普登 (UNM) 2012 Q3 法說會逐字稿

Good day, and welcome to the Unum Group third quarter 2012 earnings results conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Senior Vice President Investor Relations, Mr. Tom White. Please go ahead, sir.

Great, thank you. Good morning everyone, and welcome to the third quarter 2012 analyst and investor conference call for Unum. 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 SEC, 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, 2011, as well as our subsequently filed forms 10-Q. Our SEC filings can be found in the Investor Section of our website at unum.com.

I remind you 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 our website, also in the Investor Section.

Participating in this morning's conference call are Tom Watjen, President and CEO; and Rick McKenney, Executive Vice President and CFO; and also Kevin McCarthy for Unum US and Unum UK; and Randy Horn for Colonial Life. So now I'll turn the call over to Tom Watjen.

Thank you Tom, and good morning. Overall, the third quarter was a solid one for the Company, with operating earnings per share growing by 6.7%, and I'm generally pleased with the results around the Company. Let me touch on a few of those here, just to start the call. First, we continued to generate solid results in our two largest operating businesses, Unum US and Colonial Life, In both business segments we again experienced positive year-over-year growth in premium income and operating income. In Unum US, premium income grew 3.5% this quarter, as we continued to see positive sales momentum in our target markets and strong persistency across our major product lines.

Risk result also remained generally stable, helping to produce a 3.4% increase in operating income for the third quarter. At Colonial Life we saw similar results this quarter, with 5.5% premium growth and operating income growth of 3%. While Colonial sales results were down somewhat, which is an area of focus for our team, we continue to enjoy strong persistency across most of our market segments. The return on equity for both of these businesses is very strong, in the 13% to 14% range for Unum US and in the 16% to 17% range for Colonial Life. I'm very pleased with the consistency of performances of these two businesses. Results, though, on our Unum UK operations continue to under-perform our expectations in the quarter.

The business in general remains very profitable and has produced a 12% return on equity so far in 2012, with our group disability business continuing to generally meet our expectations. Our group life results, though, are disappointing and we are taking aggressive pricing actions in repositioning our life block to this issue. We've done this before, and I'm confident we will see gradual improvement here as well as we execute on this plan. Rick will touch on this further in his comments. Next, the results of our Closed Block segment were in line with our expectations, as the more favorable result from our individual disability line offset the somewhat weaker results in our long-term care line, which not surprisingly continues to be somewhat more volatile quarter-to-quarter. Rick will cover the performance for our Closed Block in his comments.

Now moving to our investment results. We continue to generate very solid investment performance this quarter. Today's low interest rate, though, continue to put pressure on our net investment income, and on those products which are more interest rate sensitive. Since we are not expecting the rate environment to improve anytime soon, nor willing to sacrifice investment quality in order to stretch for yield, we are taking actions needed to maintain our solid profit and reserve margin, particularly in our Unum US LTD business. This includes adjusting our discount rate and increasing our pricing in the market. You'll you're more about this in Rick's comments.

Finally, our capital position remains in very good shape. Our quarter-end risk-based capital level of approximately 407% remains above our target range of 375% to 400%. Our holding company cash position is $762 million, providing us with significant financial flexibility. We continue to balance maintaining a strong capital position with our goal of returning capital to shareholders. In the third quarter, we repurchased $100 million of stock, which keeps us on pace to complete our plan of $500 million of repurchases for full year 2012. When completed, we will have repurchased over $2 billion of our common stock, or almost 25% of our shares over the past five years. While operating earnings growth in this environment remains challenging, we remain committed to maintaining our consistent, steady program of returning capital to our shareholders.

So in summary, I continue to feel good about our Company's position and what remains a tough environment. We've been able to maintain a strong investment portfolio and capital position, grow our businesses in several strategically important areas, and generate consistent, solid profitability across the majority of our businesses. We've also continue to consistently return capital to our shareholders through our share repurchases and dividend increases, while maintaining a solid credit rating, and I would note that two of our rating agencies recently upgraded the Company's ratings.

I will not turn things over to Tom White for a review of our operating results this quarter. Tom?

Great. Thank you, Tom. As you can see from our press release yesterday afternoon, we reported net income of $230.2 million for the third quarter of 2012 or $0.$0.83 per diluted common share, compared to net income in the year ago quarter of $202 million or $0.$0.68 per diluted common share. Included in net income for the third quarter of 2012 are after-tax nonoperating retirement-related losses of $7.6 million, and an after-tax net realized investment gain of $13.8 million. Included in last year's third quarter are nonoperating retirement-related losses of $5.2 million and a net realized investment loss of $15.9 million. So excluding these items, after-tax operating income was $224 million for this quarter or $0.$0.80 per diluted common share, compared to $223.1 million or $0.$0.75 per diluted common share in the year ago quarter.

Turning the business segments, operating income for the Unum US segment increased 3.4% to $216.3 million in the third quarter, with premium income increasing by 3.5%. The expense ratio improved on a year-over-year basis and risk experience was generally stable, with the benefit ratio for the segment at 73% this quarter compared to 72.8% in the year ago quarter. Operating income in the Unum US group disability line was $74.5 million in the third quarter compared to $72.7 million last year. Premium income increased 0.7% over last year, due to recent favorable sales and persistency trends, but total operating revenue declined by nine -- excuse me -- 0.9% as net investment income declined by 6.6%. The benefit ratio, as we will discuss later, was 84.9% in the quarter, down from the year ago level of 85.5%. In the group life and AD&D line, operating income increased 7.3% to $56.1 million in the quarter, benefiting from an increase of 6.9% in premium income, as well as higher net investment income and lower operating expenses, which offset an increase in the benefit ratio. In the supplemental and voluntary line, operating income increased 1.8% to $85.7 million, with solid growth in premium income of 4.9% offsetting a slight increase in the benefit ratio.

Moving to Unum UK. Operating income in the segment declined to GBP17.3 million from GBP21.5 million in the year ago quarter. Results in the group life line of business were significantly weaker than the year ago quarter, while income in the group disability line improved over last year's third quarter results. So concluding our core operations, Colonial Life reported an increase in operating income of 3% this quarter to $68.7 million. Premium income increased by 5.5%, and the benefit ratio was slightly higher than a year ago. Results in the Closed Block segment this quarter showed a decline in operating income to $25.6 million from $30.8 million in the year ago quarter. For the Corporate segment, we reported an operating loss of $27.4 million for the third quarter, compared to a loss of $20.8 million in the year ago third quarter.

Net investment income is lower due to lower asset levels, a lower proportion of assets invested at long-term interest rates, and a decrease in investment income attributable to tax credit partnerships. Interest in debt expense was higher at $33.9 million in the quarter, compared to $32.2 million in the year ago quarter, reflecting our issuance of $251 million of 30 years senior notes during the third quarter. It's important to remember that the negative impact on net investment income from the tax credit partnerships is offset by a lower income tax rate due to the tax benefits recognized as a result of the tax credit partnerships. Finally, the tax rate in the third quarter is also lower due to a reduction of $9.3 million in our income tax expense in the third quarter to reflect the impact of the UK tax rate reduction on our net tax liability related to our UK operations. The reduction in our tax expense from a similar rate reduction was $6.8 million in the year ago quarter. These were driven by a reduction in UK income tax rates that were enacted in both the third quarter of 2012 and 2011. So at that, I will turn things over to Rick McKenney for further analysis of this quarter's results.

Great. Thank you, Tom. This morning I will cover the profit trends we experienced in our business segments this quarter, a little more detail on our sales and growth trends, and I'll also update you on our investment results and capital position. First on the operating results of the third quarter, I will begin with Unum US where we had another strong quarter for the overall segment. Operating earnings growth was 3.4%, and risk experience was generally solid across the segment. Focusing on risk results, for group disability, the benefit ratio remained generally stable at just under 85% for the quarter, compared to 85.5% in the year ago quarter and 84.7% in the second quarter. In the third quarter, we lowered the discount rate for new claim accrual's on the group long-term disability by 50 basis points.

While our interest reserve margin remains at a very healthy level of 86 basis points, we continued our measured pace of new claim discount rate adjustments, given the extraordinarily low interest rate environment. This is particularly true for tenure public and private bonds, our primary assets backing this line. As we have outlined in the past, a discount rate reduction of this magnitude reduces quarterly earnings by about $6.5 million. The impact of the discount rate change was largely negated by several factors related to risk trends this quarter. Namely, stable paid incident trends, a lower average size of new claims, and continued very good claim recovery experience, as well as our ongoing price discipline on new sales and renewals.

Our profit margins continue to remain at a healthy levels for the group visibility business. The group life and AD&D line was also a strong earnings contributor this quarter, up $56 million, up 7.5% from last year. The benefit ratio was 72.3% in the third quarter, higher than the 70.2% in the year ago quarter, due to an increased volume of large claims in the quarter. Margins also remain very strong in our group life and AD&D lines. The supplemental and voluntary line within Unum US continues to produce a very strong level of earnings for us, with earnings of $85.7 million for the quarter. Risk experience remained generally stable, with a benefit ratio of 51.5%, compared to 51% in the year ago quarter. These lines of business continue to be attractive growth opportunities for us, with strong margins and consistent performance. Colonial Life also continued to produce solid results with third quarter earnings of $68.7 million, an increase of 3% from a year ago. The benefit ratio remained relatively stable at 52.9% this quarter, compared to 52.6% in the year ago quarter, with higher mortality in the life line of business, but favorable experience in the cancer and critical illness and the accident, sickness, and disability lines. Solid, consistent results once again generating ROE in the 16% to 17% range.

Moving to Unum UK, results continued to be challenging with third quarter operating earnings at GBP17.3 million, compared to a year ago quarter of GPB21.5 million. Result in the group life line business were negatively impacted by higher claim volumes and higher average claim sizes. On the other hand, results in the group disability line improved on a year-over-year basis due to favorable claim incidents and claim recovery rates. As we have discussed with you in recent quarters, results in Unum UK can be inherently more volatile than most of our other lines of business because of the size of the policies we write and the relative size of this block of business. In order to restore the profitability of this business, we will need to aggressively raise prices, particularly with our group life policies. We are working to do so with double digit rate increases, and expect to see improved results looking out over the next several quarters.

Concluding my comments on margin, overall results in our Closed Block were in line with our expectations at $25.6 million this quarter. Results in the individual disability line of business were stronger than normal, with favorable risk experience as indicated by the interest adjusted lost ratio at 82.5% this quarter compared to almost 85% in the year ago quarter. Long-term care results were slightly under our expectations, with the interest adjusted benefit ratio at 91.3%. Our year-to-date results of 90% are slightly above our expected range. We experience higher claim volatility this quarter with higher new claim incidents and a higher average claim size. We continue to watch this closely, but our experience to date has not changed our longer-term views.

As we look to our growth trajectory in the Unum US, we continue to see a positive momentum in our sales results again this quarter with 4% overall sales growth, driven by 10% growth in our group disability line and 5% growth in our supplemental and voluntary lines. The sales mix was also encouraging, with over 80% of this quarter's group product sales coming from the core market segments. Premium persistency remains at a strong level for Unum US at 90.7% for group long-term disability and 91% for group life on a year-to-date basis. With these positive trends, we continue to produce good premium growth of about 3.5% in our Unum US segment, a good result given today's competitive market conditions and continued weak employment trends.

In the UK, sales results for the quarter were down about 20% in local currency, with a sharp drop in group life sales, which were down 39%, offsetting a 6.6% increase in the group disability line. We are aggressively pushing price increases into the market, and clearly this is having a negative impact on group life sales. You'll also note that the persistency for our major group lines in the UK have declined this year, with group life persistency declining to 80% for 2012 to date from 88% in the first nine months of 2011, and we are pleased with the rate of increases that we are beginning to realize in the group life line, but as we said previously, it will take several quarters to improve the profitability in this line.

Finally, premium income increased 5.5% in Colonial Life in the third quarter, in line with the premium growth trends we've seen in recent quarters. New sales in total were down this quarter by 5.8%, while new sales in our core commercial market segment were down less than 2%. We experienced large declines in the large commercial market and in the public sector market. We didn't see any dramatic changes in the market in the quarter, just a continuation of decent sales trends within existing accounts, but challenging trends with new account sales. Moving onto the balance sheet and the investment portfolio, this is very much a story similar to what we've experienced in the past several quarters. Very good credit quality experience, but a very challenging environment for new money yields due to the low level of interest rates, as well as the tight corporate bond spreads available in the market.

Briefly on credit quality, the net unrealized gain position on our fixed maturities securities portfolio stands at $7.3 billion at quarter end, and our watch list of potential problem credits remaining very low. The net realized after-tax investment gain from our portfolio was slightly positive on the quarter. The low interest rate environment continues to present a challenge, though, and the overall portfolio yield at the end of the quarter was 6.54%, a reduction of 5 basis points from the prior quarter. Our strategy for managing through this environment is centered on being selective in our asset purchases, with tighter spreads in our core asset category of investment grade corporate bonds we found better value and yields in other asset categories, such as private placements, commercial mortgage loans, and below investment grade bonds. We also continue to benefit from the hedges we have in place for our long duration LTC portfolio that cover about a third of our cash flows. With selectivity comes a higher level of uninvested cash in our product portfolios. We did make progress in the third quarter by reducing the amount of uninvested cash to less than $300 million at quarter end from over $400 million for much of the first half of the year. The other important element of our strategy for dealing with low interest rates is to make adjustments to our discount rate assumptions, such as we did with our group long-term disability line this quarter, and look to offset that higher cost by adjusting pricing on new sales as well as renewal business.

Moving onto our capital position, we continue to be very pleased with the Company's overall capital. Statutory net income was $138 million for our traditional US life insurance companies this quarter, consistent with a year ago quarterly results, and our run rate continues to support our capital model that generates about $500 million of free cash flow per year. The weighted average risk-based capital for our traditional US life insurance companies is approximately 407%, remaining slightly above our 2012 target range of 375% to 400%. Cash and marketable securities in our holding companies totaled $762 million at the end of the third quarter, and we benefited from the debt issuance we completed in the quarter. We issued $250 million of 30-year debt at a coupon of 5.75%, taking advantage of today's low interest rates, strong investment demands for corporate bonds, and our own recent rating upgrades. With this issue, our leverage remains a very comfortable 25%, and our coverage ratios are very healthy.

Our share repurchase activity in the third quarter totaled $100 million, which brings us to $400 million for 2012 to date. We expect to complete our planned $500 million of repurchases for the year in the fourth quarter. Closing with a comment on our outlook, we believe that growth in operating earnings per share for 2012 will be in the range of 3% to 6%, based off full year 2011 operating earnings per share of $2.98. We plan to discuss our 2013 outlook for operating results and capital management plans on December 17 when we will host a meeting in New York. Details of that meeting will be released soon, but I'd ask you to mark it on your calendars and join us that afternoon.

Now let me turn the call back to Tom for his closing comments. Tom?

Thanks, Rick. I will close by saying again that we are generally pleased with our third-quarter results. Unum US and Colonial Life continue to generate solid premium growth and margins, and we have continued to maintain a solid investment portfolio and strong capital position. This certainly remains a very challenging interest rate environment, but we are taking the actions necessary to effectively manage through a sustained period of low interest rates. In the one area not meeting our expectations, Unum UK, I feel good about the plan we have in place to gradually improve our performance in this business. While we remained focused on generating strong operating results, we are fortunate that our cash flow and capital position remain strong, allowing us to supplement our operating results with a consistent return of capital to our shareholders.

Operator, this will complete our prepared remarks, and please let's move to the question-and-answer session.

Thank you.

(Operator Instructions)

We will take our first question from Jimmy Bhullar with JPMorgan.

Thank you. I had a question, first, on long-term care. Obviously, you took a pretty large charge last year, and part of that was related to low interest rates. Given the decline in rates and just corporate bond yields being lower, what is your comfort with overall long-term care reserves? At what point would you need to consider taking another charge? Then secondly, just on, if you could talk about some of the things you are doing in the UK market? You mentioned you are raising prices, but your persistency has declined, and then I'm assuming it's because of that. Does that imply that competitors are not following suit, or maybe if you could talk about the competitive environment in the UK market as well.

Rick, do you want to pick up on Jimmy's first question on long-term care?

Yes. Jimmy, had a specific question on long-term care around interest rates and the impact on that line. If I take you back to the year-end process we went through, we adjusted our reserves, and based that on an outlook that we had at that point in time of a difficult environment, of a very low rate environment, looking out the three- to five-year range, and adjusted our interest rate assumptions and are discount assumptions accordingly. The world has gotten a little bit tougher in the investment grade market. What I would tell you as opposed to a change in that outlook of a three- to five-year range, it probably has brought in at the current moment to the shorter end of that range, and we will have to continue to look on that.

But I would also caution, there's a lot of other elements you have to look at when you look at that line of business. We isolated that element at year-end last year, but you also have to think about the things that we are doing in terms of price increases that we are taking, actions that we are taking in the line, and continuing to do that. For that particular element, we still feel fine with that assumption that we made at year-end. We did look out over the horizon just a short bit in doing that, and it continues to be the case, but it is a broader line that we will continue to watch, and go through, and measure, and manage.

Maybe Rick, to that point, I think since you mentioned that we are actively managing that business, even though it's in a Closed Block, it might be because I know it's on other people's minds as well. Kevin, if you could take a minute and just talk about just some of the actions that we have underway, because we have really put quite a few resources behind being sure that even thought it's closed, we are actively managing that business.

Thanks, Tom. Good morning, Jimmy. In long-term care, maybe the most important thing is rate increase process. That process is proceeding. As we've mentioned in prior quarters, it's not a one-time event. It's a dynamic renewal process. We filed in nearly every state at this point, and we're so far, at least achieving our objectives with approvals. Some of those are full approvals, some are phased-in approvals, and are partial approvals, with a fairly wide range, I guess, of rate increases, but ranging from the teens to upwards of 50%.

In total, though, those increases are very consistent with the assumptions that we rolled into our models at the end of last year and into the first quarter when we took the charge and closed the Block. We'd expect those premiums to emerge in 2013 and into 2014. Beyond the rate increase actions, we have made a number of actions in terms of shoring up Management further, increasing our claim control administration control processes, quite similar to what we do in long-term disability. I think from an actively managed standpoint, we have the right things in place.

Good. Thanks, Kevin. Jim, your other question was on the UK, and before I asked Kevin to pick up a bit, let me just again, just come back to a couple comments I made. As you know, that business continues to be very profitable. It continues to generate over a 12% return. Frankly, the LTD business in that market continues to perform reasonably well. I think as come out this morning very clearly, the issue there is Group Life.

You may recall, when we made some changes, actually a bit ago in terms of the leadership team and the structure of how we are running that business, we did talk that under Kevin's response, broad shoulders actually, because some of the issues we are confronted with in the UK we find are very similar to ones we went through in the US. I'm specifically talking about the actions we had to take around repricing and repositioning the Group Life business. So when you talk about persistency and the cause and effect between pricing actions and persistency, I'd say Kevin, we are very familiar with how to keep a good eye on how to balance those different things. Maybe just speak to a little bit about what we are doing now in that marketplace.

Thanks, Tom. I think this is a straightforward problem and a straightforward solution. We've got some issues in our Group Life line of business, primarily being driven by some previous underpricing, some deterioration in mortality, reflecting increased levels of incidence and higher average size claims. What we are doing is putting in place an aggressive renewal program, double-digit rate increases on average, with some rate increases upwards of 30%, depending on the segment or the account. In that process, I would say it is still early in the game. It will take us a renewal cycle to get all the way through that. I would expect some pressure on persistency, both from customers who don't want to accept the rate increases and/or from some purging of the Block that we'll do, similar to what we did in the United States back several years ago.

As far as competitors go, I would expect in general that they will follow. Also in these environments, just as happens in the United States, sometimes companies take steps to back off of their renewal increases if they think that they're under persistency pressure -- or too great amount of persistency pressure. I would expect there to be a follow-on from competitors, but I wouldn't expect it to be wholesale.

The other things that we are doing there, in addition to rate increases, are we are changing our mix of business, much again like what we experienced in the United States. Our larger case Group Life business has not performed nearly as well as our core market Group Life business. So, we will be changing our mix of business, we are also tightening up some underwriting guidelines by segments, and also reducing or eliminating some richer product features. All in all, I think it's the same process we went through in the United States where we had significant success.

Thank you, Kevin.

Thanks.

We will go next to Suneet Kamath with UBS.

Thanks. Good morning. My first question is on long-term care. I guess, Rick in response to Jimmy's question, you spent some time talking about the interest rate exposure and the underlying assumptions there. I guess I wanted to ask the same question as it relates to the claims experience. I think in your prepared comments, you said the loss ratio just north of 90% was a bit higher than your expectations. So I just wondering, first, what are your expectations in terms of loss ratios in that business? Then how many quarters of north of 90% would we need to see before you might have to think about taking a reserve charge, not necessarily for interest rates but for higher claims?

Rick, you want to take that one?

Okay, Suneet. It is a broader question. I appreciate you bringing that back. What I would say what happened in the quarter, and what has happened year-to-date really is much more about what's happening in the short-term volatility and claims experience. We do not see that necessarily as a trend today, and what's reflected in our reserves are much longer term trends. So when you talk about -- this isn't about quarters we're looking at, it's about at years in terms of looking at those trend line, and so I think it's hard to extrapolate off of anything in the quarter.

You mentioned the expectations. I think we would expect actually loss ratios in this line to be more in the high 80%s than in the low 90%s. So that's really where that is predicated from. It's one that we continue to watch. It is a line that we have been focused on and continue to focus on, as Kevin's comments. It's about actively managing that Block as well, as we go through that. So when you think about our broader range of assumptions, we go through a process, as we are now at year-end of looking across all of our lines of business, not just long-term care, and looking at all of the assumptions we have driven there. But this is much longer term process when you think about it. The claims experience that we've seen year-to-date, a little higher than we'd expect, but we don't necessarily see a trend there that would need to be reflected throughout the longer tail of the reserves.

Got it. So high 80%s versus low 90%s, it doesn't seem like it is wildly out of your expectations, just slightly higher?

That's right, and this is a line which we'll see volatilities. So I don't think we are overly concerned. We obviously don't like when results come in lower than our expectations, but it's nothing that causes us necessary longer-term concern. I think your calibration about how far it is off is appropriate as well.

Okay. Thanks, and my second question relates to the capital generation model, it's a slide that you typically use in your presentations. I'm just wondering where we sit today with this, because it looks to me like the UK, the last time you did the slide, you were talking somewhere order of magnitude, $100 million to $150 million of statutory net income. I'm not sure where we are running year-to-date, but my guess is that we are a bit below that.

And then in terms of capital required to support growth, your slide shows plus or minus $50 million, given the growth that you are seeing in the US. My guess is that might have some upward pressure. So I guess my question is, as we start to think about next year, I acknowledge that you are going to give us more guidance on this. But should we expect that $500 million number, given these moving parts that I just mentioned, to possibly have some downward pressure?

Sure. Let me answer that in some of the detail you had here, because I think it's a good question. We will address that more as we get to the year-end process. I tell you, that capital model is very much intact. Even when you look at the UK, which you specifically asked, we had $100 million to $150 million, in dollars, that we had there. So if you look at the after-tax earnings on the US GAAP basis, you are just slightly below that range. When you think from a statutory perspective, it runs a little bit differently than that. I think we'd probably be at the lower end of that range today, whereas we were probably the upper end of the range as you look at it last year, but it still it hasn't broke through that. We'll actually be looking for, as we've seen over the last several halves, I guess, dividends coming out of our UK companies, which we've continued to take. So that piece of the model's still intact.

We talk about our US statutory earnings continuing to be very good across the line. And then in terms of capital consumption of the business, we are certain to see the business grow. We are happy about that in terms of the premium line, but I can tell you the capital -- if you think of our product lines and that those that are growing are not heavily capital consumptive. So, when you think about that, that $50 million is probably still pretty much intact, even though we are starting to see growth in the lines which do require a lower amount of capital. So we think about the model a lot. I'm glad you are focused on that. I'd say it's still very much are on track, and we will give more detail to that as we get to our Investor Day in December.

Great, that's helpful. Thank you.

We will go next to Randy Binner with FBR.

Thanks, good morning. This is Dan [Elrod] (multiple speakers) in for Randy. Particularly as it relates to the sales environment, the sales trends in Colonial slowed down a little bit, and then also in US in Group Life. So can you talk a little bit about if anything in the competitive environment has changed, or just maybe some tough comps, or one-off sales from last quarter that slowed the trajectory down?

Sure. Actually, maybe I'll ask -- we'll break it in two pieces. Actually, maybe Kevin, you want to talk a little bit about the Unum US sales trends. Again, I think we felt pretty good, actually, about where things stand and the sustainability of that.

Yes. Good morning. Group Life sales, third quarter in general is the smallest quarter of the year in terms of sales. So you're going to get a little bit of volatility. Also, it's particularly in the larger case end of the marketplace in the quarter. We didn't see anything particularly attractive, at least in terms of the way in which we approach discipline pricing. Core sales were still up. So no, I don't see anything really going on unusual in the Group Life marketplace. I just think you're going to get a little bit of that volatility in the third quarter because it's the smallest one.

And I'd say, too, Kevin. Your year-to-date sales are up about 9% actually across all lines, and so I think the beauty of our Unum US platform is we have a whole breadth of offerings in the marketplace. The places actually we have targeted for strategic growth, we are seeing a fair amount of strategic growth.

Yes.

A lot of that is just because we've got a good offering and we've got a good connection with the marketplace.

Year-to-date Group Life sales were up 7%, and in the core market they're up 8%. So like I said, I think it's more just quarterly patterns more than anything else, and maybe a little bit of lack of attractive large case.

Then Randy, maybe you could speak a little bit about the Colonial sales results. I mean, I think as everyone knows, we really have two entrees into the voluntary marketplace. One is through the EMUS offering, which is primarily our brokerage model to come to the marketplace, where that gives us a different more diverse way to come to the market with a more integrated offering. The Colonial offering is more of a limited offering, but yet one that gets certainly to a wide -- very important segment of the marketplace. Randy, you may want to talk about some of the dynamics you are seeing there.

Again, I would add, as I mentioned in my earlier comments, frankly I'm very pleased with the 5.5% premium growth we saw in the quarter and the continued ability to maintain very strong margins and returns, actually. The one place we do recognize we are a little behind perhaps where we'd like to be is in sales. But I think Randy, you can talk to some of the things we've got underway to try to improve those results.

Sure, Tom. Thanks. Yes. Overall, we continue to see the primary pressure in our sales on the large case side of things, as Rick pointed out, and also sales to new accounts. We are pleased on a year-to-date basis with our sales to existing accounts, and very pleased with our strong persistency of our business that help generate that 5.5% premium growth. We still are experiencing some economic headwinds in our core markets. Things have been well documented in terms of continued high unemployment, and just general level of uncertainty for business.

We are not seeing any fundamental gaps in our capabilities, and we believe very strongly that we can overcome the market pressures with disciplined execution of our sales strategy. We are taking a number of actions to improve our sales results. We have recently combined our sales and marketing areas under new leadership. We feel that's going to enhance synergies and our speed to market. We are continuing to stay focused on growing our agency distribution system and enhancing their overall capabilities. We've rolled out a number of new products and services over the last few months, and through those combined actions, we feel very confident we can regain sales momentum going forward.

Okay, thanks. That was very helpful commentary. Just a quick housekeeping item. With the UK tax change going into effect, is this a -- that 28% effective tax rate number, the right way to be thinking about it across the entire complex going forward?

No. Actually those are one-time, so because of the tax legislation that went in, in the UK that actually accelerated some of the tax benefits by releasing deferred tax liabilities. You'd have to take the overall entity would be just up over 30% on a going forward basis.

Okay, great. Thanks.

Thank you.

We will go next to Sean Dargan with Macquarie.

Thank you. I'm just wondering the interplay between the macro environment and employment, and perhaps the better claim recovery you've seen in US Group Disability. I mean, is that a function of people finding work or feeling more secure that there is a job for them?

Kevin, you want to pick up on that?

Yes, good morning, Sean. It's awful hard to pinpoint anything related to the economy. I mean, I don't think the employment picture in general has gotten all that much better. I do think it's a difficult economic environment to be on a fixed income. So I think there's probably some motivation to recover. I also think that diligence and hard work and efforts of our claims management people in establishing customer relationships, working with claimants, employers, and physicians, and working to accommodate them and help them to get back to work are all factors as well. We've had consistent, strong claim recovery performance over the last number of years, and it just continues.

Thanks. I have one follow-up question about the investment portfolio. Given the NAIC taking a different view of capital charges around mortgage-backed securities, I'm wondering if you think that would have any impact on your RBC? Yes. So, no I take that. Our mortgage-backed securities are actually very highly rated government backed. A lot of the things they've been talking about were more of the structured securities that they've looked at, and we actually don't have any of those in the portfolio. So we don't see any impact from that.

Okay. Thanks.

We will go next to Jeff Schuman with KBW.

Thanks. Good morning.

Good morning, Jeff.

Good morning. Want to come back to the UK and try to get a little bit better perspective on what's happening now, and how we got to this point? I think Kevin said this morning that you are still fairly early in this process of implementing rate increases. If you go back 2010, a couple things happen. Margins slipped a lot, and yet Group Life premiums were up 18%. You made a Management change. I think one of the issues you mentioned was maybe taking a closer look at Group Life. 2011, Group Life premiums up another 15%. Local currency margins slipped some more. There was some talk about taking rates. 2012, premiums up another 11%. We are hearing about starting a process of taking rates.

Have you been taking rates the last couple of years, or is this a more recent phenomenon? Then I'm wondering how we get comfort looking at US Group Life, where you have these very strong growth of 7%, and wanting to get some comfort that, that is quality growth.

Yes, let me start up and then maybe just ask Kevin to pick up. I think you certainly, Jeff, you raise a very valid point as you look back over a couple years with the benefit of hindsight. I must say, we probably would've gone and approached the Group Life business a little differently. I can assure you, though, that I think as Kevin said, actually the rate increase actions probably began more on the first of the year, I think. So we are into this rate action pretty substantially at this point. Could we have started that more aggressively maybe a year before that? I think again, it's always an interesting benefit of hindsight, look back, that you can probably conclude that.

Part of what you struggle with when you are going through a period of time like that, is trying to ascertain what is volatility and what's real result. I think at times with a smaller business, you tend to think that a little more around volatility and therefore a little more hesitant to do the aggressive things with rate increases. I think, again, when you look back you realize that wasn't volatility, maybe there's a more fundamental issue with the margins there. I would certainly say that as we look back, maybe we could have been more aggressive sooner. Having said that, now that we are aggressive, we are being very aggressive, and we're using a very consistent model to what we used in the US to go through the same issue a number of years back.

As you may recall, we were very, very disciplined about doing what had to be done to get the right rates and let the business leave if in fact we can't get those rates. I think, Kevin, that's what you talked about in your comments, actually. I think, again, looking back, maybe we could have done that sooner, but I think we are on a very rigorous -- so we have a very rigorous plan in place to make up for loss time, if you will.

Yes. I think that's right on the money. So I think probably we were slow in adjusting to the fact that mortality was deteriorating, and moving our prices up. But at this point in time, we're moving prices up more aggressively in greater volume, as well as across our whole program. The other thing I think affected results was that we had a somewhat substantial swing in mix of business towards larger case Group Life in 2009, 2010, 2011.

What we are doing now is basically paring back on that, re-shifting our focus. When we compare, Jeff, to the US, the growth we have in the US is almost completely core market growth. That's where it's coming from. A lot of our Group Life sales are successful in across the board, but especially in the core marketplace. I think that's the shift that we will make in the UK, both raising prices and shifting to the core.

That's helpful. Thank you.

Thank you, Jeff.

We will go next to Chris Giovanni with Goldman Sachs.

Thanks so much. Good morning. Question may be for Kevin. Can you talk some about the process right now for getting rate increases through on the LTC Block? Because many of your competitors have talked recently about having a more difficult time getting rate increases through as insurance departments are now inundated with rate increases, given the max exodus of this product line.

Yes. Good morning, Chris. I think this line of business it's natural that you are going to have some give-and-take process with regulators. I mean, you are talking about a product line that, at least from an image standpoint, focuses on the elderly. That is not actually the case when you look at our book of business. A substantial part of our book of business is actually below the age of 60. That said, you've got to work through the process state by state. We filed in virtually every state. There is a moratorium with approvals right now in New York, but the rest of the states, we're moving forward. We are either getting the full increase, or we are getting a partial rate increase, or we are getting a compromise process around being able to phase it in over a multi-year period.

But I think it's a difficult problem for regulators in the sense that they know that the interest rate environment rate is low. They know that the industry is under pressure. They know that the rate increases are needed for effective liability management. At the same time, they want to be careful about pushing prices too high based on assumptions. You just go through that process, and I think we are doing very well right now.

Okay. So no real change over the course of the past 6 to 12 months in terms of approval process?

No.

Okay. Then maybe following up on Jeff's question on the UK. I guess with Peter now running the business over there, I mean, what is going to change versus what Jack was focused on, because again, I thought his main focus was taking the practices that were done on the Disability line in the US and bringing those over to the UK to improve the profitability?

Chris, let me start again remind everybody, when we made the changes, actually Jack had been over there for a couple of years. Again, we had an understanding to bring him back at a certain point, and I think as we look forward -- just to set the tone for why the changes were made is that we were on a good pathway with Jack. But on the other hand, we wanted to get some stability at the CEO level as we thought about this as a couple of year process to rehabilitate that Block of business, Chris. At the same time, as you know, we also had a significant need, as we talked about earlier, to really bolster our resources supporting our Closed Block. All things pointed to making a change at the time.

I want to be sure we put that in the right perspective, because some of those seeds were already sown with some price increases and things before Jack actually came back. Now again, as I mentioned in my comments, actually at the time we made that change, we did recognize -- at least I recognized, that maybe getting us a closer to Kevin's organization. Because that would help accelerate the ability to make some of those changes and implement some of the things that had been done in the US, in the UK.

That was done a little more effectively by tucking it under Kevin's wing, which is another piece to what we did at that point. I would say, Kevin, we're already beginning to see some of the benefits of having done that in terms of being able to bring greater resources to bear on what is obviously a challenge. But also one that, frankly, we have successfully navigated through in the past.

Yes. I wouldn't expect in general you're going to see a significant amount of change in what we're doing in the UK now versus previously under Jack. Other than that because the Group Life results continue to deteriorate during the middle and second half of this year. We've had to ramp up our focus there around mix of business and renewal pricing actions and new pricing actions.

I think probably we have ramped up a little bit the number of actions and type of actions that we need to take in Group Life. All the activities that Jack was leading and involved in, in terms of driving increased capabilities in terms of Group Income Protection claims management and underwriting management, those continue. I do think, as Tom said, we just have put it in a place where we can provide maybe a greater volume of supporting resources, whether it be in Group Income Protection or Group Life, or actuarial resources, or whatever, from the US to the UK.

Okay. Then lastly, just quickly on the buybacks. I think 4Q, you have typically been pretty light in terms of share repurchase activity. I believe some of that has been due, maybe to the timing of the Analyst Meeting. I guess with the pushback now to December, are you comfortable that there is an enough liquidity and open periods that you can get that done? And then this $500 million still the run rate that we should be thinking about going forward in terms of the free cash flow and then, i.e., the buyback opportunity?

Rick?

Yes. Actually Chris, when you think about the buyback's fourth quarter, I think you're absolutely right. If you look back over the last several years, our Investor Day was mid-February. So it was couple weeks from now. Our windows were really -- what's that?

November.

I'm sorry, mid-November. Actually our windows were actually quite short and it was difficult to buyback of fair bit of shock, at least in an open window type time frame. We don't have that constraint this year. I mentioned December 17 will be the date. Put it on your calendars. We actually have plenty of opportunity to buy back stock through the fourth quarter.

The $500 million that you talked about, with another $100 million in the fourth quarter, we'll be on track for that. We'll talk more about next year in the capital plans in December. I think as I've reiterated talking on the capital model with Suneet as well, we still see the free cash flow in the Company of around $500 million. In the current environment, given opportunities that we have out there, we still think that buying back stock, particularly at these prices is very opportunistic for the Company. I think everything you said is correct.

Thanks so much.

Thanks, Chris.

We will take our next question from John Nadel with Sterne, Agee.

Hello, good morning everybody. So a couple of questions. Maybe just going back to US Group Disability for a moment. I think it was mentioned that the 50 basis point discount rate reduction would typically impact quarterly results by about $6.5 million. I just want to make sure that's pretax number, correct?

That is pre-tax, yes.

Okay. If I think about the results this quarter, if everything had been constant, right -- which it never is, of course. But if it had remained constant versus the second quarter, that 50 basis point reduction in the discount rate, that would typically cost, what, the benefit ratio about 120,130 basis points?

Something like that, yes.

Okay. So claim recovery is really the primary quarter-over-quarter improvement. I guess the question is, or it sounds like that was the case anyway. Maybe you can just confirm that and just help us understand how sustainable you think that might be.

Sure. The different pieces of that. So actually, paid incidence was quite flat, and has been. If you are looking on a sequential basis, claim recoveries were quite good, as you mentioned sequentially. Also, the average claim size was down a little bit. So in terms of how that persists, we will have to continue to watch that.

I think what you saw this quarter was a very good quarter, although there is nothing really in there that would say it doesn't have the opportunity to continue to persist as we look out into further sequential quarters. We'll have to continue to watch that loss ratio. I think what you saw is a very good quarter. We took some good actions, I think, to reduce our claims discount rate by 50 basis points to reflect the environment. We will have to see how that plays out.

All right. That's helpful. Then just back to the UK. Just thinking about it for more of a 50,000-foot perspective. I think last quarter, maybe the quarter before, you were characterizing your expectations over the near-term as being GBP20 to GBP25 million of quarterly earnings. Obviously this quarter, a little bit light of that. Sounds like mostly on the Group Life side. How quickly do you think you'll recover to that range? Do you feel like results in the UK have found a trough?

John, I'd actually say we are still in that range. I think what we said last quarter was GBP20 to GBP25, but we might see some volatility around that. That's what we saw this quarter, and unfortunately it was to the downside, but I'd say that GBP20 is still probably a pretty good anchor number when you look at it. As we look to take price, we will look to watch it, price and block management. It's not just about price, it's about risk selection and customers that we are continuing to work with. As we take that forward, we look to see it improve from there.

Okay. Then the last question I have is just on the investment portfolio. On the residential mortgage backed-security allocation, it looks like over the last couple of quarters that the actual level of holdings there has been consistently declining, maybe $100 million, $200 million a quarter. I'm wondering if that is a proactive move on your part or if that is more a function of prepayment activity? And if it is the latter, can you give us some sense for how much that is contributing to current net investment income, but perhaps some incremental pressure we have to think about as we looked out to 2013?

Certainly. I'd like to think that everything we are doing is proactive, but in reality in that block is what we are doing is just not buying more residential mortgage-backed securities. We just don't see the value in terms of what we'd be taking in there. These are actually ones we've initiated a number of years ago that actually had good rates. I can't give you a good number offhand in terms of how much deterioration that has caused, because it's been effectively rotation out of those assets into others, but when you think about the general investment income pressure, we'll feel it on that front.

Yes, John. This is Tom White. Just on the prepayments. To the extent we get prepayments, we include that in our definition of miscellaneous investment income. Actually, miscellaneous investment income for this quarter was very consistent with what we saw in the second quarter, and actually down probably $2 million or $3 million from a year ago, but we just haven't bought a mortgage-backed security in years. So you have seen a gradual decline in that exposure for several years, as a matter of fact.

We will take our next question from Steven Schwartz with Raymond James and Associates.

Hello, good morning, everybody. Just a few, I think follow-ups from some comments. There was a mention that vis-a-vis the UK, the need to get through a renewal cycle. If you can remind us how long your renewal cycle is in the UK?

Kevin?

Given where we are right now, it'll be about another 1.5 years.

But generally speaking, are we talking two years, three years?

Two years, I would say, would be typical.

Okay. All right, good. Then follow up on the LTC expected ratio discussion. Rick, you indicated that high 80%s, presumably what you are referring is today with today's rate on line. As rate increases piled through, I assume that you would think that would come down over time?

That would be an expectation over time, yes.

Okay, just want to make sure on that. And then a theoretical question I guess. You didn't discuss it in your script, at least I didn't catch it, but it was in the release. A discussion of improvement in the loss ratio in the UK, which is counterintuitive given the fact that earnings in the UK went down. I guess what I want to ask is, how meaningful are those numbers that were in the press release? Given the fact that you also have this issue in investment income with regards to the inflation adjustment factor, which can really screw up the ratios if that's not accounted for?

It is a challenge. Tom, why don't you walk us through that?

Steve, I think you described it well. (laughter) Essentially what happened is we've got an RPI adjustment, an inflation adjustment on roughly one-third of our Group Disability business over there. So when we have swings in inflation, that will flow through. I think from this quarter the RPI came down a little bit, and we buy index-linked [guilds] in the investment portfolio. So as inflation comes down, you'll see a drop in investment income that we report, but also a drop in the benefit ratio, and they offset each other. So there's really no impact in the quarter. You are right. When you look at just the pure benefit ratio in that business, it can distort things a little bit.

There's probably some additional disclosure that we can look at to help you see the underlying risk trends. I think as we've tried to describe on the call, the underlying risk trends in the Group Disability business actually got a bit better. That benefit ratio improved, and on the Group Life side it was deteriorated. Now, the adjustment that we look at it internally would've had our benefit ratio at about 76% in both the second and the third quarter. So the underlying benefit ratio stripping out the RPI adjustment, again was pretty stable. Again, a little bit of improvement on the Disability side, but a little bit of deterioration on the Group Life side.

Okay, that's good. Maybe something can be worked out for the December 17, I think it was, day.

We're thinking about that. Thank you.

Thanks, guys.

We will take our next question from Mark Finkelstein with Evercore Partners.

Good morning. A couple of follow-ups, actually. One is, what is the dollar value of premium that you expect to get between 2013 and 2014 in LTC relative to the current annualized premium level on rate increases?

I'm sorry, go ahead.

Kevin, you want to take that one?

Yes. I mean, we have to let the approval process play its way out, and then we have to let the implementation process play its way out, and then from there, as we implement it, we'll have to see what the persistency effects, et cetera. I will give you a number, but I wouldn't, like, bank it. I would say right now based on what we've seen so far, we're in about the $50 million to $60 million range in terms of annual premium affect. As we get more approvals and as we phase things in, that number will get bigger, but we'll just have to wait and see how it plays out in terms of persistency.

Okay, and that's an annualized number, I assume.

Yes.

Okay. I guess a broader question. If I look at operating expenses this quarter, they were fairly low. Obviously the trend, if you go back a few years, actually gone down in terms of the operating expense ratio. This quarter in particular it seems awfully low. I'm just curious if there was anything that was driving that, and if this level is sustainable?

Rick, you want to pick that up?

I would. Actually, when you think about our operating expenses, we're a Company that we don't talk an awful lot about our operating expense ratio, but our entire team, all of our associates, are focused on efficiency and how we drive business through the process. Our operating expense ratio was low in the quarter, and if you look at a number of our lines, that is action that we've taken over time to really be efficient. As we start to see growth come back in on the premium line, making sure we hold that, the overall expense level and keep there.

So it is an ongoing process. It's something we spend an awful lot of time working on. I tell you, from a quarterly perspective, there is nothing really in there that you'd highlight that was a big adjustment which would have influenced that operating expense ratio. So it's something that will continue to be as a core driver, as part of how our Company operates.

Okay, all right. Thank you.

Good. Thanks, Mark.

Operator, any other questioners in the queue?

We have no further questions at this time. I'll turn it back to you for any additional or closing remarks.

Good. Thank you, and thank you all for joining us today. As Rick said, we have our discussion of outlook coming up December 17. Please do put that on the calendar, and more details will be coming out on that. Again, thanks for joining us for this morning's call. This will complete our third quarter 2012 earnings conference call.

Thank you for your participation. That does conclude today's conference.