普登 (UNM) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to the Unum Group third-quarter 2011 earnings results conference call. Just a reminder, today's call is being recorded. At this time for opening remarks and introductions, I will turn the conference over to the Senior Vice President, Investor Relations, Mr. Tom White. Please go ahead, sir.

Great. Thank you, Debbie. Good morning, everyone, and welcome to the third-quarter 2011 analyst and investor call for Unum Group. 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, 2010, and in our subsequently filed Forms 10-Q. Our SEC filings can be found in the Investors section of our website at www.Unum.com.

I 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, also in the Investors section. Participating in this morning's conference call are -- Tom Watjen, President and CEO; and Rick McKenney, Executive Vice President and CFO; and also our business segment presidents, Kevin McCarthy for Unum US, Randy Horn for Colonial Life, and Jack McGarry for Unum UK.

And now I'll turn the call over to Tom Watjen. Tom?

Thank you, Tom, and good morning. Although a little choppy this quarter, actually I'm pretty pleased with our quarter. Because despite the pressures we saw in several of our product areas, the most notably in the UK, our earnings per share grew 9% in the quarter. Before I turn things over to Rick and Tom, I'm going to touch on, actually, a few of the highlights.

First, despite continued challenging market conditions, our investment portfolio remains in excellent shape. Today's low interest rates remain a headwind but our portfolio yields remain generally stable again this quarter. Despite this, we have already begun to reflect today's lower interest rates in certain of our businesses and reduced the new claim discount rate for our US group disability business by 25 basis points.

Second, our capital position remains solid with a weighted average risk-based capital ratio of 396% at the end of the third quarter and our holding Company's cash and marketable securities position at over $600 million, providing a solid financial foundation for the Company. Third, with respect to our share repurchase activity, given the weakness in our stock this past quarter, we stepped up our stock buyback activity with a total of $250 million repurchased this quarter. Over the past year-and-a-half, we have repurchased $975 million of stock and reduced our share count by 12%. Since the fourth quarter of 2007, we have repurchased almost $1.7 billion of stock, reducing our share count by 19%. Over the same period, we're raised our quarterly dividend by about 40%, while all at the same time, remaining financially -- in a very solid financial position.

Finally, despite the difficult market conditions, I am pleased that we continue to see modest growth in most of our target markets. Unum US reported growth in new sales at 10% this quarter, with 12% growth in core market sales and 16% growth in voluntary benefit sales. Sales of Colonial Life were up almost 4% in total and core commercial markets sales grew 7%. Sales growth in the UK remains challenging as we continue to raise prices on new and existing business. In summary, despite the pressure we saw in parts of our business this quarter, particularly in our UK business, I am generally pleased with our performance.

Looking ahead, we expect the environment to remain very challenging with continued pressure from persistently high unemployment and low interest rates. We continue to believe that we are well positioned for this environment and we will continue to take the actions needed to deliver value for our customers and solid financial results 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 third quarter was $205.6 million, or $0.69 per diluted common share compared to net income of $220.8 million, or $0.68 per diluted common share last year. Included in the results for the third quarter of 2011 are net realized after-tax investment losses of $15.9 million, or $0.05 per diluted common share, compared to net realized after-tax investment gains of $0.9 million, or less than $0.01 per diluted common share in the third quarter of 2010.

Net realized after-tax investment losses for the third quarter 2011 include an after-tax loss of $21.8 million, resulting from changes in the fair value of an embedded derivative in a modified coinsurance contract compared to an after-tax gain of $1.1 million in a year-ago quarter. Excluding these items, after-tax operating income was $221.5 million for this quarter, or $0.74 per diluted common share, compared to $219.9 million, or $0.68 per diluted common share in the year-ago quarter. The income tax rate for the third quarter was lower compared to a year ago, due to the release of $6.8 million of income taxes related to the enactment of a tax rate reduction in the UK and our increased level of investment in tax credit partnerships over the past year.

Turning to the operating segment, Unum US operating income increased 7.2% to $219.5 million in the third quarter, as strong results in the supplemental and voluntary line of business and generally stable results in the Group Life and AD&D line of business more than offset a decline in operating income in our group disability line of business. Within Unum US, operating income in the group disability line declined by 7.3% to $72.1 million in the third quarter of 2011, driven by a lower level of premium income and an increase in the benefit ratio. Premium income declined 0.9% to $508.9 million in the quarter, largely due to the ongoing effects of the weak economy on headcount and salary growth at existing customers.

The group disability benefit ratio rose to 85.5% from 84.6% in the year-ago period due to a higher level of paid incidence for both long-term and short-term disability, as well as a reduction in the discount rate for group long-term disability new claim incurrals. Rick will have additional comments about our risk results in his remarks.

Within the group life and AD&D line, operating income increased 0.6% to $53.1 million in the third quarter, benefiting from slightly higher revenue and a slightly lower benefit ratio. In the supplemental and voluntary line, third quarter income increased 27.3% to $94.3 million. The year-over-year improvement was driven primarily by strong results from the voluntary benefits business line, as well as solid growth in the recently issued individual disability lines, the effects of which more than offset a decline in income from the long-term care business. Premium income for this line increased 3.9% to $412.3 million in the third quarter, primarily due to higher sales in the voluntary benefits line of business.

The interest-adjusted loss ratio for individual disability recently issued declined due to favorable claims performance. The interest-adjusted loss ratio for long-term care was higher, primarily to an increase in active life reserves as a result of continued favorable persistency levels, as well as an increase in loss trends. The benefit ratio for voluntary benefits declined to 50.3% from 54.6% in the year-ago period, due primarily to a lower average paid claim size for voluntary life and lower paid incidence and prevalence rates for voluntary disability.

Moving to Unum UK, operating income in this segment decreased 26.1% to $34.9 million in the third quarter of 2011. Operating income declined 28.6% in local currency. So while premium income and local currency was up 4.8% in the third quarter, the benefit ratio was higher at 78.8% compared to 66.9%, reflecting unfavorable risk experience in the group long-term disability product, driven primarily by an increase in the average size and severity of new claims in the third quarter relative to the year-ago period.

Concluding our core operations, Colonial Life experienced a 5.6% decrease in operating income compared to the year-ago period, as premium income growth of 5.3% and slightly higher net investment income were more than offset by a higher benefit ratio. The benefit ratio rose to 52.6% in the quarter from 49.9% in the same period last year, due to a higher level of incurred claims in the accident, sickness, and disability product line, and an increase in the level of cancer claims coming from an older block of cancer products.

Individual Disability - Closed Block operating income was $14 million in the third quarter of 2011 compared to $9.8 million in the year-ago quarter. This was driven primarily by lower operating expenses and a decline in the interest-adjusted loss ratio, which more than offset a decline in both premium income and net investment income due to the expected run-off of the closed block. Premium income declined 5.8% to $196.4 million, while net investment income declined 1.9% due to a lower level of bond call premiums, a decline in prepayment income on mortgage-backed securities and a decrease in the level of assets. The interest-adjusted loss ratio was 84.9% this quarter compared to 85.5% in the year-ago quarter, reflecting favorable mortality experience.

Finally, the Corporate and Other segment reported an operating loss of $21.5 million compared to a loss of $10.8 million in the year-ago quarter. The higher operating loss was driven primarily by lower net investment income resulting from lower short-term interest rates and investments in low-income housing tax credit partnerships.

So with that overview of the operating results, I will turn the call over to Rick McKenney for further analysis of this quarter's results.

Great. Thank you, Tom.

A couple of themes to take you through. First, I will highlight the key drivers for risk results, a little bit on our top line growth in our core business segments and then update on our investment portfolio, with a particular view to rates, and conclude with an update on our capital strategy. I will begin with a review of risk experience for our primary lines of business starting with Unum US.

For group disability, the benefit ratio of 85.5% increased by roughly 1 percentage point in the third quarter compared to the second quarter of 2011, as well as the third quarter of 2010. Focusing on the change from the prior quarter were 2 primary drivers. First, we elected to reduce the discount rate we used on new claim incurrals this quarter by 25 basis points. This had an impact on our earnings of $3 million or about 65 basis points on the benefit ratio. We felt that this was an appropriate move given today's low interest rate environment. I would note that our portfolio rate remains very robust. In fact, the margined widened by 2 basis points to 98 basis points this quarter. Despite that, we did feel that the magnitude of the recent drop in interest rates warranted the move to adjust slightly.

Second, as we have commented in the prior few quarters, we have seen a higher level of volatility in our new claim incidence, and this quarter was no exception to the trend. New claim incidence was slightly elevated again this quarter and had a negative impact on the benefit ratio of approximately half a point. As we have seen in the past, our claim recovery experience remains solid again this quarter. Looking ahead, we will continue to monitor these 2 trends closely and look to take the appropriate pricing actions to maintain profitability.

For the Group Life and AD&D line, results continue to remain stable. The benefit ratio of 70.2% for the third quarter is very consistent with the results we produced over the past several quarters, and the earnings contribution remains very consistent in the low $50 million range.

Looking to the supplemental and voluntary lines within Unum US, we saw very good overall earnings results driven by strong performance in the voluntary benefits and individual disability recently-issued lines of business. Risk results in these lines are favorable compared to the year-ago quarter. We also saw lower amortization of deferred acquisition costs, due to favorable premium persistency in certain product lines, as well as an unlocking for favorable mortality experience in our interest-sensitive voluntary life products.

Turning to long-term care, the loss ratio is higher, both on a year-over-year and compared to the second quarter, driven by the continued growth of active life reserves for this quarter, due to the trend we have seen for both persistency, as well as loss trends. As we have discussed on prior calls with you, we are working to offset this by filing for rate increases on certain of our ILTC policies. These filings have been completed in all 50 states and the District of Columbia. So far, we have received rate increase approvals in 35 states and have achieved 88% of the requested rate action in those states that have reached a decision. The additional premium from this rate increase will merge over next year into 2013.

Looking across the business, loss pressure was most acute in the UK. We saw an unusually large increase in the average size and acceptance of new claims and the group long-term disability line in the third quarter, which drove an increase in the benefit ratio to 78.8% compared to 69.8% in the second quarter and 66.9% in the year-ago quarter. While year-over-year new claims volumes were broadly in line, the percentage of approved claims went up, resulting in an increase in reserves associated with these new claims. In addition, the average size of these approved claims was also elevated. This compounded the effect of the higher acceptance ratio. As we've analyzed the results, we can't point to any external causal factors, but we will obviously continue to watch closely to determine if it is truly just volatility.

Finally, on Colonial Life, the benefit ratio for the third quarter was 52.6%, slightly higher than our expected range of 50% to 52%. This quarter, we experienced less favorable risk results in the accident, sickness, and disability line and also in the cancer and critical illness lines. The primary driver of our adverse results for cancer and critical illness came from an unfavorable risk experience on older policies that we no longer actively market and have been taking pricing actions on. Our newer policies do not have the policy provisions that have led to the volatility that we've experienced in this line. Given these results as well as the mix shift towards slightly higher benefit ratios associated with a new accident product, it is likely that the Colonial Life benefit ratio will continue around these levels into 2012. Overall, we still like the profit margins we see this business produces and the growth opportunities we see going forward.

I would like to now turn to the top line performance for each of our business segments, beginning with Unum US. We saw good momentum for new sales in Unum US again this quarter, increasing 10% for both the third quarter and the first 9 months of 2011. Group LTD, STD and group life, and AD&D combined to show sales growth of just over 4% but importantly, 80% of those sales were generated in the core market. Voluntary benefits continues to be a positive growth opportunity for us, with sales this quarter growing 16% and growth of overall premiums in this line at a healthy 10%. While new sales trends remain encouraging, we have stable persistency trends in our primary Unum US business lines. The challenge continues to be a slight drag on our overall premium growth from a weak economy and lack of employment and wage growth.

At Unum UK, the top line trends we experienced in the third quarter were largely consistent with what we experienced in the first half of the year. While new sales trends remain difficult, declining 30% compared to the year-ago quarter, we are seeing that persistency is holding up well and premium income continues to firm up, increasing 4.8% compared to last year's third quarter. So while gaining new business remains challenging in the UK, especially in the large case market, we are encouraged by the progress we are making on renewals on our in-force business.

Finally, sales in Colonial Life segment increased 3.6% in the third quarter, primarily driven by higher sales activity in the core commercial sector, which was up 7.1%. Recruiting trends at Colonial Life remained positive with new rep contract growth of 5% this quarter and 6% year-to-date.

If we now turn to the investment portfolio, we continue to be very pleased with the results. The credit profile of our investment portfolio remains in excellent shape, with the net unrealized gain position in our fixed maturity securities portfolio at $5.7 billion at quarter end. This quarter, we reported a net realized after-tax investment gain, excluding the new ModCo derivative impact of $6 million and our portfolio watch list remains quite small. So while the quality of the existing portfolio continues to be quite strong, the challenge remains in investing new cash flows at attractive rates. This is not a new topic, but so far has only had a marginal impact on our portfolio yields.

We benefit from having a low level of new cash flow to invest relative to the size of our existing portfolios as well as the hedges we have in place on our long duration LTC portfolio. This allows us to pick our spots as we did this quarter by investing early in the quarter. As a result, our portfolio yields continue to hold up well, with our aggregate portfolio yield of 6.68%, down only 3 basis points from the beginning of the year. The yields on the investment portfolios backing our various product lines also showed similar stability.

As I mentioned previously, we did move the new claim discount rate down by 25 basis points in the Unum US Group long-term disability line this quarter, to begin to recognize the drop in interest rates. The portfolio yield net of our discount rate for this line expanded by 2 basis points in the quarter to 98 basis points, so we continue to remain well positioned, but we are also taking actions on some of the challenges that we see on the horizon. We will spend more time at our upcoming Investor Day meeting dissecting the impacts of the current environment on our portfolio.

Our balance sheet and capital position remain in a very healthy position. Book value per share continues to grow, increasing 15.2% from September 30, 2010 to $32.36 at September 30, 2011, and leverage remained stable at 21.2%. Statutory operating earnings for our traditional US Life Insurance Company declined somewhat to $139 million from $157 million in the year-ago quarter, reflecting some of the loss pressure that I mentioned. The weighted average risk-based capital ratio for our traditional US Life Insurance companies remain strong at approximately 396% at quarter end, at the upper end of our targeted 375% to 400% range.

Holding Company cash and marketable securities totaled $647 million at September 30. With a lower stock price in the third quarter, we stepped up our share repurchase activity and bought back $250 million in the third quarter, which brings the total year-to-date number to $620 million. Finally, as we look to the fourth quarter, we are confirming the outlook we provided going into 2011, which calls for operating earnings per share growth of 6% to 12%.

We will discuss our outlook for 2012 at our Investor Day on November 16 in New York and look forward to seeing you there. I will now turn it back to Tom for his closing comments.

Thanks, Rick. In closing, despite pressure in a few areas, especially within our UK business, I'm generally pleased with our overall results and the 9% increase in earnings per share. Our investment portfolio and capital position remains significant assets in this environment and position us well for what is likely to remain a very difficult environment. Operator, this completes our prepared remarks. Let's move to the question-and-answer session.

Thank you. (Operator Instructions) Randy Binner with FBR.

Great, thanks. So just jumping, I guess, to the UK, the higher loss severity there, the paid incidence as it was described, can we get more color around what is driving that? Is that the result potentially of lack of return to work ability by workers there?

Good morning, Randy. Jack, do you want to pick up on Randy's question?

Yes, it really wasn't a result of a lack of return to work. In fact, during the quarter, our recoveries were very solid. So the return to work -- it was around the initial claim decision. We get claims in the door, we go through the process of deciding whether the claim meets our definition of disability or not. As we went through that process, we had an abnormally high level of approved claims and a lower level of declined claims, so, the mix of approved and declined. And the average size on the approvals was elevated whereas the average size on the declines was abnormally low. So, we think it's pure volatility. It's not a reflection of the economy or any claim trend that we can see. We'd liken it that throwing 4 coins in the air and they all show up on tails. It doesn't happen very often that all the variance goes in the same direction and it doesn't really say much about what we expect in the future.

Okay. That's helpful. But it's not, I guess just to be clear, it's not an issue of increased claim incidence, it's just same number of claims that is skewed more towards higher costs non-denial situations?

Yes. In fact, year-to-date, our submitted claim incidence, so the incidence of claims coming through our door is down year to date. In fact, in every quarter of 2011, submitted incidence has been below the year-ago quarter in 2010. So, the submitted claim volumes are behaving very well. It's just a fluke around the ones that were approvable versus declinable.

All right, thank you.

Jimmy Bhullar with JPMorgan.

I had a question for Kevin, if you could maybe talk about pricing trends? We've heard from several of your competitors that they intend to raise prices in the disability market. I'm wondering if you have actually seen pricing improve? And then second for Jack, if you could just talk about how competitors are behaving in the market. You've obviously been raising prices. Have you seen competitors follow through or have you not seen that because your sales results suggests that other companies might still be at lower price points than where you guys are?

Thanks, Jimmy. Kevin, you want to take the first piece of that?

Will do. Good morning, Jimmy. I would say prices seemed to be maybe hardening a bit, particularly in the core markets. A number of carriers have expressed the need to either adjust their discount rates or to raise their rates to adjust for claim volatility. I think we have seen some of that coming through during the third quarter. I wouldn't say it's a significant element but it's at least, I think, useful to us in terms of maybe some hardening in the marketplace, making it a little bit easier to place renewals and to maintain existing business. So, yes, a little bit harder in the core market, I would say.

Thanks, Kevin. Jack, do you want to pick up on the UK piece to that?

Yes, what -- I think it took a while to happen but I think we are showing some signs of hardening in the market. Although our sales were down for the third quarter, they were pretty much in line with what our expectations were. The other positive note is we are continuing to accelerate our renewal program. Our [persistency] is getting stronger, so it's improved throughout the year. You have seen that reflected in our earned premium line. We've also heard of a couple of different competitors that have recently announced to the brokerage community that they are rolling out their own renewal programs. So there are signs that the pricing environment in the UK is reacting to the economic environment and improving.

And then if we think about -- I think you just recently started an ad campaign but penetration rates in the UK market are actually pretty low. Are you expecting that to move up over the next few years and have you seen any move in that direction as you've started to raise awareness of the product?

We just started the ad campaign. It's been very favorably received by the market. If people haven't seen it, it's on back-up plan Unum on YouTube. We have seen -- we have been deepening penetration. A larger portion of our sales is coming from deepening penetration on existing customers which is consistent with our strategy. We are also encouraged by our interaction with the brokerage community because more and more of the key brokers are talking about that as a key growth strategy for 2012.

Okay, thank you.

Chris Giovanni with Goldman Sachs.

Good morning. I wanted to see if you guys could comment just a little bit more in terms of lowering the discount on the new claims, I guess, given the margin you guys still have and the cushion relative to the target?

Rick, do you want to pick up on this?

Yes. When you look at what we did on the quarter, one of the things, we would have talked about this last quarter; we do have a pretty significant margin, it gives us a lot of flexibility in terms of how we go through that. When we look at pricing in the marketplace, we have to be reflective of the environment that we are in. We chose this quarter to actually lower the discount rate by 25 basis points, notwithstanding the fact that we still maintain a significant margin. In fact, on the quarter it went up by a couple of basis points. But, as we take it into our new claim discount rates and as we ultimately take it into the market, we do need to reflect what is going on in the environment with regard to interest rates. So the flexibility has not changed at all but I think that we are reflective of the severe drop we saw even since the second quarter.

Okay, and then I guess in terms of interest rates and the ILTC book, you guys pointed to persistency remaining high, loss trends higher. I mean, how should we be thinking about the reserves you have set aside for that book of business, potential need to maybe strengthen those or write-off DAC? And along those lines, what is the opportunity given that you are not writing any more new business there to maybe move that to a closed block?

Rick, do you want to take on that?

Sure. Just a few thoughts on LDC, I think it's important to paint the whole picture. I think we have been pretty open about the challenges in this business. Like the rest of the industry, We have seen low lapse rates in the product; it causes us to build reserves faster than we would have initially thought. And that is mostly in the individual LTC product line which I think you did specify. We stopped selling that a few years ago, and We have been taking pricing actions, as I mentioned, to stabilize that loss ratio. I gave you a few of those details in my prepared comments.

What we have been seeing over the last couple of quarters is some pressure on the loss trends which we will handle in the same way with regards to pricing actions but it will take time for those pricing actions to take hold. I think the bigger change you saw in the quarter was a sharp move down, particularly the 30-year Treasury's dropped almost 150 basis points. In this line, like any line, that makes it more tough on a long-tailed insurance type product. So the product is still profitable but I think we have been clear it's going to be a difficult product to manage in today's environment.

Okay, thanks. I'll get back in the queue.

Steven Schwartz with Raymond James.

Just a few -- Jack, I guess maybe this is a semantic issue but I'm just trying to figure this out. You are talking about severity being up. That's, in my mind, that's usually an indicator of just being one of those things. You said claim submission, the acceptances, or the actual submissions are down, the acceptances are up. Like I said, maybe it's semantic but that, to me, would seems to indicate that frequency is actually up. What can drive that difference?

I wouldn't suggest actually that frequency was up. Severity was up this quarter. Year-to-date, our acceptances are down, our paid claims are down and our submitted claims are down. So we had volatility this quarter. The severity was a combination of just as you are working through the claims; more of the claims were medically justified. We had a lot of cancer claims during the quarter that are pretty clear cut. Actually, I would suggest that it's just the opposite of what you would expect with an economically driven trend. Because if you had an economically driven trend you would expect submitted claim volumes to rise as economic pressures rose. You would expect more of the claims that you got were actually declinable and not medically justified.

So although your submitted claims would rise, your paid claims would rise less quickly and your acceptance rate would actually lower. What we saw in this quarter was just the opposite of that. Submitted claims were down year-over-year and our acceptance rate was up because the claims that we did make decisions on in the quarter were justified medical claims. So, I do think a lot of it is just, a lot of things lined up against us in one direction. Some of them go back and forth. It's unusual to have them all point in the same direction like that at once. And we saw that begin to subside toward the end of the quarter and don't expect it to continue into the fourth quarter.

Okay, great. And then if I could, just a couple more quickies. Rick, maybe you could talk about, what should we be thinking about the tax rate on a go-forward basis or at least for the fourth quarter? And maybe Randy, I think you touched on, there was a benefit that you had and some older policies that you no longer have, was that unlimited chemo?

Rick, why don't you pick up on the tax rate and then maybe also on the question about Colonial, we will move that to Randy, whichever --

Yes. On the tax rate in the quarter, we reported just over 30%. We did benefit from a tax rate that was affected in the UK which had an impact on our deferred tax liabilities which brought that down. So the 30 -- if you back that out, right around 32%, I think is probably a reasonable number. That is down from where it's been in the past because we do have some low-income housing tax credits but 32% is a pretty good range as you look going forward. Then your question specifically around the policy's affected, yes, that was correct. There was unlimited chemo and those type of products.

Okay, thank you.

Mark Finkelstein with Evercore.

Maybe just a clarification on the UK. I guess based on what you are seeing in early Q4 and, I guess Jack, how you're describing the claims, I mean, is it your expectation that the UK normalizes and we should be thinking about loss ratios in line with what we have seen in the past? Or is there anything that you are seeing, whether it's severity or what have you that maybe it's going to be elevated?

That would be my expectation.

Okay, so it normalizes. I guess the only -- just a clarification. I mean, you are relatively new to the UK. You've obviously made some changes over there. Is there anything that's changed in the claim handling practices that may have driven that ratio of accepted versus submitted claims to change at all?

No, there really hasn't. In fact, I think we've made changes in our claims organization that has gone in the other direction in terms of shoring up the claims organization. We actually, for the quarter, had a pretty strong recovery quarter so our ability to get people back to work was actually pretty solid for the quarter. This was all around that initial decision about accepting or rejecting liability.

Okay, and then just finally, one follow-up on long-term care. The interest adjusted loss ratio on a rolling four-quarter average has trended up pretty meaningfully. I know you are putting in place rate increases. I guess the real question is, are the rate increases that you have been filing, are they enough? And what is the strategy around that if they aren't?

Rick, do you want to pick up on that one?

Sure. When you look at loss ratios, where the interest adjusted loss ratio is in the quarter, it is a little bit higher than we expected going into the process. I think the expectation was certainly around the persistency, causing some pressure and that is really what the pricing actions were targeted towards. We'll have to continue to look at what the right pricing level is for these policies, given what we're seeing both on persistency as well as loss trends and reflect that going forward. I think it's going to be an ongoing discussion when we look at this block of business.

When would be the next opportunity, I guess, to try to submit additional rate increases if the decision was that, it's not purely a persistency issue but also an incidence issue?

We could probably break down every specific state. I think there is a regular process with each state actually going through. So I don't know, Mark, [if] there is a real theme around that. There is an ongoing strategy, I think Rick, as you said and I know Kevin has said in previous calls, they're just continually move through the book and almost once you have been through it, you start again actually. So I think that, that strategy, I think, remains the right one with that individual long-term care block.

Okay, all right. Thank you.

Bob Glasspiegel with Langen McAlenney.

You are using a 6% to 12% EPS range for the full year which is very wide given that we have three quarters in and suggests, if my math is right, a $0.68 to $0.84 range for Q4. I mean, $0.84 seems challenging. In prior years, you targeted like lower, middle part of the range or gave us some color. Plus the fact that you haven't suggested that there are a lot of wild cards going into Q4 and you just want to make sure that the visibility, signal that the visibility is a little murky going into the fourth quarter?

I would say -- Rick, why don't you pick that up? I would say it is less that than actually, I think, as you know Bob, really a couple of years ago, we began the practice of getting off of quarterly guidance and getting to an annual guidance. Every Investor Day, as you know, we break down our business into component pieces and share some outlooks for the component pieces as well as the bottom line. So I think what you are sensing -- seeing is a continuation of staying within an annual set of targets. And really, I don't think you should interpret that as being -- having lack of confidence in the fourth quarter. I think we've got some pretty good visibility into the fourth quarter.

Okay, the one follow-up. Could you just expand on what the claims incidence increase was within long-term care?

Sure, Rick, do you want to pick up on that?

Yes, I look at it in terms of the loss trends did increase so incidence is one piece of that. We've had a couple of quarters of building incidence. I think we've also had lower mortality in that block which goes back to almost a persistency type element. So it's really multiple areas, nothing specific that I'd point to. I would note that, this is a block of business where we actually have very low amounts of claims that come through. It's still fairly early in the [block], particularly as you get to some of our newer policy years. There's -- we are dealing with the data that we are seeing today.

Thank you.

Jeffrey Schuman with KBW.

Thanks, good morning. A clarification, I think Rick mentioned something about DAC unlocking and voluntary, I didn't catch that was the case, and what was the amount, please?

Rick?

Sure. The DAC unlocking that we saw, it was in voluntary in our interest-sensitive Whole Life business, DAC was $97 million, unlocking was roughly $5 million in the quarter.

Was that pre-tax or --?

Pre-tax.

Pretax, okay. And then elsewhere in the Company, were there any other DAC or balance sheet type of adjustments like that in the quarter?

There was, actually, I should mention in that line, same -- supplementary and voluntary line, our IDI block recently issued also given some higher persistency in the block, we actually had slower amortization in there, and that was $4 million to $5 million as well.

$4 million to $5 million Okay. And I'm wondering, in terms of what should be the expectation for US Group Disability? In other words, we had a number of years where there was a clear guidance about loss ratio improvement and you delivered on that. Then we transitioned to a period of flat loss ratio expectations and you delivered very clearly against that. I think last year, the loss ratio was flat as a pancake. We have seen a couple quarters now, very slight, sequential deterioration, even if you ex-out the change in the discount rate. Are we entering into a period now where we should expect a little movement there or are we still in the flat period?

Rick, do you want to pick up on that and maybe ask Kevin also to supplement that?

Yes, I think that what you said is right. The discount rate was the biggest move that you saw in the quarter. I think we've been seeing all along, there has been volatility, so we saw a little bit of that in the quarter. We'll have to see how that settles back down as we head into the fourth quarter but that slight uptick is probably something that we will continue to see in that range. But we are still talking about pretty small movements within the overall loss ratio.

Kevin, you may want to pick up on that, too, because I think the big difference today versus where we were in the past was that the profile of our book of business is very different, obviously, with a lot more core market business in there.

Right. Thanks, Tom. Hi, Jeff. I think our expectations on the loss ratio was still fairly flat, and then plus or minus around the 85% range. We are a little bit above that now primarily because of the discount rate move. We will be moving prices up in the mid-single digit range on both in-force and new business, and that will mitigate that effect and actually get back some of the cost of the discount rate. For three consecutive years, we've had submitted incidence spike in the third quarter that then flattened out and declined during the subsequent fourth quarter and first quarters. That happened in third quarter of '09, third quarter of '10 as well. And so as we saw it happen here in third quarter of 2011, I think we felt it appropriate to bake into our price increases and renewals for next year, not only did discount rate change but also the expectation that we might see that same flow. We've also had a little bit of volatility, upward volatility in incidence and prevalence on the STD line and although we haven't seen much of that change in terms of flow-through to the LTD line, we are cautiously watching that as well.

We think right now in this marketplace is a good time to move our rates upward much in the same way that our competitors are. So you put all that together, and I would say we are really effective at placing renewals, as you know. We are effective at adjusting our sales force's attention towards where we go hunting, if you will, making sure we pay attention to sales in lower volatility segments. And also, as you know, we have been ramping up our voluntary sales which don't have the same economic impact or risks as the LTD. So all in all, I think we are well positioned both on the growth front and mix of business front, as Tom mentioned, but also I'd say the loss ratio ought to stay pretty stable in and around that 85% plus or minus range.

Very helpful. Thank you.

Eric Berg with RBC Capital Markets.

Good morning. Thanks very much. My first question relates to the UK. I'm trying to understand, still, I mean we've talked a lot about it, but I'm trying to understand the outlook here. The reason I don't fully understand yet is that, I believe Rick said we'll have to take a wait-and-see attitude and I believe Jack expressed optimism about a return to a lower loss ratio. I guess my first question is, which one is it? Are we going to take a wait-and-see attitude or are we thinking we are going to go back to normal in the fourth quarter? And relatedly if you are optimistic about a return to a lower loss ratio, what is the basis for that optimism? In other words, I understand that you ruled out economic considerations but because it may be something else, maybe there's a morbidity issue that you are not fully understanding, why isn't the right answer here we're just going to have to wait-and-see and it's too early to declare victory?

Eric, let me make a comment and then I will ask actually Rick to pick up a little bit. I think, both, you've heard Rick and Jack as they spoke about the performance in the UK use the word volatility. And I think you can't ignore that, actually.

The UK business is our smallest of our 3 businesses, whether you measure that by capital, whether you measure that by premium, whether you measure that by earnings contribution. And what that means is obviously, you can have months, quarters and weeks, obviously, given the nature of this business which just simply affects your overall results for the quarter because of the relatively smaller block of business that, that operation is. So, again, I think what you are hearing us say first and foremost is, when you have a quarter like this, and as Jack went through some of the assessment of that quarter, I think we clearly view it not being systemic, we clearly believe it's not a carryover to some of the European issues. We clearly don't see any significant trend here.

And for the moment, we stated more of a volatile issue, which again, I think as Jack alluded to, we began to see the October results begin to tap back quite nicely, actually. So I guess when I put this whole thing in context, which is when you see a smaller business like this, our business does have elements of volatility from time to time. Some of the bigger operations like the Unum US, for example, you're not going to see it as much because it's a bigger base of business as opposed to the UK which is dramatically smaller. So with that, I would ask maybe Rick or Jack if you have anything you'd like to add that.

I should probably clarify because it was my comment which I think was off. I think that I share very much what Tom and Jack were saying. I do believe the volatility and that volatility, I expect -- it's not a wait-and-see attitude, I expect to see that come back end of the fourth quarter. So it'll be very clear about that.

Thank you, Rick.

John Nadel with Sterne, Agee.

Hi, good morning. I have two questions if I could. You've talked to us in the past about the natural growth of your business, normal employment, reasonable wage growth environment. Can you just update us on what you think you are seeing in terms of pressure given stubbornly high unemployment levels and I think most recently, a lack of really any wage growth?

Yes, thank you John. Kevin, do you want to pick up on John's question?

Yes, good morning, John.

Good morning.

We are seeing the same pressure we have seen at least in the last couple of years. I think a few years ago, we said that we typically saw something in the 2% plus range in terms of upward help, tailwind, if you will, on the top line from wage inflation and employment growth as well as growth in our in-force accounts from [MBOC] and during 2009 and 2010, we actually had a negative impact. I think in 2009, it was like minus 2% effect and 2010, it was maybe a minus 1% or so. Coming into this year, we thought we might be on the plus side. It started out that way but as the year has gone on, it's basically flat, even trending slightly negative perhaps. So we've that same effect of a loss of tailwind and no headwind at the moment but no tailwind either.

Okay. So -- and, I guess my, I guess the way to think about that, with some mid-single digits price increases for next year, at least on a good portion of your book and sustained reasonably strong persistency levels that we still see some premium growth in 2012 despite the lack of any help from this particular item?

Yes, I think we will see some very modest, very modest 1% earned premium growth, something like that, I think primarily driven by solid persistency, some effective renewal placement that gooses it a little bit and then another strong sales year during 2011 that will contribute to 2012.

Okay, that's helpful. Thank you. and then on the -- just turning to the long-term care business and the rate increases that you have gone through, I mean, you gave us some good data on the states and percentage of expected. Can you remind us of the -- of how that should earn through your book of business and if 88% of what you have been filing for, can you give us a sense for what that is in percentage terms on the rate?

Rick, would you pick that up, please?

I think our intention, going with that rate increase, we expected to see somewhere in the $25 million to $30 million range of premium that will ultimately come through and so that gives you a sense that, that 88% is of those levels. And it's still not done yet, and so we'll have to see how that continues to play out.

And what is the time frame that we should think if we are getting to 88 -- if we've got right now, 88% of $25 million to $30 million, does that all come through in 2012? Does it come through over a longer period than that?

No, it's going to be over a longer period than that, and it will probably come through mid -- starting in 2012 and through the middle towards the end of 2013. It takes some time.

Okay. Appreciate it. Thank you.

Thomas Gallagher with Credit Suisse.

Good morning. Hi, just wanted to ask a quick one on the UK and then circle back on long-term care. So the expectation for the UK, just so I'm clear, is that we get back to roughly around 2Q levels, call it, low- to mid-$50 million range or is there just some uncertainty, volatility expected there just based on what you are seeing? More just looking at what should we expect for 4Q?

Rick, do you want to touch the UK outlook?

Sure. I can just give you a sense which is as that volatility comes back in, we see our loss ratio come back down around the 70% range. Maybe we would see it ticking up closer to that $50 million number.

Got it. Okay. And just on the long-term care, just so I'm clear as to how we should be thinking about it, if you look at where the interest adjusted benefit ratio has gone up to 86% now, if we assume claims remained where they are today, just the natural increase in the interest adjusted loss ratio, based on low lapse rates and assuming interest rates remain where they are today approximately, I would expect the interest adjusted benefit ratio to climb toward high 80% to 90% maybe? Is that a level at which would precipitate a reserve charge? So that's question number one.

Then question number two, assuming that this is a potential scenario, to think about, are you guys still comfortable moving ahead with your buyback because I assume that if there was a gap reserve strengthening, there might also be a statutory impact. But any light you can shed on that would be appreciated.

Rick, do you want to touch on this?

Yes, I think when you look at where the loss ratio trends toward, and I think we already said it last quarter, we expect mid-80% type level. I did mention we had some loss pressure. We'll have to see how that plays out next quarter. We don't expect that necessarily will continue at that level and then it will be offset by the pricing increases. So you've got a few dynamics going on in terms of what's going to impact the loss ratio. That product line is still profitable. So, as a result of that, we will have to continue to monitor how it continues to go and even as we head into the fourth quarter and go through [experience] studies, it's one that we pay very close attention to.

And, Rick, I think as it relates to the share buyback, I think we expect to be in the market in the fourth quarter. Just to remind everybody though, fourth quarter last year, we had fewer opportunities to purchase given the staggering of Investor Day and things like that. So I think The volumes are going to be down but I think at this point, we expect to be in the market continuing to buy.

Okay, so I shouldn't be thinking about this from the standpoint of being a potential large statutory drain, at least not over the near term.

We will lay it out at Investor Day in a couple of weeks our capital plans and then we'll weave into result of all that. But we will probably save that discussion for them but we don't expect any radical change around our statutory cash flows.

Got it. Thank you.

Mark Hughes with SunTrust.

Thank you very much. Anything you care to venture in terms of customer end markets where you might have seen an uptick in frequency either in the US or UK? And then secondly, any change in behavior out of the Social Security Administration and their willingness to approve disability claims?

Kevin, do you want to just talk a little bit about the US piece including maybe the Social Security side and then maybe Jack can connect on the UK?

Will do. Good morning, Mark. Nothing particularly noticeable on a by industry segment basis. This quarter, manufacturing incidence rates were up a little bit, transportation incidence rates were up a little bit, retail was up a little bit, education was down a little bit, data processing was down a little bit. That's the same volatility we see every quarter; we didn't see anything radical. I don't expect, really, to see anything too significant either. We always keep our eyes on it anyway and we adjust our prices accordingly for those segments that seem to be behaving a little bit out of line, we either increase rates or shift our sales focus away from it or both. On the Social Security Administration, no, haven't seen much change at all. Our offset levels continue to be at very strong levels.

Thank you.

Jack, do you just want to offer it from the UK side?

Yes. I think from the UK side, we haven't seen anything from any consumer markets. UK is a little bit different market than the US, in that we are -- we don't have the same penetration in customers. It's largely senior executives and senior managers. So our book tends to be a little more homogeneous even though if it is split by industry because it's largely covering upper management. So I think that's one of the reasons why we have tend to seen more stability through economic downturns than, perhaps, the US market has.

Thank you.

Colin Devine of Citi.

Good morning. A couple of questions. I guess, first for Kevin, you had some very strong voluntary sales this quarter, in fact, I think the third quarter, it was a record -- first quarter is used to being obviously the strongest but very strong third quarter. That seems to fly in the face of all the other trends you're seeing for your business, and perhaps just even tell us, what is selling so much?

Second, I don't want to beat a dead horse here on long-term care. Rick, I appreciate you said it's profitable but I think it would be helpful to know just how profitable it is. We are getting really close to the line here.

Following up on Tom Gallagher's question, it's not just reserves but it's also -- what is the size of the DAC asset backing that line? And how close are we getting to having to impair that because certainly, I assume you are projecting we're into a period of lower long-term rates given that the discount rate action you took on group disability. So I would like to understand a little bit more just the outlook on that.

Then finally for Tom Watjen, Unum, there was, I guess, chatter in the media that you might have been a bidder on the Irish Life Property that's out there, looking at some M&A as well or do you have any comments on that? Thanks.

Sure, will do. Thanks Colin. Kevin, do you want to pick up the first one on voluntary and maybe also if I could just maybe ask you to speak to the small commercial market, too, because there are pockets of growth that are quite visible in your business.

Thanks, Tom. Good morning, Colin. On the VB side, first of all, I don't think it's any particular product in the portfolio. I think it's the whole portfolio. I think what it reflects maybe is a combination of things, our continued strategic emphasis on ramping up the voluntary market given the trends that we see in employee benefits in general, and the shift from, if you will, defined benefits to defined contribution at the employer level.

I think it could also reflect our expanded field focus. If you recall, over the last two years, we have expanded the portfolio of all of our core market reps to include both group and voluntary products as part of our Simple Unum initiative. And in fact, during this quarter, 70% of our group sales included an attached voluntary sale so really strong integration and strategic emphasis on the part of our field force, and I think that's, for the most part, what's driving it. You couple that with a strong 13% growth in our core market group business, with -- if you think about that growing 13%, you think about voluntary growing and you think about the increase in integration, I think that is what's driving the growth in voluntary.

What ROE targets are you pricing for? It's hard to parse that out given IDI and LTC within that segment.

We price voluntary though, for the mid-teens.

Okay. Thanks Kevin. Rick, do you want to pick up on the long-term care piece of it of Colin's question?

Sure. Colin, I will try to give you a couple more dimensions to that when we talk about the business. It is profitable. I would tell you that the returns on that business are low single digit type ROEs. I think we've talked about that in the past and given the pressure, it remains at those levels which we will try and combat with pricing actions. Just around the sizing of it, you have a reserve balance on that line of about $4.5 billion and the DAC asset is about $300 million. So those are all the pieces that we watch in terms of going through and analyzing the changes that we are seeing.

Okay. That would have be your most interest-sensitive line right now, right?

I would say, yes, the most challenging line to put new cash flows behind given the long-term nature of it, yes.

Colin, to the last piece, as you know, no surprise, we really can't talk about specific acquisitions but I do think just a couple of points I'd make and certainly we'll look forward to embellishing these at Investor Day. But I think first off, we like the 3 businesses that we are in. We see good growth opportunities. Kevin talked about the growth we're seeing in the small commercial and voluntary. Randy had good small commercial growth in his market and obviously, the UK is going through some adjustments. But I want to always start when we talk about M&A with the fact we actually like our 3 businesses and think we've got some good prospects, especially as we look beyond some of the economic challenges that I think everybody is facing right now.

Having said that, as you know also, we've got a pretty strong financial foundation from which to not just support our businesses but we generate a fair amount of excess capital. We have, over the last couple of years, been much more active looking at acquisitions that could fit within our framework of how we assess risk, how we think about what we want to play in the marketplace and not get too far afield from the things that we know well, which means we are looking at things that extend our product focus, extend our geographic focus. And I would say, especially in this environment, even though there is not a lot of things out there, I think the marketplace views us as one of the people who, frankly, are a player. And therefore, we do get a chance to look at some things.

As you can see that we haven't done anything which means we have a very high bar that we have set for ourselves in terms of doing things that could complement the things that we do in place right now. And frankly, measure any acquisition against our existing standalone plan with redeployment of capital which creates a pretty high threshold. But We are in the flow. It's always better to look at things and say no or walk away than it is to miss something that may have been a nice complement to our business and our financial goals.

By geographics, since you mentioned it, that does mean that you would consider outside the United States?

We would, absolutely, yes, provided it's got, as I said, the characteristics that we're looking for in terms of the products and the marketplace dynamics that, obviously we are comfortable with in the US and the UK. So it has got to have those characteristics but we would look outside the US, yes.

Thank you.

Chris Giovanni with Goldman Sachs.

Thanks. Just 2 quick ones. The sovereign exposure, the $1.5 billion or so that you have in the portfolio, can you maybe just break that down by geography, particularly focused on Europe?

We can, Chris. We will let just Tom skate through this document here so we can get that in a second.

Why don't you ask your second question while I try to find this for you real quick --

Okay. Then, Tom, you made some comments in terms in the open window period for share repurchase in the fourth quarter being smaller than other quarters. If you look at, you mentioned in the release, the attractive share price, taking advantage of that in the third quarter, is there potential to maybe do an ASR or something like that in fourth quarter given where shares are today?

Let me pass that to Rick and ask Rick to speak to that.

I think that all tools are available to us in terms of how we buyback our stock. It comes back to the attractiveness of where the price is. We have the capital ability and as we showed in the third quarter, we will take advantage of those windows. I think that we prefer to be in the open market and buying back the shares. And so with a limited number of windows, that may, in fact, be the case. But any big movements, ASRs are certainly available to us.

Chris, on the international exposure, looking at the aggregation of Portugal, Ireland, Italy, Greece and Spain, we have no direct sovereign exposure. We do have on a book value basis, about $545 million of corporate exposure and just looking through the list, there are only 2 securities of the probably 20 or so that we have positions in that are below investment grade. Both of those are in the double B range, and those two together would be about $30 million, again, of the $545 million. So, everything else is investment grade corporates in those countries.

That's helpful. Thank you.

I think, operator, we have time for perhaps one more question. We know we've run a bit long.

Thank you. John Nadel with Sterne, Agee.

Hi, thanks for going a little bit longer. Us life guys, you were the only ones on the docket today. (laughter) By the way, I can't tell you how much I appreciate that versus tonight. The follow-up question that I have for you is about the UK. Just thinking about the economic backdrop there, maybe setting aside the volatility of the quarterly submitted and that thing, just given the increasing pressure, downward pressure, potential for the UK to fall back into recession, unemployment rates seem to be rising, not stabilizing just quite yet, can you give us a sense, maybe Jack can give us a sense for the pricing environment there. I know you were first movers. You said maybe you are seeing the market move now but can you give us a sense for sizing, the pricing actions that you have been taking?

Jack, do you want to pick up on that?

Yes, I would. One of the things that I would point out is that the public sector is driving a lot of the unemployment in the UK currently and we don't -- we are not involved in the public sector. We don't currently insure it. So we are a little bit immune to some of that driver. From the perspective of the pricing environment, the market had been softening through 2008 to 2010. We turned the corner on it in the second half of last year. We paid some price for that from a new sales perspective and initially, particularly early in the year from a persistency perspective, the persistency outlook has improved. There are competitors in the marketplace with renewals as well. People are reacting to the low interest rate environment.

I think there are even some small signs that, perhaps, particularly at the last case, the market may be getting firmer there as well. So, we are encouraged by where we are. We have accelerated our renewal program through the year. We've had better results in the second half of the year than we did in the first. So, I think there are some pretty positive signs going into 2012. Not that it's going to be easy, mind you, and there is still pressure from a growth perspective with the lack of natural growth and salary increases but we are positive about the direction the UK market is going.

I appreciate all of that, Jack. Maybe just relative to Kevin's comments on mid-single digits, pricing in the US, any ballpark figure you can give us at least in terms of the UK?

I would say a similar level in the UK.

Appreciate it. Thank you.

Actually, thank you all for taking the time to join us this morning. We look forward to seeing hopefully many of you at our Investor Day meeting on November 16, in New York and please contact Tom White or anybody from the Investor Relations staff if you have any questions about our Investor Day meeting. With that, operator, this will conclude our third quarter call.

Thank you, gentlemen. Ladies and gentlemen, we thank you for your participation. This does conclude today's conference.