourth quarter, we expect to be active again in the first quarter. This deployment contemplates the utilization of our free generation of $500 million per year, as well as reducing slightly the excess capital we have built up over the last several years. Additionally, we will pay off the $225 million debt maturity as of March 1, 2011, which we pre-funded in September. Our reported year-end leverage ratio would've been 20.9%, adjusting for this payoff. Concluding on our outlook for 2011, it's unchanged from the outlook we provided at our November 17 Investor Day, which called for operating earnings per share growth within a range of 6%-12%. Now I'll turn the call back to Tom for his closing comments. Thanks, Rick. As I said earlier, I was generally pleased with our overall results and believe that the additional $1 billion in share repurchase authorization is a strong statement regarding our confidence in our future. The economic and competitive conditions remain challenging, but I'm hopeful that the slow, gradual turn we're seeing in the natural growth of our business will continue. In the meantime, I believe we have a solid business plan in place and a commitment to consistent, disciplined execution of that plan. Our capital position and financial flexibility will continue to be an asset, an asset which we expect to continue to use in 2011 to create value for our shareholders. Now operator, this completes our formal comments, so please let's go to the question and answer session. Thank you. If you do have a question at this time, please press star one on your touch tone phone. If you're using a speakerphone, please make sure your mute function is turned off so your signal can reach our equipment. Once again, that is star one if you have a question. We'll take our first question from Darin Arita with Deutsche Bank. Thank you. Was hoping to think about the U.S. and the growth there, and there were comments about the employment pressures easing. I was wondering how quickly could we see that translate into some premium growth in the U.S.? Good morning, Darin. What I'll do is ask Kevin to pick up on that because I think it's probably most affecting his business. Good morning, Darin. As we talked about it, last year we had about a 3% headwind in 2009. 2010 was closer to a 1% headwind in terms of natural growth, which is basically the lack of job creation, lack of employment growth, lack of wage inflation. Fourth quarter, and in particular December, it sort of flattened out. If we continue to see that trend sort of from flattening and into the positive, it should flow through fairly quickly because basically what it does is it increases payrolls on your in-force book of business, and it flows through sort of directly to in-force premium growth. You'd start to see it sort of emerge pretty much as it emerges in the economy. In addition to that, not directly related to natural growth, over the last two years we've seen a fairly significant dampening of what we call MBOC or upgrades and benefits for existing clients. It's been down significantly both in 2009 and 2010. I would expect that as the economy improves and consumer confidence improves and businesses start to reinvest, we'd start to see some upgrade in benefits as well, which I think would benefit us on the sales side as well. Although you wouldn't see the earned premium effect of that until the subsequent year. Okay, great. That's helpful there, Kevin. Turning to Unum UK, I was wondering what the dividend potential is out of that with the returns above 20%. Let me just ask Rick to pick up. You are asking, Darin Arita, about the dividending capacity of our U.K. business? Yeah. Go ahead, Rick. Actually, we were able to receive a dividend in the fourth quarter. Dividend flows do come out of our U.K. business. We are sitting in an excess capital position in that business, and we expect those dividends and working with regulators, et cetera, will continue to flow out of that enterprise. You would note as part of our overall capital plan, we do expect some of the capital generation will come out of our U.K. business. That is what we are seeing, and that is what we expect to see in the future. Is there a typical rule of thumb guideline on maximum dividends similar to what we have in the U.S.? There are, in working with the FSA in the U.K., there will be different capital expectations that they'll have through the different capital models, different pillar structures that they have. Needless to say, we are in an excess position there as we continue to generate the capital. You'll see local capital generation fairly similar to what we see from a US GAAP perspective, and those flows should look pretty similar. All right, thank you. Thank you, Darin. We'll take our next question from Bob Glasspiegel with Clingan McNally. Good morning, everyone. As you sort of postmortem the Colonial quarter, is there any concern that maybe the good sales you've had versus competitors may have sacrificed too much price? Good morning, Bob. Actually, I'll ask Randy to pick up on that question about sales activity. Yeah, thanks, Tom. Good morning, Bob. Good morning. No, we don't have any strong concerns in that regard. We have a very disciplined pricing approach, still selling primarily individual products that again have been relatively stable over time. So no, I don't see us sacrificing margin or having to come down significantly on price to maintain sales momentum. Okay. If I could switch gears, now that you got an A rating from AM Best, you sort of have been balancing generating statutory earnings, which is maybe a dampener on sales to maybe thinking more that we'd be able to sacrifice stat earnings for growth. I know it's not either/or, but as you look at the continuum of stat earnings and sales, could there be a little bit of a shift in focus going forward, or is maximizing stat earnings your primary objective? Hey, Bob, this is Tom. I'll ask Rick to add to my comment. First off, we're very pleased, obviously, to get the AM Best rating. It's something that was important for no other reason than I think certainly this company's come a long way, and we think the performance of the company certainly should've led to a ratings upgrade. I think we said in the past, commercially, the only place I think we saw that rating somewhat helpful is in the public sector business and Randy's business. So it wasn't a big commercial victory. But I would say it's a big victory in terms of being able to show that the hard work that's been put into this company has led to a ratings improvement. I don't think, Rick, it's going to fundamentally change, though, how we think about managing the business at all, actually. We wanted the rating, but I'm not sure we actually compromised anything financially in order to get the rating. No, I think we've been running the business as we've expected and as we've communicated to you over the last several years. We were happy to get that, but I don't think it was reflective of any change in the structure. To pick up on your question around, are we maximizing stat earnings versus sales, I'd go back to our capital and then say that as we've generated the statutory earnings into our capital base, first and foremost, we'd like to put that capital back into our new business. We are not sacrificing on the new business front to generate more statutory earnings. Quite the opposite. We'd rather put more capital back into the business to generate those returns. I'd reverse your commentary around that and say I'd much rather sacrifice a little bit on the stat earnings front and grow our good, profitable businesses around the company. Thank you. Good. Thanks, Bob. Thanks, Bob. We'll take our next question from Mark Hughes with SunTrust. Thank you very much. Good morning. Good morning, Mark. The natural growth trend through the quarter, I think you'd emphasized December. Was December steady, or was December actually up a little bit in terms of natural growth? Kevin, do you want to pick up on that? Yeah. December was better than the earlier part of the fourth quarter, but we're splitting hairs here. We're talking about the fact that it was basically zero plus or minus percentage points. Yeah. The inflation index product, is that going to continue to have an effect on future quarters? I think, Mark, you're shifting to the U.K. then. Rick, do you want to pick that up, please? Right. I would say it does. Let me remind you that the inflation index, it only impacts the benefit ratio. So what you'll see equal and offsetting in the investment income line is similar volatility. So it is more of a reporting issue. That's why we spike it out, because it is more how it comes to the benefit ratio as opposed to how it affects profitability. Because we do have assets that back that same inflation index that float against the same indices. So we'll continue to spike it out, but it does cause a little bit of noise in our benefit ratio. Right. And it's just a reporting issue rather than an income issue. That's correct. Right. The higher long-term care rates, you are having success with your filings. When does that kick in in terms of premium? What should we expect in terms of losses? When will that change or moderate? Does that have an impact on persistency as well? Do a certain cohort abandon the policies when you raise the rates like that? Sorry, Rick. Yeah. Yeah. When you look at the long-term care business, we did see an uptick in the benefit ratio. You will see it stabilize probably around that level over the course of 2011. The timing of the premium starting to flow through and affect the benefit ratio probably are more of a 12-month to 18-month timeframe. I think as we get towards the end of 2011, you will start to see that feather in over the course of early 2012. That is kind of the trend lines that you should expect to see there. With regards to persistency, I think that we will have to see how that plays out. Previous rate increases have not affected persistency. They have been absorbed into the market, and so we will have to see how that plays out. We do not have an expectation that persistency ticks up, or I should say, reduces as a result of the price changes. Thank you. Good. Thank you, Mark. We will take our next question from Mark Finkelstein with Macquarie. Good morning. Morning. Actually, a follow-up on the prior question. I guess with the rate increases in long-term care, I understand that naturally the business is going to show higher loss ratios over time, offset by investment income. If we look at it on a margin standpoint, would we expect that with these rate increases that it would essentially improve the margin or essentially kind of freeze it where we are at relative to the experience that we are showing? How dramatic would we expect that margin expansion to be, if that is the case? Rick? Yeah. When you look over the next couple of years, it is also early in the process, so I do not want to over-commit what the process will look like. What you would see happening is it bringing in the expense ratio a little bit, but that continued headwind we have seen with high persistency will continue to push it up. So you will see those two competing forces happening within our benefit ratio really over the next two years. You can think about that from a margin perspective. That is how it will flow. It will be somewhere in this range with the increase in active life reserves from high persistency being offset with some of the premium changes. That will play out over the course of the next eight quarters or a little bit longer. Okay. But you would expect the margin from where we are today to improve with these rate increases? Yes. Okay. Slightly. Not a tremendous amount. Okay. Just on the U.K., sounds like a lot of optimism around some of the claims management practices that Mr. McGarry is working on. I guess my question is, what is it that we're trying to achieve? Is there any way of kind of quantifying what you think the inefficiencies in what is currently being done today, whether it's in terms of loss ratios or improvements in claim recovery patterns or what have you? Maybe if you could elaborate on what you expect the outcomes to be as a result of these procedures. Jack, you want to pick up on that, but maybe also add a little to it, to what you're seeing in the marketplace with some of the top-line growth prospects as well. Okay. Yeah. I think the claims management processes really aren't as focused on margin improvement as they are on consistency, predictability, and improving our value proposition in the marketplace. It's about fairness, objectiveness, making sure that we're fully documented. We probably will see some improvement in the loss ratio. It's going to be a more expensive benefits organization because we're going to apply more resources to it, both management claims people as well as medical and vocational resources. Very consistent with the U.S., we face similar kind of headwinds in the U.K. around a kind of a tightening regulatory environment. So we expect those things to net out as opposed to seeing really good profit improvement from there. We do expect to see significant profit improvement from our renewal efforts. Early days on those, but we're encouraged by what we're seeing in the marketplace and encouraged by, similar to the U.S., the margin improvement potential from those profit movements because the business that we're losing in the marketplace is significantly underpriced relative to the business we're keeping, at least with the business we've renewed thus far. Again, we've seen stabilizing premiums. We actually have seen over the last two quarters, a pretty good increase in what's called MBOC in the U.S., but is called upsell in the U.K., and that's existing policyholders adding coverages and expanding coverages. We have a big push on in the U.K. about encouraging employers to expand coverage, and are optimistic about that. We begin to see some natural growth in the market as well. Okay. All right. Thank you. Thank you, Mark. We'll go next to Colin Devine with Citi. Good morning, guys. I really got a couple of questions for you. The first one, Kevin, can you just give us a sense of how much these, I guess, up buys, as Jack refers to them, are down in the U.S.? Because that was quite significant, I think, for one of your competitors. And then for Randy, what is it about your agent comp program that is allowing you to be so much more successful than one of the other large firms out there that seems to be struggling mightily to recruit agents? Kevin, you wanted to start? Yeah. Good morning, Colin. MBOC or up buys, as they say in the U.K., were down 30% in the fourth quarter, down 16% for the year. That is down from a 2009 level that was also down by similar levels versus 2008. Typically, in more, quote unquote, "normalized times," about a third maybe or so of our group insurance lines would experience their sales numbers would be from this MBOC. So when you are down by that much, I think the fact that we came in with a flat fourth quarter in terms of overall sales, and with growth sort of in new business and new account acquisition, I think it was a pretty remarkable quarter. That is very helpful. Thanks. Good. Thanks. Randy, you want to pick up on the recruiting question? Sure, Tom. Good morning, Colin. Our ongoing growth in agents is really not a matter of agent comp. It really comes back to performance expectations that we have for all of our field management group. We have very clear expectations established. We have a great structure in place at this point that really maintains a very strong focus on new agent recruiting on a continuous basis. We have very solid processes around recruiting, a good support structure in place, both in the field and the home office. I think it's just more about continuity, expectation, focus, and we're getting good, steady results. Colin, it really is not a matter of compensation that's driving that. That's also very helpful. I had one just quick one for Rick. You mentioned on the, I guess, problematic individual long-term care block that you had approval, I think it was in 18 states. I'm curious, though, more importantly, as to what percentage of the in-force have you received approvals on? That's a good question, Colin. I don't know if you have that offhand, Tom. Yeah, Colin, I think that's just slightly under 20% at this point. So that's 13 states. We've had two states that have denied our request that we'll go back to. I think of those states that have approved, it's a little less than 20% of our overall program. Great. Thank you very much. Thanks, Colin. We'll go next to Jimmy Bhullar with JP Morgan. Hi, thanks. Good morning. Good morning, Jimmy. I had a couple items. First, on pricing trends in the disability business, you touched on this a little bit before, but a few of your competitors have been talking about raising prices. I just wanted to see if you could discuss whether you've actually seen some of the large competitors in the group disability market in the U.S. raise prices, or are they just talking and no action in the marketplace? Secondly, on buybacks, obviously you announced the additional $1 billion. Part of that is drawdown of your existing excess capital position. How should we think about the pace of buybacks over the next year and a half? Should a portion of them be front-ended, or would you expect to do them evenly throughout the next year and a half? Good. I should just go back to your first question, Jimmy, on pricing trends there. Kevin, you want to pick up on that? Yeah. Good morning, Jimmy. We really haven't seen much change in the marketplace, is what it comes down to. We've maybe seen during the fourth quarter, a little bit more stability on pricing in terms of the large case end of the business than we'd been experiencing in the past. But in the small and medium-sized sort of core marketplace, we just haven't really seen much movement at all on the pricing side. Industry pricing levels have been sort of flat to slightly down over the last 18 months. We haven't seen any change in that. When we look at our 2011 renewal program, I think we're making good, solid, steady progress, but we recognize that incumbents are continuing to defend their in-force books of business. Short answer, I guess, is no, haven't really seen any change. Jimmy, as we shift to your second question, Rick, you want to pick up on the buyback? Sorry. Yeah. I think the key question you have is on the pace of buybacks that we expect to see over the next 18 months. I would think it would be fairly level in terms of what we would expect. We have the capital to do more today, and given the right opportunity, we would move it earlier, move it later. But I think it's going to be more dependent on what we see and being opportunistic on that front. I think it's a reasonable estimation is on a level basis, but expect that we will do more and less based on what the market dictates. Okay, thanks. It's not a question of capital, though. We have that available to us today. Opportunistic would imply the stock price, then if it were to correct, then you would do more, otherwise just at an even pace, right? I think that is one input, certainly. Okay, thanks. Good. Thank you. We'll go next to Chris Giovanni with Goldman Sachs. Thanks so much. A follow-up question for Rick on share repurchases. At Investor Day, you talked about, I guess, $500 million of repurchases being included within your guidance. Wanted to see if your affirmation of 6%-12% growth in EPS includes just $500 million or something bigger than that. You also talked about $900 million as capacity in terms of running down RBC and reducing some of the excess liquidity. Also wanted to see if we expect that in 2011. Finally, if you can just talk some about taking the foot off the pedal a bit in Q4 in terms of the buyback activity. Sure. Okay. We start out in terms of our EPS guidance. We've got the incremental, and this is if you did level load that $1 billion over the course of the year, you'd see maybe a percent and a half type movement in EPS. That's still within our range, so we're not adjusting guidance for that, but I would assume that that is baked in. It really depends on how this program plays out, and we'll update that over the course of the year. In terms of the capacity that we've got and that we laid out in Investor Day, we are generating $500 million a year. It came in a little bit heavier than that last year. So we are starting with this $1 billion to start to bring down our expectation a little bit of our holding company levels, which are still running. The $1.2 billion is running at almost five times our annual needs. We'll run that down a little bit and our RBC ever so slightly, but we'll still stay within our range of $375 million-$400 million, most likely. With regards to the fourth quarter, we did do a small amount of buybacks in the fourth quarter. It was around $29 million. But you're right, it was slower than what we did in the third quarter, which was closer to $200 million. When you look at the fourth quarter, there actually were not a lot of windows in terms of buying back shares. I'll have to remind you, we did our earnings in early November, Investor Day, November 17th, holidays and volumes drying up as we get into December. So there just wasn't the opportunities there. You will see us active here in the first quarter, buying back our shares, so you can expect to see that. Thanks. Everything else was talked to on. Good. Thank you, Chris. We will go next to Sean Dargan with Wells Fargo. Thank you. To follow up on Chris Giovanni's question, should we still view the operating earnings growth guidance of 0%-5% to be in place? In other words, it is not taking incrementally more share repurchase to get to the EPS growth guidance? That is right. The 0%-5% would still be intact as well. We have got a little bit of movement around there, I think, as we get to our final plans, but that 0%-5% is still good and we are keeping the 6%-12%, both of which these actions are, or I should say, expectations are still within that range. Okay, thank you. Just one more question about Colonial Life. There is a mix shift going on. Am I to take that to mean that there will be a higher utilization going forward based on the client base that is buying the product now? Yeah. Actually, Randy Horn, you want to pick up on that? Because again, the mix shift is something you have been talking about for some time, and it relates to your markets as well as your product portfolio. Maybe just pick up on that a little bit. Yeah, Tom. Good morning, Sean. Yes, it definitely is a market and a product shift. We do see a little bit higher utilization of benefits on the public sector side of things. As we focus on that market, we'll see a little more shift there. Also as we introduce new products that are more competitively priced, that's going to inch it up a little bit. Then just seeing a mix within product segments with more focus on the accident and sickness side of our benefit offerings, all coming together to kind of inch things up from a benefit ratio standpoint. But still, we feel very comfortable in terms of stability in that low 50s range that Rick talked about, and we think it's a very good place to operate our business from going forward. Thank you. Good. Thanks, Sean. We'll go next to Steven Schwartz with Raymond James. Hey, good morning, guys. Good morning. Good morning. Just to follow up on there. The message vis-a-vis Colonial Life and risk results is not necessarily that this is an adverse morbidity quarter that we had here. It is more along the lines of this is where we think things are given our mix shift, and we adjusted reserves accordingly. Is that the way to think about this? Yeah. Rick, you want to follow up on that? Yeah, I think that most of what you said, I agree with. In the fourth quarter, we did see some things, which were related to prior quarters, so we adjusted reserves. You really should take some of that increase that we saw and spread it back towards second and third quarter. We did not see it at that point in time. Some of it did not emerge until the fourth quarter. But it is ultimately a higher incidence, and that is why we say the quarter in and of itself was 50.7%, which was higher than we have seen in previous quarters. But still within our range of expectations. Okay. Then if I may follow up on a couple of things, Rick. The guidance now seems to be to look for, not that it makes a whole lot of difference to the earnings or the EPS, but the guidance now seems to be looking to a $1 billion of share repurchase somewhere in that range. So you would have $500 million coming out from the insurance companies based on operating cash flow. Of course, that comes back in during this year, taking another $500 million or so out of the holding company. Is that correct? I would really look at it probably more over split into the two years, because over this next 18 months, we will actually generate 750 coming out of the insurance companies. So you draw down, probably out of the holding company, 250. Those are rough numbers. But it gives you a sense because we are looking out over 18 months. Okay. Then to follow up on Colin's question about the in-force rate increase on individual long-term care. Could you remind us what percentage of your book of business are you looking to take rate increases on? Tom, do you think Let me do a little homework on that real quick. Oh, okay. All right. Okay. Steven, we'll need to get back. We'll try to check up on that as we're speaking here now. Okay. All right. That's what I got. Thank you, guys. Okay, good. Thanks, Steve. We'll go next to Randy Binner with FBR Capital Markets. Hi, good morning. Thank you. Good morning. I guess the Colonial questions have been answered pretty well. But coming back to the long-term care, I just wanted to better understand Rick's comment that the benefit ratio would stabilize kind of later this year. A, I assume that you're talking about interest rate adjusted. But B, I guess if I'm thinking about it, you have kind of a little bit younger book, I think, than some of the peers. And so if utilization is higher, wouldn't that cause more of a longer-term increase there? I just want to understand why that would stabilize instead of kind of naturally rising, notwithstanding your comments on the re-rates. Yeah. So when you look at the increase in the reserve, you'd have to do it over a little bit longer-term trend. This isn't about claims or things we've seen. When you look at that, we're within our expectations around what we're seeing on the claims front. So it is purely the increase in reserves that we're seeing as a result of high persistency. So my comments around that is the fourth quarter is probably a little bit higher than our expectation going into 2012, maybe around it, but to the higher end of expectations when you isolate a quarter. So you're looking at kind of 82, 83-ish range. That's where we'll expect to run over the course of the year. As we get to the end of the year, you'll start to feather in the higher premiums on the re-rates coming in, which will neutralize that ever-increasing loss ratio as a result of the high persistency. Okay. The persistency maybe is driving it more than just kind of pure utilization. Is that fair to say? I think you can say it's all persistency that's driving it. Okay. And can you remind us what the average age of someone that's coming on claim there is and what the average age of the whole block is? I think- Go ahead. I was going to say maybe, Kevin, do you have a sense of that? Yeah. In individual long-term care, I think the average age on claim is in the 70s somewhere. The average age of the total in-force block, I think is in and around age 60 or so. Whereas in group long-term care, the average age is in the sort of high 40s in terms of in-force. But as Rick said, this isn't about claim utilization. We're not seeing any deviations in terms of expectations around incidence patterns and recovery patterns or morbidity. It's all about expected persistency levels and adjusting active life reserves for that. Understood. Thank you very much. Thanks, Randy. Tom, just before we take the next question, do you have a- Yeah, just to follow up on Steven's question. The block of individual long-term care business we're looking for rate increases on represents roughly 40% of the total individual long-term care block. Good. Okay. Thank you, Tom. And once again, that is star 1 if you do have a question. We'll go next to Jeff Schuman with KBW. Thank you. Good morning. Good morning, Jeff. I wanted to come back to the U.K. I think I understood Jack to say that the claim management function there has been under-resourced, and that you are going to put more resources there in search of a higher degree of fairness and consistency. I guess that begs a fairly obvious but loaded question, which is, were there some issues there historically? Are you taking a look at some of the historical claims practices there? Jack, do you want to follow up on Jeff's question? Excuse me? I was going to say, Jack, do you want to follow up on Jeff's question? Yeah. We have done actually a pretty exhaustive review of the claim decisions over time. It uncovered no issues historically with claim decisions. A piece of the focus is on the consistency and predictability of results that we need to improve. Another element is that even though the claim decisions themselves were accurate and according to guidelines, we didn't have the same rigor of controls in place around them to assure that that would always be the case going forward. A real piece of what we're doing is putting in similar controls in the U.K. that we have in the U.S. Okay. That's helpful, though it's still hard not to note your use of the word fairness before. Was that maybe not the right choice of words? I think it probably wasn't because the decisions had been fair before. It wasn't the right choice of words. Probably it's more around documentation and standards. Okay. Jeff, one of the things I'm sure going through your mind is trying to draw the parallels between the U.S. and the U.K. Of course. We have found that the FSA has consistently felt good about the claim practices that we've followed. I think with Jack's arrival, amongst other things, I think we've found there's actually a better way to do things. I think that's what this is all about, is taking a good process and making it better. Okay. That's understandable. Thank you for that. One other thing I wanted to ask you about is how we should think about market share and competition in Unum US Group at this point. We've observed from competitors that some of them clearly have been underpriced, and that's coming through in their results. Your commentary is that you're not seeing a lot of firming of pricing. I guess you add those two together, and it would suggest that there's still maybe some level of inadequate pricing in the market. Given that, is there a way for you still to hold share as the market recovers and grows here? Or is that going to be a little bit challenging unless pricing moves from here? Kevin, you want to pick up on that? Yeah, thanks. Good morning, Jeff. In terms of market share, first of all, over the last 24 months, we've gained share in terms of case sales, if you will, case share. We've also gained share in the core market during that period of time. Our struggles in terms of top line notwithstanding because of the economy, those struggles have been less than many of our competitors in the industry in total. Our growth rates were much less pressured than the industry in total. First of all, I'm not overly focused on gaining share. I'm mostly focused on achieving rock-solid, disciplined financial results that meet our business objectives. To the extent that we're gaining share, that's great. But I think our value proposition has worked very well. Our focus on the core market, the growth of our core distribution system, the expansion of our enrollment capabilities, the integration of Simply Unum into the marketplace. All of those, I think, bode well for share gain over time. Okay. I guess what you are saying is you can still find your spots where you can lift the pricing. Absolutely. I think to the extent that the market continues to shift from sort of historical fully employer-paid to sort of shared funding with employer and employee, our voluntary capabilities and our ability to integrate group and voluntary, I think play well. Okay. Thank you. Thanks, Jeff. I think operator, we will take one more call. We know there is another company call just coming up here shortly, so we want to be able to close promptly. We will take one more question. We'll take our last question from Mark Hughes with SunTrust. Thank you. In the U.K. business, you had a tough comp this quarter. On a normalized run rate, what should sales growth look like as we look over the next 12 months? Jack, you want to pick up on that? Yeah. Did have a tough comparison because the Aon business was in the fourth quarter of 2009. Our expectations are that sales will be down slightly next year because of the rate actions we're trying to take and put into the marketplace. We would expect that to be more acute in the beginning of the year, and as rates harden in the marketplace, which we're optimistic they will, to lessen toward the end of the year. Thank you. Which I think, again, Rick, is consistent with the guidance we provided actually Investor Day. We're sort of holding to that guidance that we gave at Investor Day, I think, which is down in, I guess, local currency, around 10%. Down about 10%. Thank you. Great. Well, thank you all for taking the time to join us this morning. Again, we are all standing ready if there are further questions after today's call. I think at this point, operator, this will complete our fourth quarter 2010 earnings call. Thank you, everyone. That does conclude today's conference. We thank you for your participation.