Earnings Call: Q3 2010

Nov 3, 2010

Good day, and welcome to the Unum Group third quarter 2010 earnings results conference call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead, sir. Great. Thank you, Tim. Good morning, everyone, and welcome to Unum's third 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. Please also note that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on the website in the investors section. Participating in this morning's conference call are Rick McKenney, Executive Vice President, CFO, and our business segment presidents, Kevin McCarthy, Randy Horn, and Jack McGarry. Now I'd like to turn the call over to Unum's President and CEO, Tom Watjen. Tom? Thank you, Tom, and good morning. We had another solid quarter with operating income growth for the quarter and year to date remaining in line with our 2010 outlook of growth of between 4% and 6%. I would say, too, that we certainly benefited from our more diverse business mix as the relatively strong performance of Unum US and Colonial operations, driven frankly generally by stable risk trends, offset the relatively weaker performance of our Unum UK operations. While the economic and competitive environment in both the U.S. and U.K. remain a challenge, by staying disciplined, we have continued to generate solid profitability, including strong statutory earnings, which has enabled us to continue to repurchase stock while still maintaining a strong capital position. Now let me just touch on just a few highlights from the quarter. First, as I indicated, third quarter after-tax operating income grew 3.9%, earnings per share grew 6.5%, which are both consistent with our 2010 outlook of growth between 4% and 6%. Second, while we saw very little change in the business and economic environment this quarter and no substantive changes in the competitive environment, we are capitalizing on profitable growth opportunities as they arise. I point especially to our voluntary benefits businesses in both the Unum US, where sales grew 27% in the third quarter, and Colonial Life, where our commercial sales grew 5.7% as good indications of how we're actually capitalizing on today's market conditions. Don't get me wrong, the combination of the economy and aggressive competitors make it challenging to profitably grow the business, but we feel very good about our market position. Third, our investment portfolio remains in excellent shape with the net unrealized gain in our fixed maturity securities portfolio increasing as a result of the decline in interest rates and ongoing tightening of credit spreads to $5.7 billion this quarter. The flip side, however, is that today's low level of interest rates and investment yields can create some challenges. But we have positioned the company to effectively manage through this environment. Finally, with our solid financial results and strong investment performance, we continue to build on our very strong capital position. Our weighted average risk-based capital ratio is currently at 410%, and our holding company's cash and marketable securities position is slightly above $1 billion, giving us continued financial flexibility in these uncertain times. We have built these strong capital levels while also purchasing $198 million of stock during the third quarter and $328 million of stock year to date. In summary, I feel very good about our results so far this year. I think the diversity of our company is becoming more apparent. The relatively strong performance of Unum US and Colonial Life operations offset the lower level of performance in the U.K. As you know, we've made a management change there, but I'm confident that under Jack McGarry's leadership, we can more effectively operate in this difficult market environment and capitalize on the growth opportunities which I believe exist in this market. While we continue to face premium growth challenges in certain lines of business, we continue to benefit from our disciplined business approach, which has allowed us to generate capital that can be used to repurchase stock at a very opportune time. Now I'll ask Tom White to provide an overview on our operating results this quarter. Tom? Great. Thanks, Tom. Net income for the third quarter was $220.8 million, or $0.68 per diluted common share, compared to net income of $221.1 million or $0.66 per diluted common share last year. Included in the results for the third quarter of 2010 are net realized after-tax investment gains of $0.9 million, or less than $0.01 per diluted common share, compared to net realized after-tax gains of $9.5 million, or $0.02 per diluted common share in the third quarter of 2009. Net realized after-tax investment gains for the third quarter of 2010 include an after-tax gain of $1.1 million resulting from changes in the fair value of an embedded derivative in a modified coinsurance contract compared to an after-tax gain of $28.9 million in the third quarter of 2009. Also included in net realized after-tax investment gains for the third quarter are net realized after-tax investment losses of $200,000 related to sales and write downs of investments, compared to net after-tax losses of $19.4 million in the third quarter of 2009. Excluding these items, after-tax operating income was $219.9 million for this quarter, or $0.68 per diluted common share, compared to $211.6 million or $0.64 per diluted common share in the year-ago quarter. Turning to the operating segments. In total, Unum US operating income increased 4% to $204.7 million in the third quarter. Within Unum US, the group disability line reported another solid quarter, with income up 4% to $77.8 million, driven primarily by improved risk experience on a year-over-year basis. Within the group life and AD&D line, operating income increased 6% to $52.8 million in the third quarter. A slight improvement in premium income as well as stable risk experience helped to generate the improved earnings. In the supplemental and voluntary line, third quarter income was up 2.8% to $74.1 million from $72.1 million a year ago. The improvement was driven by strong earnings growth from the voluntary benefits line of business. Moving to Unum UK, operating income in this segment decreased $19.6 million to $47.2 million. Operating income declined 15.1% in local currency. While premium income in local currency was essentially flat in the third quarter, the benefit ratio of 66.9% was well above the unusually low benefit ratio of the year-ago quarter. You'll recall that the third quarter of 2009 benefit ratio benefited from a reserve reduction associated with a significant reduction in the value of inflation index-linked policies. This reduction in reserves was largely offset by a corresponding reduction in net investment income on index-linked securities. The year-over-year reduction in income reflects pressure from the economic environment on our ability to resolve claims and continued competitive pricing pressures, particularly in the group disability line. Concluding our core operations, Colonial Life had a strong quarter, with premium growth of 6.2% and operating income growth of 5.8% compared to last year. The benefit ratio was 49.9% this quarter, compared with the year-ago benefit ratio of 48.2%, but in line with our longer-term expectations for this business segment. The individual disability closed block operating income was $9.8 million, compared to $7.2 million in the year-ago quarter. The interest-adjusted loss ratio was higher at 85.5% this quarter, compared to 81.6% in the year-ago quarter, but was consistent with the second quarter of 2010. Premium income declined by 6%, and net investment income was up 1% year-over-year. The corporate and other segment reported an operating loss of $10.8 million compared to a loss of $13.7 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 $31.8 million this year compared to $24.1 million last year, reflecting the debt issuances from September of 2009 and September of 2010. With that review of our operating results, I'll turn the call over to Rick McKenney for a deeper analysis of this quarter's results. Thank you, Tom. In my comments, I'd like to discuss this quarter's key drivers, which have remained relatively consistent, and also cover our investment portfolio, interest rate management, and our capital position. First, starting on how risk is performing. Across the company, it is generally stable, with some pockets of elevated experience off of last year's very favorable results. Focusing on Unum US, risk experience remained generally stable across all lines this quarter. Our group disability results remained strong with a third-quarter benefit ratio of 84.6%, lower than the year-ago quarter experience of 85.3% due to more favorable claim recovery performance and flat with the benefit ratio in the second quarter. New claim incidents for the quarter was consistent with the year-ago experience, but slightly elevated relative to the second quarter. The claim incidence trends are not showing notable underlying trends or any signs of being economically influenced. This quarter's results also reflect our view that our group disability benefit ratio will level out this year, and that longer-term opportunities for improvement can be achieved gradually as our core market exposure changes with our in-force mix of business. I would note that given today's challenging environment, I believe our current pre-tax margin of 15% and ROE of 12.6% for the third quarter for the group disability business line are quite strong. Also within Unum US, group life and AD&D experience remained very steady with the third quarter benefit ratio at 70.4%, compared to 70.3% in the year-ago quarter and second quarter as well. Finally, the voluntary and supplemental line showed favorable claims experience in the voluntary benefit line, with third quarter benefit ratio declining to 54.6% from 59% a year ago, offset by a slightly higher benefit ratio in the individual disability recently issued line due to higher average size of new claims. The long-term care line showed generally steady interest-adjusted loss ratios of 80.9% in the third quarter, compared to 80.8% in the second quarter and up from 77.5% in the year-ago quarter. Moving to our Unum UK results. Risk results were worse than last year and up slightly sequentially, with a third quarter 2010 benefit ratio at 66.9%. Weaker results have a number of drivers, including lower net claim resolutions and continued competitive pricing pressures in the group disability line which is only partially offset by a slight improvement in Group Life experience. The impact of inflation on the inflation index linking group policies is generally a non-economic influence and was a significant contributor to the year-over-year change in the benefit ratio, but had minimal impact on the sequential quarter results. The competitive market conditions are negatively impacting our margins in the U.K., and we expect this drag to continue for the near term. I will remind you that the Unum UK pre-tax margin was 29% and ROE was nearly 21% this quarter, still a very healthy level of profitability. Finally, Colonial Life's risk results this quarter were somewhat unfavorable in the accident, sickness, and disability line of business and drove the benefit ratio for the quarter to just under 50%, compared to 48.2% in the year ago quarter. As we have mentioned before, we believe that the benefit ratio of around 50% is likely an ongoing expectation for Colonial Life as a whole. Turning to the premium line, the challenges continue in today's economic and business environment. Looking at Unum US first, we are not seeing any improvement in the natural growth that we have discussed with you over the past several quarters. Our estimate is that natural growth still represents a stubborn headwind of approximately 1% today as the economy, and specifically high unemployment and low wage inflation, continue to pressure our top line. The highlight we continue to see within Unum US is our success in growing our voluntary benefits business. Sales in this line increased 27% in the third quarter and are now up 17% year to date. Having a strong voluntary benefits presence is essential to our strategy, as we believe our markets will move towards more employee participation in benefit plans, and our team is executing very well in this area of growth. Within Unum UK, we are starting to see some stabilization of our premium income. However, we continue to expect to see pressure over the near term as competitive market conditions persist and economic trends remain challenging in the U.K. Our new sales were somewhat encouraging this quarter, and while they were down 3% in local currency this quarter, the comparison was very difficult given the success we had in the second half of 2009 gaining sales as a competitor was exiting the market. In addition, we are continuing to see a greater portion of our sales mix from group disability relative to Group Life, which is more in line with the balance that we are looking for. Rounding it out with Colonial Life results, our growth metrics remain in good shape. Third quarter sales increased by 2.3%, less than the rate of growth we experienced in the first half of the year, as public sector sales were down on a year-over-year basis. But the commercial markets results remain good with third quarter sales growth of 5.7%. Recruiting trends continue to be strong with new contracts up 14.2% this quarter and up 19.6% year to date. New account growth also remains encouraging, up 10.2% this quarter and 17% for year to date. Countering these positive results, our average new case size is lower by 8.8%, driven by the economy and the tendency for our newer agents to have their initial success in the smaller end of the market. With positive sales and recruiting momentum, along with stable persistency trends, Colonial Life's premium grew 6.2% for the third quarter. As you shift to the balance sheet, our investment portfolio continues to be a highlight as we continue to see excellent results in the credit profile of our portfolio. With a rally in the Treasury markets during the third quarter, our net unrealized gain position for our fixed maturity securities portfolio improved further to a quarter end level of $5.1 billion, compared to a gain of $3.7 billion at June 30. Net realized investment losses this quarter were insignificant. Importantly, our internal watchlist of potential credit problems in the investment portfolio continues to decline to the point where, in aggregate, they sit in an unrealized loss position of less than $5 million. As happy as we are about the strong credit profile, the downside of low interest rates and tight corporate bond spreads is obviously the challenge it creates for new money on investment opportunities. As we have discussed with you in the past, the key focus for our business in this environment is the relationship between the portfolio yields backing our various product lines and the aggregate discount rates embedded in the reserves. For the third quarter, our portfolio yields held up very well with our aggregate portfolio yield of 6.73%, down only three basis points from the second quarter of 2010 and down only one basis point from 12/31/2009 yields. Our individual product line portfolios showed similar results. Although no insurer enjoys this environment, we believe we are relatively well-positioned for ongoing low interest rates for a few key reasons. Number one, we have a relatively small amount of new cash to invest in our product lines relative to the size of our existing investment portfolios, which allows our investment team to be very choosy in the assets we take from a relative value perspective. Two, we have maintained a conservative discount rate assumptions while our new money investment opportunities benefited from the wide investment spreads of 2008 and early 2009. Three, we are still putting our new claim reserves each quarter at discount rates lower than the aggregate rate, which will continually lower our aggregate discount rate just as lower new money yields will lower the overall portfolio yield. Lastly, we have the ability to reprice many of our product lines, which allows us to price for lower interest rates over time. To sum up, while today's low interest rates are a challenge, I believe we are well positioned to tolerate this environment. With solid financial and investment results, book value per share continues to grow. The company's book value per share was $28.08 at September 30, 2010, an increase of 13% relative to a year ago. Looking at our capital, our statutory earnings continue to be quite healthy, which drives a very sound capital position for the company. Net income on a statutory basis for our traditional U.S. life insurance subsidiaries in the third quarter was $148 million, in line with the roughly $150 million we have been generating. This healthy level of earnings resulted in growth in our capital base at our insurance subsidiaries, an improvement in our RBC ratio to approximately 410%, which is above the range we have set out for ourselves. Holding company cash and marketable securities remains at a very strong level, totaling $1.03 billion at quarter end. During the third quarter, we issued $400 million of 10-year senior notes, primarily to fund the payment of a debt maturity of $225 million in the first quarter of 2011. In addition, we have recently used $100 million of the proceeds for an additional pension contribution, which occurred in October after the close of the third quarter and is an acceleration of the pension plan contribution we expected to make in 2011. With the $400 million debt issuance, our leverage ratio is now 23.3%. However, this will decline by approximately 200 basis points as we pay off the debt maturing in the first quarter next year. We also continue to return capital to shareholders by buying back our shares, repurchasing 9.5 million shares in the third quarter. We have been opportunistic in buying back shares when the price has been low, with this quarter's repurchase done at an average share price of $20.91. We have approximately $173 million remaining of the $500 million authorized by our board in May. I will close with a comment on our outlook for the remainder of 2010. Our outlook a year ago, coming into 2010, was for operating income growth within a range of 4%-6%. We believe that the lower end of this range is more likely for operating earnings growth for the full year 2010, with continued challenging results expected from our U.K. operation in the near term. However, given our share repurchases, we anticipate operating earnings per share towards the higher end of that target range. We will discuss this, as well as our outlook for 2011 at our investor meeting on November 17th. I will turn it back to Tom for his closing comments. Thanks, Rick. As I said earlier, I continue to generally be pleased with our results. While the economic and competitive conditions remain challenging, we are benefiting from our disciplined, more diversified business model and strong capital position. While it may be difficult to see today, I also think the investments we are making in our businesses today are positioning us well for the future. As Rick said, we look forward to discussing this with you further at our Investor Day meeting in New York in November. If you have not already done so, you can register for the meeting through our website or by contacting our investor relations office. This completes our formal comments. Tim, let us move to the question and answer session. At this time, if you'd like to ask a question, you may do so by pressing star, then the number one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that's star one to ask a question. We'll take our first question from Darin Arita with Deutsche Bank. Good morning. Question on the RBC ratio. It's up to 410%. How high are you willing to let that increase to? Good morning, Darrin. Rick? When you look at the 410%, I think we had talked about a range of 375-400. So we're actually above that range today. We're very fortunate that statutory earnings have pushed to that level, but I think it's above the range that we've set out for ourselves already. I don't think we'd expect it to go much higher. At the same time, you're seeing us buying back stock and returning capital to our investors at a rate consistent with the earnings that we're generating. So we feel very good about where we are from a capital perspective, but we have no desire to let that grow further. Is it fair to assume that the dividends out of the insurance subs should increase and be pretty steady from here? I think it's actually been pretty steady, and we'll expect those dividends to look similar. You would note our holding company cash flows, so we don't need to take the dividends out, but we like to keep a very steady operating model of cash upstreaming consistent with the earnings that we're generating in our subsidiaries. Okay, great. And turning to the U.K., you have Jack there now. He's very well regarded. I guess, what are we planning to do differently in the U.K.? Yeah, if I could, Darrin, let me just sort of set the stage a little bit before I ask Jack maybe to make a few comments on his observations. But I think as you and others know, for the last couple of years, as we've been talking about our U.K. business, we've been talking about the fact that the generous margins that we've been so fortunate to be able to experience are probably not sustainable just because they're going to invite competition, and as competition comes in, we expected our margins to certainly come down. The other thing, too, is we certainly didn't see any acquisitions that I think that could continue to help support those higher levels of margin. Now, what we certainly didn't expect was the really venomous level of competitive dynamics that Jack can talk to in that market, nor did we expect the economy, obviously, to soften to the extent it did. But I think just to set the stage for why I thought a change was necessary, it certainly wasn't about a quarter. It wasn't about a feeling of concern about a business in crisis. It was more about just concern about the speed by which we were addressing the short-term issues, which are really more competitive market conditions and economic issues. The other part of it was also the speed by which we're positioning ourselves to benefit from what I think is a tremendous set of growth opportunities there. That's really what was behind the change. You're right, Jack's got a tremendous track record in the things that he's done. We have a lot of confidence in that business. It's still our highest ROE business, as Rick said in his comments. I think as you know, Jack has been there since the middle of July. I think, Jack, you've had a chance to get some pretty good observations on things, and maybe just turn it to you just to share some of those insights. Yeah. Thank you, Tom. Darrin, I think the things we're focusing on are really twofold. The first is improving our operations. The U.K. is now finding itself operating in a competitive environment that's more similar to the environment that the U.S. has operated in over the last several years. Fortunately, the margins are higher in the U.K., but a lot of the things that you need to do to succeed in the U.K. are similar to the things we did in the U.S. Those would be focusing on pricing and underwriting discipline, make sure we're controlling the rates we're quoting, having milestone sign-offs, increasing the focus of underwriting and sales on profitability, and implementing some of the comprehensive renewal programs that we had in the U.S. here within the U.K. in order to improve margins. We're also going to bring across a lot of the claims management processes that we've developed over the last couple of years within the U.S. and implement those in the U.K. I'd note that it's a well-worn path that we're implementing. It's something we've done before in the U.S. It's something that I personally was involved in, both within underwriting and the claims process. We believe that by bringing those best practices over here, we will be able to buck against the competitive headwinds we're facing, continue to get strong margins, and continue to improve results. The second piece of that, though, beyond shoring up the business with operational and financial controls, relates to really tapping into the untapped market over here. In the U.K., only one out of 10 employees in the private sector are currently covered for group income protection. That's probably 70%-80% in the U.S., Canada, and several other developed countries. We want to take a good run at expanding that coverage. We think that's a huge growth opportunity within the U.K. The time is ripe, both in terms of what's happening in the government, as well as in employee benefits, and we hope to capitalize on that. Great. Thank you. Thanks, Darin. We'll take our next question from Mark Finkelstein with Macquarie. Hi, good morning. Good morning, Mark. I guess I kind of want to follow up on that on the U.K. On the one hand, loss ratios were higher, I think probably than most people on this call had expected. On the other hand, we're still talking about a 20% ROE business. I guess the question I have is, one is, you talk about pricing discipline. Is there opportunity to push price given where margins are in the U.K. and given where the competitive landscape is? Is it more driven by claim handling procedure changes? Or should we be really thinking about this kind of level of loss ratio experience as kind of a new normal? Jack, I know you've got all those in your mind. Why don't you take that one? I do think prices have eroded in the marketplace over the past two years. I think there's recognition in the U.K. that it's been a very soft market, and that it's not in the best interest of carriers, intermediaries, or anyone to continue in that direction. We are the market leader in the U.K. If prices are going to harden in the U.K., we need to participate in that. That will be a part of pricing discipline with an attempt to make sure we shore up margins, make sure they don't continue to erode and face pressure from the economy, but do it in a strategic and really targeted way so that we minimize the impact on our in-force block while we're improving margins. From a claims management perspective, there's a big difference between claims management practices within the U.K. and what we had done within the U.S. My read on that one is kind of a why wouldn't you do it? We have solid practices. We know how to implement it. We're confident that it can improve results. It's a better process both from everyone's perspective, both internally with regulators and with claimants and employers. It just makes sense to implement that. We do believe our margin in claims management relative to competitors is not as wide as it's been in the past. By implementing these practices, we think we can begin to spread that out a little bit and give us more opportunity to grow the market and invest in it. Okay. Mark, if I could add to that. I think that really, therefore, when you look at the financial results, I think probably the pricing actions are the more important as you think about financial results. I think when Jack talks about claims improvements, those are certainly the things that are going to continue to be sure that we position ourselves in the market in terms of the quality and consistency of our performance, which we think has leverage in terms of growing the market. Okay. I guess one other question on the discount rate and commentary around portfolio yields, which seem to be holding up and the spread to the discount rate seems pretty healthy above what you target. If rates stayed kind of where we are, at what point would you need to make a discount rate change? Or do we have several quarters where that doesn't really come into play? Rick? Yeah, we certainly have several quarters that doesn't come into play. You may be even talking in terms of years in terms of how that looks. We're getting through this environment very well. I'll tell you, our investment team is being very opportunistic, so we haven't seen our margin that we talk about or the distance between our asset yields and our discount rates deteriorate at all in this environment. I think we may have lost a couple of basis points related to our disability rates, but still well in excess of our margins. I don't think we feel under pressure today to do a whole lot on that front. Okay. All right. Thank you. Rick, if I could add, too. I think actually, you made the point in your comments, but we don't have a lot to put out, actually, because, again, we've worked very hard from an asset liability point of view to be sure that we spread out our maturities and match our liabilities very carefully. I think actually, between now and the end of the year, we only have about $100 million to put out into the marketplace, which just gives you a sense as to how little investment activity is really happening in this environment. Right. Interesting. Okay. Thank you. Thanks, Mark. We will take our next question from John Nadel with Sterne Agee. Hey, good morning, everybody. Rick, I wanted to come back to your comments on capital and buybacks for a moment. As we think about excess capital and deployment, especially given the risk-based capital ratio at the insurance subs, is it fair to us to look upon that $1 billion of cash at the holding company, maybe net of the $225 million debt maturity in March, as fully deployable? If so, what time period should we be looking at in terms of expectations for deploying that capital? Yeah. If I look at the holding company capital specifically, I think you're right to take that $1 billion, haircut it back to the $225 million. We have effectively pre-funded for our maturity coming up in the first quarter. Okay. Also, haircut $100 million off that we put into the pension. Right. Okay. last year. There is excess there. In this environment, we probably would still look to around 2 times coverage at the holding company, which is quite conservative, but probably a good benchmark. 1 times coverage is roughly $250 million. So there is still excess there. But think of this very much as a capital run rate generation that we have seen over multiple quarters and returning that capital to shareholders. Okay. So 2 times coverage, $500 million? Really? Yes. Wow. Okay. I said it was conservative. Very conservative. That's very conservative. Then I guess, related to excess capital, I guess, a question on M&A. Has there been any pickup in M&A opportunities in the group insurance area? Given the pressure, we see the pressure from the companies that we actively cover. But I have to assume, there's so many other smaller players out there that must be struggling as well, and potentially might view the current environment as an opportunity to change their view on what they believe is a core business. Is anything changing along those lines? When you look at the group space, I think people still like the business. It's generating good returns for people, so that's the one that people are hanging on to and concentrating on. You see that sometimes in the competitive environment. There are opportunities out there. I think the most important thing as we look at those opportunities, one, we have the capital to transact, as we just talked about. But they have to have the right fit. We have to be getting something more. We'll do a financial transaction, but it will be with a very high hurdle. But we have to be getting something out of that deal as well. Yeah. I'd tell you that it's still a pretty sparse market in the group space, that M&A will be a big part of the growth strategy. But we're certainly looking, and we're certainly well known out there that we would be a buyer in many situations. Okay. And then finally, it would be remiss. You guys have probably more this quarter in your prepared remarks than I can recall over the past couple of quarters. The competitive environment, aggressive competition, are terms that I think we've heard at least a few times on this call. Any update you can provide as to where the competitive environment sits, if you think about it relative to last quarter, the quarter before? We are coming up on a very important sales period. What are your expectations around that? Terms and conditions just getting that much more aggressive? John, maybe we will ask Kevin McCarthy to speak to the U.S. Maybe, Jack McGarry, if you could make a couple quick comments. Thank you. About the U.K. But Kevin McCarthy? Good morning, John. Good morning. I don't think it's so much terms and conditions. I think it's flat out price. Okay. As I said last quarter, incumbent carriers, in-force carriers are continuing to defend their in-force blocks, I think primarily driven by the fact that they want to maintain their earned premium levels. They want to maintain their field sales and service organizations. With employment or the economy not turning around, new sales are just down across the board in the industry. As we track pricing levels using some outside research support, industry pricing levels continue to sort of slide downward. They haven't flattened, and they certainly haven't turned in the other direction. We're entering the 2011 renewal season. We would've expected, maybe, based on some comments we've heard in the marketplace, that renewals might be easier to place, but we haven't seen that so far. We see competition on business that we're putting out to renew, just as aggressive, maybe even more aggressive than it's been in the past couple of years. Bottom line is, I'm not seeing any hardening. In terms of that pricing level sliding downward, can you give a sense as to order of magnitude there? I think in this economy, it doesn't really take very much. It might be sliding down a couple of points. Okay. Something like that. On any given case, though, when you've got four or five carriers bidding, the spread can be quite wide. Yep. Between high and low. Okay. Jack, do you want to make a quick comment on the U.K.? Yeah. Within the U.K., I think there is a lot of pressure. It is a little different. We are 50% of the market in the U.K. If you think about it, our persistency 2009 to 2010 improved 3.5%. So that puts a lot of pressure on competitors. From a pricing perspective. Anyway, I think there is a lot of pressure on the fourth quarter. Unlike the U.S., the fourth quarter is not the big quarter in the U.K. It is actually April is our biggest renewal month. So it is a little bit different, a little bit delayed. But there are a lot of competitors out there that are starving for sales. We are looking to raise the pricing umbrella. We are probably going to have to suffer a little bit in persistency for that to happen with the expectation that rates will harden certainly in the second half of next year. That's great. Thank you very much for all the color. Good. Thanks, John. We'll take our next question from Tom Gallagher with Credit Suisse. Good morning, Tom. Good morning. The first question is, can you talk a bit about statutory earnings trends, those who remained pretty strong. Overall, $600 million sort of annualized a pretty good run rate here, especially as we consider a sustained low rate environment. Is there any stat impact that you would expect to see as a result of low rates, or do you think we still will see a pretty steady level of earnings power including in the U.K.? Are you still generating the same level of, say, cash earnings that you'd be able to take out of the U.K.? That's my first question. Rick? Sure. When you look at the stat earnings, they're actually the generation. We saw $150 million. That's still been a very steady run rate. A lot can happen, but we see that very consistently even as we look to the future. Specifically to interest rates, there are impacts that can happen with lowering of discount rates on a statutory basis. But we see that baked in to our results and still being able to generate that clean $150 million roughly a quarter. When you look to the U.K., I think those earnings there will come down a little bit commensurately with what you're seeing on the GAAP side. There will be a little bit lower earnings run rate that we see in the U.K., but nothing that we're overly concerned about. If I took you back to a slide we were showing you at Investor Day last year, the overall capital generation in the company still is very good, and we expect that to continue. Okay, got it. Rick, is there any pressure coming from the long-term care business in any way, shape, or form, whether it's GAAP or whether it's on statutory financials? In what subsidiary would the long-term care book or most of it be in on a regulatory basis? Most of our long-term care book was written out of Unum America, so that's where you would see the LTC business was written. When you look at the pressure there, I don't feel any particular pressure different than we would've seen years ago at LTC. The individual business, which we have stopped writing, is a more challenging business. That's why we're not writing it. But I haven't seen the trend lines on that business change very much from what we would've seen over a number of years. I'd say no additional pressure that we see there. Got it. Okay. Now, I guess just getting back on the U.K. As we think about that business, is there any risk here of a reserve review of anything else that we should be aware of from a margin standpoint? It sounds like it's a challenging environment, but is it really just an issue of looking at operating earnings, or could there be something beyond that? Whenever I hear a situation where things are in flux and restructuring to some extent, that's one question that comes up. Can you address sort of that question on the U.K.? Yeah. When you look at the U.K., I'd first start off with the margins of this business is still very high. So they're lower than what we would've seen, but those were off of what we would've said, and we did say were very lofty levels. So I think you have to start there before we talk about the pressure. As we've seen the loss ratio creep up into the 67% range, that's even higher than we would've said a quarter ago. So there is pressure there, and we're recognizing that, but that's more of an earnings run rate issue than anything else from a structuring perspective. As Jack mentioned, as he looks in the business and different practices he wants to bring in, there will be change that goes on there, but I don't see anything material on that front. Got it. Jack, just one last for you. I know you talked a bit about best practices on claims handling. If you successfully overlaid your U.S. best practices on the U.K. business, are we talking about a 50 basis point improvement on the benefit ratio or 500 basis points? Can you help sort of frame what you think the opportunity there would be? I think it's really hard to predict what the opportunity will be. I think it's pretty clear that we can improve things through increasing the rigor of the practices and putting the appropriate resources on it. There are some differences between the U.S. and the U.K. in terms of practices that would make it hard to predict from the U.S. experience just how much things can improve in the U.K. We're very optimistic that we can make things better, but I think we'd be reluctant to put a number around what the improvement would be. Okay, thanks. Good. Thanks, Tom. We'll take our next question from Chris Giovanni with Goldman Sachs. Thanks so much. Tom, on your Investor Day, you had highlighted that capital management could contribute 3%-5% to earnings growth on a normalized basis. If we assume the board approves another buyback authorization when the existing one is exhausted, would you expect to see this 3%-5% annual benefit over the next couple of years? Rick, you want to take that one? I think, again, that starts to get into some of the things we will talk about at Investor Day, actually. We will talk about it at Investor Day, but I think that was done, the 3%-5% was consistent with what we ended up doing here as we authorized our $500 million buyback. We will obviously have to talk to our board about what we are going to do, but it all comes back to the earnings generation and the statutory earnings and returning that to shareholders. When you pull that all back and returning that capital and concentrating our shareholder base effectively will generate those kind of earnings growth rates. Chris, if I could add, too, I think one of the things you can certainly sense is that we are very confident that our business model is capable of producing much more consistent results, including statutory results. I think Rick touched on it. When you have that consistent delivery of statutory results, that makes available free cash flow that you have a lot of choices in terms of how you put that cash flow to work. To my second point, if you look at the last three years, we have to be one of the only companies that has been out there fairly aggressively on share buybacks as well as dividend increases. I think that's just part of our MO going forward. Okay. Then, one follow-up for Kevin McCarthy in terms of the group disability side at Unum US. A number of the larger competitors, as people have talked about, have seen adverse loss experience and are beginning to talk about taking rate increases. Would you expect that some of these plans are shopped around and you maybe get some more looks than you've gotten in the past? Or do you think the business was just priced way too low to begin with, that even mid-single-digit price increases doesn't make the risk appropriate? I don't know if we'll get more looks than we got in the past, but as a market share leader, we tend to get pretty much all the looks that are out there, and we've got the broadest field, wholesale, and retail distribution system out there as well. But I think if competitors started to raise rates in this economy, I think that would be good for stabilizing the risk environment, and I think that the quality of our field force and the diversity of our portfolio would probably see some benefit from that. Yeah. Okay. Thank you. Good. Thanks, Chris. We'll take our next question from Mark Hughes with SunTrust. Thank you very much. Good morning. Good morning, Mark. Am I right in understanding that you've been doing some consumer advertising in select markets to support the voluntary business? If so, what kind of results have you seen from that? Yes, it's a good question, Mark. Maybe I'll ask Kevin to state that because actually we've been doing that mostly in Kevin's market. In the last year or so, we've been doing some consumer advertising, primarily targeted in four cities in the U.S., trying to track changes in consumer awareness of our brand and trying to see whether the change in that awareness generates both increased quote activity as well as increased maybe participation in voluntary cases. It's still pretty early to sort of quantify whether or not those outcomes are going to be the outcomes that we want. But I think early indicators are that they're helpful, that the advertising has been helpful. Okay. Then there's been some discussion about the brokers maybe focusing a little more on voluntary benefits with health commissions threatened to be cut. Are you seeing that? Yes. Our Simply Unum platform, which also allows brokers to integrate group and voluntary coverages. Our Simply Unum sales are very robust and up and occupying a greater and greater share of our small case market growth. More and more brokers are participating in the voluntary market. More and more brokers are asking for information and looking for support in that voluntary market, and we think we're just positioned great for that. If I could add to that, Mark, too, I think as you know, we made a pretty strong commitment a few years ago to the belief that the market was going to move more in a voluntary direction. Obviously, we've got two businesses in the U.S. that are beneficiaries of that. Certainly, Kevin's business in Unum US is continuing to have very strong voluntary sales here this year. Randy's business, the Colonials, continue to have the same. So we like the fact that we've got two businesses positioned to sort of capitalize on what's a very clear movement towards the voluntary business. Great. Thank you. Thank you. I will take our next question from Ed Spehar from Bank of America Merrill Lynch. Thank you. Good morning. Two questions. First, I wanted to go back to the U.K. and the comment that the U.K. is looking more like the U.S. but still higher margins. Can you give us some sense of where you think the U.K. ROE normalizes? Then I have one follow-up. Jack, you want to take that question? Yeah. I think our expectation right now, given the look at the margins and where we are, is certainly over the long term, we do not expect any further deterioration in the ROE. So we would peg it at that 20%, which is where it is now, with some optimism around these pricing changes if the market does react to that, as well as if we can get on some footholds in the claim processing changes. We think there are opportunities to improve it. But I guess the question would be that doesn't sound like it looks very much like the U.S. I was talking about the U.S. in terms of the erosion of margins and the level of competitiveness as opposed to the absolute level of margins. The absolute level continues to be significantly higher. It started from a much higher level than the U.S. did. It's a much narrower market than the U.S. So my comments were more from a relative perspective to where it had been historically as opposed to comparing margins in the U.S. and the U.K. because they are much stronger, have always been much stronger, and would expect to continue that way. I think to add to Jack also, when he speaks too, speaks to a lot of the operational efficiencies we can get by using best practices from the U.S. maybe more aggressively in the U.K. That's also a source of value, including the fact that we're rolling out a new offering that's very similar to Simply Unum that, as you know, we rolled out about a year and a half ago here in the U.S. We're rolling that out in the U.K. actually here this month. So the other part of this is just the leveraging of some core capabilities that we have that are proven elsewhere and maybe more quickly accelerate the usage of those in the U.K. as well. Could you remind us, if we look at the competitive dynamic in the U.K., what type of market concentration there is, say, among the top three or three players in terms of new business? It's significantly more concentrated. There are basically four players in the group income protection market. There's Aviva and L&G. I think those four players account for some 80% of the market over here. Okay. Thank you. That's helpful. Then just the question on capital for Rick. If you look at other I would say well-run disability companies, I mean, take a look at our group insurance companies StanCorp talks about an RBC target of 300%. I understand your business is different. You have the U.K. piece, but I'm curious why 375%-400% RBC plus 2X holding company requirements isn't an excessively conservative level of capital. Well, when we look at the level of capital that we're holding, I think it's trying to be reflective of the environment. I think some of our peers that you mentioned are running at higher levels as well. They just haven't changed their benchmark. I think what we're trying to say is we want to reflect the environment, so in a more difficult environment. I define that on a couple of fronts. One would be what we see in the economy still, which is challenging. You can see that in unemployment and wage rolls. You can also see it in terms of the dynamic regulatory environment that we see around us. I think being a little bit more conservative makes sense. Do we need to hold there? Is that a new level that we expect the company to run at going forward? Probably not. But in today's environment, those are the levels that we think are dictated by this environment that we're in. When you think about how you price products, you are competing against players that are looking at lower RBC ratios. What do you consider as your target when you are talking to pricing actuaries and you are saying, "This is how we write business"? What is the target used for pricing formulas? Yeah, I probably won't give you the specifics on that, but it is going to be lower than we are running the company at today for that exact reason. We are running with excess, given the environment around us. That is not our long-term expectation of the capital we would have. It also is product dependent. I wouldn't get specific into those RBCs, but it is south of certainly where we are running the company at today. Thank you. Sure. Thanks, Ed. I'll take our next question from Colin Devine with Citi. Good morning. Good morning, Colin. Morning. Just a couple quick ones. First, I guess for Jack, that sort of upward trend in the benefit ratio here in the U.K., how much longer does he think that's going to go on? Secondly, for Kevin, you're pretty much through the renewal season now. In terms of premium growth that you're looking at for next year, is it going to be fairly similar to what we've seen this year? And it isn't a surprise given the economy, but just to sort of set that up. Then, turning to then supplemental and voluntary, in many ways another tough quarter, I guess, in terms of returns. A bunch of your, I don't know if you want to call them competitors now since you're not writing individual long-term care anymore, but have announced some fairly steep rate hikes over the past quarter. The interest-adjusted loss ratio there still setting, I guess, the second highest in your company's history. Is there anything you can do to start to improve this, or we're going to be looking at this thing sitting over 80% for a while? Thanks, Colin. Let's go back to your first question. Jack, you want to take the question about your sense of the benefit ratio in the U.K.? Yeah. My sense of the benefit ratio is certainly the level of deterioration in it will slow. Our premiums have begun to level out over the last couple of quarters. That's been a factor in the benefit ratio. Depending on what happens, I think we might see some pressure for the next couple of quarters. But I would expect beyond that by the second half of next year, we would have stabilized and begun to improve it. It could get a little bit worse before it gets better. Is that fair to say? I think potentially, but it might not get worse before it gets better. Thanks, Jack. Kevin, you want to pick up the question on renewals and premium growth and that question? Yes. Good morning, Colin. Yeah. 2011 renewals. Yeah, we're into the program. The program's slightly higher in terms of volumes than it was in 2010, and the average rate increases will be probably slightly higher, especially maybe in the core market a little bit, just reflecting the economic environment. I think we've got to be careful that we know that our persistency is already quite high. That's been shoring up our earned premium levels while the sales environment kind of lags. We're going to be careful and sort of monitor the renewal program sort of quarter by quarter. Kevin, you are on a roll. You want to pick up the question around the LTC strategy? Well, in group long-term care, first of all, we continue to be in that market. It is a valuable part of our portfolio, consistent with the brokers that we do voluntary benefits with. It is very consistent with our employee benefit strategy. Much of our group long-term care business includes employer funding. The average age is still right smack in the middle of the workforce in the mid-40s. That said, we have the ability to reprice group long-term care because it is a group product. We continue to evaluate sort of over the course of time what the right level of pricing is and how do we make sure that pricing matches up with the interest rate environment in particular. In terms of operational experience, group long-term care has performed quite well. On the individual side, where we are no longer writing business, we are in the process of looking at what kind of rate increase will be necessary to shore up that book of business, and we will be rolling that through a number of discussions with state regulators over the next several weeks. Then we will have more to report in a few weeks. Okay. One follow-up. I did not want to leave Randy out of this. The persistency at Colonial, I think, hit record levels across the board. What is working so well for Colonial that does not seem to be working for some of your other competitors? That's a long answer, Colin. We're just focused on the basics. With our field force, we're really emphasizing the service side of our business and getting our agents back out to visit our in-force customers, and spending time with them doing benefits counseling. In many cases, that doesn't add to sales. In many others it does, but at least gets our folks out in front of our existing customers. We're just staying after that and having nice, steady, and even improving persistency results, as you pointed out. I think it just comes back to a strong area of focus for us. One, you are still growing sales too, which- We're growing sales as well, yes. Mm-hmm. Okay, thank you. Good. Thanks, Colin. We'll take our next question from Randy Binner with FBR Capital Markets. Hi, thanks. Good morning. I was actually going to ask about Colonial too, and I guess, Colin just hit on it, but your largest competitors have been having trouble really in recruiting, I guess. So your sales are holding up, and so I'm just wondering if there's an update on what sectors are working. You said public sector was down and commercial was okay, but just understanding how that's a better story for Colonial versus that large competitor. Then just on the recruiting front, that seems to be going well for you as well. The comments from the competitor have been that it's hard to recruit folks with unemployment checks persisting and salary jobs more attractive. Just trying to get more color on what's making Colonial work so well. Thank you. Randy, I think you're happy to talk about that, actually. Oh, I am. I think the Please. Yeah, I sure am, Tom. I think the answer there is really intertwined for both sides of that. We are very focused on growing our agency distribution system. We continue to have very good results there quarter-over-quarter. We are up near 20% on a year-to-date basis in terms of new rep contracts, and we are working very hard to make more and more of those folks productive as early as possible. I think it is just a matter of focus and consistency there, and that is also helping us then with our overall sales increase for the year. We are getting a considerable lift in production from reps we have brought on over the last 2-3 years, and that is a real difference-maker for us in this very tough economic environment. Do you think that, back to the recruiting issue, is that helping you recruit? Because I think that, I guess the other folks in this area are just having trouble getting sales folks in the door, and it is not just Aflac, but it is other smaller franchises out there. Is it that success of new people? I am just trying to understand it because it seems a little bit, it just seems like it is hard all of a sudden to get these types of salespeople in the doors. Just trying to understand why the recruiting is working well. Yeah, I think it definitely is a success breeds success, and more people wanting to come on board, and we are getting a lot of referrals for new agents from people that have joined us in the last couple of years, and it just snowballs in a very positive way for us. Okay. I guess I will leave it at that. Thank you very much. Yeah. Thanks, Randy. I think we have time for one more question, Tim. We will take our last question from Jeff Schumann with KBW. Hey, thanks. Good morning. This is actually Ryan Krueger for Jeff. Good morning, Ryan. Good morning. I had a high-level question on operating earnings trends. If we just look at recent sequential numbers, the total operating earnings were $229 million in the second quarter, $220 million in the third quarter, and I think guidance implies in the $215 million range in the fourth quarter. So we've had a sequential declining trend in recent quarters, and I'm curious when we look out to 2011, given the pressures on the top line, is that a trend that you think will stabilize, or should we expect earnings to continue to decline somewhat on a sequential basis based on the top-line pressures? Rick, want to take that? Sure. It's a good lead-in, actually, to our Investor Day, which I'll reiterate is on November 17th. But just to give you the high level, I think those flattening trends are something that you've seen from the operating earnings. That's certainly being offset by a lot of the share repurchase we've been able to do. So our EPS is growing quite nicely. And we'll give you some more insight into 2011. I think we've seen good results in 2010, consistent with the way we laid it out in the 4%-6% range, and we'll look to 2011 to give you a similar view. Okay. Thank you. Good. Thanks, Ryan. Well, thank you all for taking the time to join us this morning, and I hope that we'll see you at our Investor Day meeting, which again, will be in a couple of weeks. And Ryan, this will complete our third quarter 2010 earnings call. That concludes today's conference call. We appreciate your participation.