普登 (UNM) 2012 Q4 法說會逐字稿

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

Great, thank you, Kim. Good morning, everyone, and welcome to the fourth 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 form 10-Qs. Our SEC filings can be found in the investor section of our website at unum.com. I'd also remind you that statements in today's call speak only as of the date they are made and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on our website in the 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, speaking for Unum US and Unum UK, and Randy Horn for Colonial Life. And now, I'd like to turn the call over to Tom Watjen.

Thank you, Tom, and good morning, everybody. Our fourth quarter was another solid one with operating earnings per share growth of 5.1%. And, for the full year, our earnings per share grew 5.7% This represents the seventh consecutive year of operating earnings per share growth at the Company. In the fourth quarter we saw a continuation of many of the positive trends we discussed with you at our investor day meeting in December. First, our operating performance remains solid. We continued to see premium growth in our target market and continued to generate solid operating results across most of our businesses which allowed us to maintain our strong profitability and returns. For the fourth quarter, our return on equity was 12.2%, and full year return on equity was 12.3%.

Second, our investment performance and asset quality remains strong. We have not deviated from our investment strategy to chase yield but are continuing to take the actions we discussed with you at our December meeting to manage through this low interest rate environment. Third, our overall balance sheet remains in very good shape and our book value per share, excluding AOCI, grew by 12% this past year to $29.55 per share. Our past three years, even with our restructuring actions last year, our book value has grown by an annual rate of 8.4%. Finally, our capital position remains strong and we have maintained our financial flexibility. We continue to generate strong cash flow from operations with statutory net income for the total year totaling $625 million from our traditional US insurance companies.

For the year end 2012 we are estimating our combined risk based capital ratio to be 396% and holding company cash at just over $800 million. We are continuing to return capital to our shareholders. And, in the fourth quarter we repurchased another $100 million of stock bringing us to $500 million for the full year and $2.2 billion over the past five years. At our December meeting we also discussed two areas which represented some challenges for us. And, I'm pleased that we saw some improvement in both of those in the fourth quarter.

First, results for Unum UK improved relative to the prior quarter. While much of that improvement resulted from strong group long-term disability results, our group life line of business, which has been the greatest challenge, stabilized in the quarter. We are in the process of repricing the life block. And, while still early, we are generally pleased with the results to date. And secondly, within our closed block segment, our long-term care loss ratio was lower in the fourth quarter relative to the prior quarter. And, we continue to take the pricing actions we discussed with you in December.

So, in summary, 2012 was another solid year for the Company. As we look to 2013, we still have a generally cautious view of the environment with continued low employment growth and low interest rates. However, we are confident we can continue to create value for our shareholders by maintaining our disciplined growth strategy, delivering consistently strong returns in our ongoing businesses, maintaining our solid financial foundation, and returning excess capital to our shareholders through share repurchases and dividend increases. With that quick overview of the fourth quarter, I'll now turn things over to Tom for an overview 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 $233.9 million for the fourth quarter of 2012, or $0.85 per diluted common share, compared to a net loss in the year ago quarter of $369 million, or $1.26 per diluted common share. Included in net income for the fourth quarter of 2012 are after tax nonoperating retirement related losses of $7.5 million and after tax net realized investment gains of $16.4 million. Included in fourth quarter 2011 were after tax reserve additions and the write off of deferred acquisition costs in our closed block segment totaling $619.6 million, net tax benefits of $22.7 million, after tax nonoperating retirement related losses of $5.1 million, and after tax net realized investment gains of $4.8 million. So, excluding these items, after tax operating income was $225 million for this quarter, or $0.82 per diluted common share, compared to $228.2 million, or $0.78 per diluted common share, in the year ago quarter.

Moving to a review of our business segments, operating income for the Unum US segment increased 2.3% to $212.2 million in the fourth quarter with premium income increasing by 3.2%. The expense ratio was stable on a year over year basis and risk experience was also generally stable with a benefit ratio for the segment at 73% this quarter compared to 72.7% in the year ago quarter. Within the Unum US segment, operating income in the group disability line was $73.5 million in the fourth quarter of 2012 compared to $77.1 million last quarter. Premium income increased by 0.5% over last year due to sales growth and generally favorable persistency trends in recent quarters. But, operating revenue declined 0.3% as net investment income declined by 4.1% due to lower assets allocated to this line and a decline in the investment yield.

The benefit ratio for this line was 84.5% in the fourth quarter, down slightly from both the year ago 84.7% and the third quarter 84.9%. In the group life and AD&D line operating income increased 4.8% to $55.1 million in the fourth quarter benefiting from an increase of 5.5% in premium income as well as higher net investment income and a lower operating expense ratio which offset an increase in the benefit ratio to 72.5% this quarter from 70.7% in the year ago quarter. In the supplemental and voluntary line, operating income increased 7.6% to $83.6 million with solid growth and premium income of 5.6% offsetting a slight increase in the benefit ratio to 52.5% in the quarter from 51.9% in the year ago quarter.

Moving to Unum UK, operating income in this segment declined to GBP21.8 million from GBP33.1 million in the year ago quarter. The benefit ratio was 76.2% in the fourth quarter compared to 69.1% in the year ago quarter, while premium income in local currency increased by 1.6%. Results in the group life line of business were significantly weaker than the year ago quarter, but were stable with the third quarter while income in the group long-term disability line was generally flat with the year ago quarter but up significantly from the third quarter. Concluding our core operations Colonial Life reported an increase in operating income of 5.1% to $68.3 million, premium income increased by 4.4%, and the benefit ratio was stable on a year over year basis at 52.5%.

In the closed block segment, operating income totaled $28.8 million in the fourth quarter, compared to a loss of $922.3 million in the year ago quarter. Adjusting for the impact of the reserve addition and DAC write off, operating income last year was $30.8 million. For the corporate segment we reported an operating loss of $34.6 million for the fourth quarter compared to a loss of $18.8 million in the fourth quarter last year. 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 and debt expense was higher at $35.3 million in the fourth quarter, compared to $32.4 million in the year ago quarter, again reflecting the issuance of $250 million of 30 year senior notes in the third quarter. With that, I would like to turn the call over to Rick McKenney for further analysis of this quarter's results.

Great, thank you, Tom, and good morning, everyone. This morning I'll cover the profit trends we experienced in our business segment this quarter, a little more detail on our growth trends, and I'll also update you on our investment results and capital position. First, on operating results in the fourth quarter, our Unum US segment again produced good results with growth and operating earnings of 2.3% and generally stable risk experience across each of our product lines. Focusing on the risk results, first with group disability, the benefit ratio has remained stable at 84.5%, which is consistent with last quarter as well as a year ago. The underlying experience this quarter was again favorable with stable claim incidents, continued strong claim recoveries, and the ongoing benefit of price discipline on new sales as well as renewals. These favorable trends are somewhat offset by the interest rate environment and the impact of the 50 basis point reduction we made in the reserve discount rate for group long-term disability new claim accruals in the third quarter. All in all, we are quite pleased with the level of profitability we are experiencing in the group disability line with a full year ROE of just below 13%.

The group life and AD&D line was again a strong earnings contributor this quarter at $55 million. The benefit ratio was 72.5% in the fourth quarter, which is consistent with the third quarter level with mortality running slightly higher than previous quarters. Margins in this line of business also remained very favorable with ROE for the year at approximately 16%. And finally, in Unum US the supplemental and voluntary line continues to be our largest earnings generator at $83.6 million this quarter, an increase of 7.6%. Premium growth was 5.6% year over year and risk experience also remains generally favorable. The fourth quarter benefit ratio of 52.5% was up slightly as both the individual disability recently issued and voluntary benefit lines similarly had slightly higher benefit ratios. These lines of business continue to be attractive growth opportunities with very good returns generating ROEs in the 13% to 14% range.

Moving to Unum UK, fourth quarter results improved relative to the third quarter. Operating earnings for the quarter were GBP21.8 million, and back within our range of expectations of GBP20 million to GBP25 million. The improvement relative to the third quarter was driven by strong results in the group long-term disability line of business as claim incidents and claim recoveries were favorable. Results in the group life line, which has been the source of much of the recent under-performance of this segment, were comparable to the third quarter. Our primary focus for this product line is to stabilize the profitability in the near term and look to improve returns and growth over the medium term.

Our fourth quarter results were a step in the execution of that plan, which includes repricing and shifts in our mix of business over the next several quarters. Additionally, as we mentioned at our December investor meeting, we were evaluating alternatives to reduce volatility in the group life results. And, to that end, we have executed a reinsurance transaction for this line effective at the beginning of the year. This reinsurance arrangement will have the effect of reducing the amount and relative volatility of earnings from the group life line and will also reduce the overall level of required capital. The overall ROE was 13% for the year.

Colonial Life once again produced solid results for the fourth quarter earnings with earnings of $68.3 million, showing an increase of over 5% while premium income increased by 4.5%. The benefit ratio remained stable at 52.5% this quarter, which enabled an ROE for Colonial Life for the full year of 2012 of just under 17%. When you look across Unum's core businesses, you see we had very good returns for 2012. Concluding my comments on profitability, results in our closed block were higher at $28.8 million this quarter. Operating earnings in the individual disability line were higher than normal driven by favorable risk experience.

On its surface, net investment income was also higher than recent quarterly trends. This occurred primarily in the individual disability line where we received several million dollars of miscellaneous income as a result of bond call prepayment premiums. While that bond call premium increased our net investment income results for the quarter, we correspondingly adjusted the discount rate for new claim reserves. This was done to recognize the impact of losing these higher yielding bonds to an early call and to maintain a net interest margin in our reserves. Aside from this adjustment, underlying claim experience in the individual disability block was favorable in the fourth quarter. Long-term care results for the fourth quarter showed some improvement over the third quarter results with the interest adjusted loss ratio declining to 89.9% from 91.3%. Our full year 2012 LTC interest adjusted loss ratio was 90%, at the high-end of our long-term expected range.

Now, I would like to move the discussion of our sales and growth trends beginning with Unum US. We continue to be pleased with our sales results with a 4.8% growth in overall sales in the fourth quarter and 7.5% for the full year. This quarter, sales growth was a bit more skewed to the large case market where we remain disciplined and are happy to see this progress. Sales in the core market were down 2.6% for our LTD, STD, group life, and AD&D lines combined, impacted by the rate increases we have been implementing on sales over the past several quarters. Our mix of sales continues to reflect our long-term growth and mix objectives from the core market in 2012.

Premium persistency has been positive all year and ended at over 90% for group life and LTD in 2012. With these positive trends, we continue to produce premium growth in the 3% to 4% range for Unum US segment, a good combination of growth and strong profitability, particularly in today's competitive market conditions and continued flat employment trends. In the UK, sales results reflect the actions that were taken to turn this business. Sales were down by 42% in total, including a sharp drop of 72% in group life sales and a more moderate decline of 6.5% in the group long-term disability line. We continue to push price increases into the group life market as well as scale back our certain sales in certain market sectors as we reposition this business line for better margins in the future.

Persistency also declined, as expected, due to the pricing actions we are taking from 89.3% in 2011 to 82.5% in 2012 for group life. Persistency in group long-term disability was more stable, declining from 86.6% to 84% in 2012. And finally, at Colonial Life sales showed a modest increase in the fourth quarter. However, coming off a decline in third quarter sales of 5.8% we were pleased to see this turn. Sales rebounded nicely in the public sector market showing 8.6% growth over last year's fourth quarter, while sales were slightly negative in the core market sector. In the fourth quarter, we also saw slight improvement in sales to new accounts. We have seen increasing sales from existing customers, which will certainly remain a focus of ours, but we are also pleased to begin to see improvements in our growth in sales attributable to new account relationships.

Moving on to the balance sheet and investment portfolio, there is little change to our recent trends of strong credit quality in the midst of a challenging environment for new money yields. This is due to the low level of interest rates as well as tight corporate bond spreads. On credit quality, the net unrealized gain position of our fixed maturity securities portfolio stands at $7.2 billion at year end, which is mostly driven by low rates. However, our watch list of potential problem credits remains very low. The net realized after tax investment gain or loss from our investment portfolio was slightly positive again this quarter and for the full year.

On the low interest rate environment, while 10 and 30 year treasury yields increased slightly in the fourth quarter, much of that improvement was lost to tighter corporate bond spreads. The net result continues to be low new money investment yields which led to a reduction of 7 basis points in our portfolio yield this quarter to 6.47% at year end. Our strategy for managing through this environment is centered on being selective in our asset purchases and utilizing higher allocations to asset categories, such as private placements, commercial mortgage loans, and below investment grade bonds. In 2012, we believe this provided better relative value. We also continue to benefit from the hedges we have in place for our long duration, long-term care portfolio, which will cover about 20% of our asset purchases for LTC in 2013.

The other important element of our strategy for dealing with low interest rates is to make adjustments to our discount rate assumptions such as the 50 point basis reduction we did in Unum US group long-term disability in the third quarter, which leads to higher pricing on new sales as well as renewal business. As a result, we saw our interest margin improve by 1 basis point in the quarter. As we mentioned at investor day, we estimate that the low interest rate environment will impact our earnings growth by 6% to 8% in 2013, of which we will recoup a third as price increases work their way through the book.

Now, moving on to our capital position, which closed the year in a very strong position. As we've discussed in the past, the important driver is statutory net income which totaled $188 million for our traditional US life insurance companies in the fourth quarter and $625 million for the full year. This performance helps to support our capital generation model that generates between $550 million and $650 million of excess capital annually before shareholder dividends. The weighted average risk based capital for our traditional US life insurance companies was approximately 396% at year end, at the upper end of our 2012 target range of 375% to 400%. Holding company cash and marketable securities totaled $805 million at the end of the year, slightly exceeding our 2012 expected range and 3 times our annual cash needs.

Our share repurchase activity in the fourth quarter totaled $100 million and completed our 2012 plan of $500 million, which reduced share count by 8%. We continue to expect an additional $500 million of repurchases for 2013. And finally, in closing, we remain consistent with the overall outlook we introduced at our December meeting as we anticipate growth in operating earnings per share for 2013 to be within the range of zero to 6%. Now, I'll turn the call back to Tom for his closing comments.

Thanks, Rick. As we move to your questions I'll close by reiterating what I said earlier. We are generally pleased with our financial and operating results this quarter and for the full year 2012. Unum US and Colonial Life continued to generate strong results in the quarter while the results in Unum UK and the closed block segment showed some quarter over quarter improvement. Our balance sheet remains strong. And that, along with our solid capital position, enables us to continue to create value for our shareholders by supplementing our operating performance by returning excess capital to our shareholders through consistent share repurchases and dividend increases. Now, this completes our prepared comments and, Kim, let's move to the question-and-answer session.

Thank you.

(Operator instructions)

Suneet Kamath, UBS.

Thanks, and good morning. I wanted to focus on the UK and the long-term care business, which surprised relative to what we are expecting. I was just wondering if you could comment on two things? First, in terms of the UK and LTC, how much of the better than expected claims experience would you say is a quarterly variation that could reverse or how much of it is just some of the actions that you have been taking in terms of pricing? And then, related to that, specifically on pricing, can you talk about where we are with respect to the repricing of the UK business? Maybe a percent of the way through that? And then, any feedback you have gotten from the regulators as you've tried to reprice the in-force long-term care business? Thanks.

Let's see if I can organize that a little bit, Suneet. Let's start with just the UK, if we can, and maybe just break it down into a couple of pieces. One is your discussion -- your question about group life pricing and where that all stands. And then, Rick, maybe we can talk a little bit about the financial outlook. But maybe, Kevin, starting with you back on the UK pricing of the group life block and where that stands. And, perhaps where some of the early indications of its effectiveness are.

Thanks, Tom, good morning, Suneet. With respect to the UK business and the group life business, we are in the early stages, probably we're about maybe 30% through the book of business in terms of placing renewal increases. The average increases are around 12.7% so far on the renewed business. We have some segments, as Rick mentioned, that the price increases are significantly higher than that. And, we even have some subsets of our group life business that we are deemphasizing, in particular the larger end of the group life marketplace. It will take about -- into 2014 before we fully get through that block. But, I would expect us to be making that kind of progress throughout 2013 on the group life side.

And, maybe just shifting then, if we could Rick, to you, just on an outlook for the UK. Just put the quarter in perspective as we go to 2013.

Yes, as you look at the different elements, you asked about claims, I think the life business running similar to what we saw and we are taking actions to move through that. The disability line actually looked pretty good, but I would say it is back more in a range of our expectations as opposed to what we thought in the third quarter. When you take that all together, as we look out next year and we came in close to GBP22 million in the quarter, we are going to see that, I think, stabilize over the course of the year. So, we go into a relatively flat plan as we're looking out into 2013. But, we are hopeful with what we saw in the fourth quarter that things can look pretty good there.

Great, and then on long-term care?

Yes, we'll break it out into two pieces again, Suneet. And, maybe, Kevin, just on operational price actions and things we talked about in December I think we continue to make progress on.

Yes, we continue to be pretty much what we discussed at our investor day in December. We are about 60% of the way through the process in terms of filing and approvals. As you know, we are seeking rate increases in excess of 25%. And, to date, on the 60% that went through so far we are running ahead of that plan. Good, solid steady progress. Those price increases don't actually get executed and implemented in the marketplace until the beginning part of this year. And then, their effects will flow through operating earnings toward the end of 2013 into 2014.

Rick?

Yes, if I could pick up on the long-term care question around the experience that we saw there, you would have seen our loss ratio come in a little bit in the fourth quarter relative to the third, we're certainly happy to see that, but as you see our -- just under 90%, so we are back within our range of expectations around that. But, certainly something to watch as we continue to move through time on that, and as we have done. But, it is good in the fourth quarter to be back within our range of expectations, which is in the high 80%s.

Got it, and then, just one quick follow-up on the long term care, if I could. If I look at your block, I think it looks like maybe 50% of it, in terms of premium, is group LTC and the other 50% is individual, roughly. As you are going for these price increases, do the regulators look at individual versus group differently? Is one more likely to get a rate increase versus the other? Or is it pretty consistent across the two product lines? Thanks.

Yes, I would say it's fairly consistent. The average age of the group long-term care book is much younger. There is usually -- there is always an employer involved and sometimes employer premiums involved. And so, to that extent, I think the regulators may, to some extent, look a little more kindly on what we need to do in the group long-term care business. Because there are many options available to the employer as well as employee given their younger ages. Individual long-term care being a much higher average age, I think the regulator is probably a little tighter on that. But, so far, in both cases we are exceeding expectations.

Perfect, thank you.

Jay Gelb, Barclays Capital.

Good morning. I wanted to get your perspective on how an improvement in the economy and payrolls would essentially act as a tail wind to your overall business, particularly in the US?

Kevin, do you want to pick up on that? We just spent a fair amount of time on that.

Good morning, Jay. Two things would benefit us in the US in terms of an improvement in the economy -- well, three, I'll talk to two. Wage inflation would be one. The large majority of our group life and group disability lines of business are directly related to covered payroll and the benefits that are tied to payroll. So, to the extent payrolls go up, benefit levels and premiums go up. Second, I think a positive effect would be growth in employment. As you know, we tend to target market in our group business toward economically less downward sensitive industries and we try to target those that are growing.

So, to the extent we get overall employment growth that would benefit us on the sales side, it probably benefit us on the in-force book of business side as well. We would start to get some positive uptick in terms of earned premium. And then, the third piece of the economy probably is interest rates. I'll let Rick talk to that.

Yes, I think when you look at the -- certainly tied together in terms of actions that are being taken by the Fed as well as just the overall improvement in the economy. As we start to see rates come up, certainly a benefit to our business. All of our product lines that we have out there benefit from a rising interest rate environment. So, we certainly will look forward to that, although we have not factored that into our plans today.

Okay, thank you. And then, just to get your level of comfort in the UK business and the run off operations. Things tracking according to plan there?

Kevin, you want to pick up on that again? Also, I think, Jay, too, you remember we went through some of this before in the US. I think, as we think about what's happening there, I think Kevin, there's a fair amount that we can take from our experience in having been through a very similar exercise a number of years ago in the US.

Right, very, very similar to what we had to do with resetting our US block of business. As you know, we are taking a couple of different actions in the UK. In the group income protection side we've been bolstering our claim management practices, transferring some capabilities and skill sets from the US to the UK. I think some of that is starting to flow through and we had very solid group income protection claim management results, risk management results during the fourth quarter. I'd expect that to continue going forward. On the group life side, we already talked about the rate increases that we're placing.

We're also managing mix of business downward toward more core market business. And, we also are putting a variety of other internal underwriting measures in place. That would probably have a downward effect on persistency in sales, at least in 2013 until the market normalizes.

Much appreciated. Thank you.

Yaron Kinar, Deutsche Bank.

Hi, good morning, everybody.

Good morning.

Can we start with the US segment for a second? When I think of the 50 basis point reduction in the discount rate, I guess I was somewhat surprised to see group long-term disability new sales grow by about 15% in the quarter with that. So, any additional color you may be able to offer there would be helpful.

With regard to the discount rate change, that is primarily with respect to new claim accruals. On the risk side, we did have a very, very strong quarter because we basically were able to absorb the discount rate and keep the loss ratio basically flat. In terms of the discount rates effect on pricing, we were already moving ahead. It's really not a discount rate change it is more a reflection of what's the assumed interest rate that we assume in the pricing. We had built that in during the course of the year and we had mid-single digit price increases going on in both new business and renewal business in LTD throughout the year and we'll continue that in 2013.

Okay. And then, the UK segment, could you, and I'm sorry if I missed this, but could you provide a little more color on the reinsurance program to date? You put on the size or structure of it?

Absolutely. Rick, want to pick that one up?

Yes, certainly, there's two elements to it. And, as I mentioned, it is really to reduce the volatility of this business. Our core line there is certainly our group disabilities side, so as we have had the challenges here we're taking actions. We're using reinsurance to help us mitigate some of that volatility. Roughly, we're going with a 50% quarter share on the block. So, you actually reduce capital, profits, premiums associated with that block. And then, we are also reducing our retention levels in terms of what we retain cutting those down to GBP500,000 per life. So, actually some good restructuring there. It is not going to have a large impact on our earnings to do that. We think it is a good use and it also frees up some capital up behind that product line as well. We are happy with the transaction and will see how it plays out over the course of the year.

Got it. If I could sneak in one more. The RBC ratio came down to within the target range now. How should we think of the ability to return excess capital with the target range in -- being in the target range already?

Certainly. When you look at where our RBC level is, we are within our target range. And, I'll take you very quickly back to our philosophy on how we are returning capital, and that is returning capital, in which we have been using to buy back stock here for a period of time, based on our capital generation. Regardless of where our capital levels are, our 396% is quite high and probably higher than in the long-term that we'll need. That doesn't change our outlook in terms of returning capital that we generate back to shareholders. Which we expect over the course of this year will look very similar as to what it did over the last several years which is why we are sticking with a $500 million share repurchase.

Okay, thank you, very much.

And, If I could just add one thing too, Rick. I think we closed the third quarter with $762 million of cash, we were above $800 million in this quarter. There is some fluidity between RBC and risk based capital, actually, and it's probably worth everybody keeping those two numbers in mind as we think about this whole capital position.

Absolutely, as we were over $800 million of cash. So, when you think of that, think of it roughly 10 basis points to the RBC ratio is $100 million of cash. There is there is fluidity have. And, like I said, I'll take you right back to what our capital generation model looks like, and that's really what we predicate our share repurchases on. Not necessarily the levels of excess capital we have, which we do believe we have today.

Got it. Thank you.

Randy Binner, FBR.

Hi, great, thanks. Good morning. Just one on the discount rate change. We look at the 10 year and then credit spreads have been tighter too. The 10 year, I guess, is moving higher, credit spreads are still tight. My question is what would need to change in those metrics we look at as analysts before we would expect the need for another discount rate change?

I think that the discount rate change we made in the third quarter was reflective of those rates that we see today. I think things would have to get quite a bit worse before we would change the discount rate. It's something we always look at but we made a pretty aggressive move in the third quarter. And, I'd take you back to the fact that we do maintain a margin in that line. When you think about that it can be more fluid, it is not directly tied to how we put money to work on the quarter, it is taking into account how we are putting money to work combined with the fact we had roughly an 87 basis point margin between our earned rated and our discount rate. So, we can manage through that. The move we made I think was prudent in the third quarter. And, we'll take that out and I'm sure we'll come back and look at that as we get out towards the end of this year.

Okay, understood. And then, on Colonial, I just had a couple broad questions. And so, it is really starting with the benefit ratio. I mean it came in kind of where we thought it would, maybe 52.5%. That's been where we have been running. But, it's higher than we were, I guess, in '11 and looking back to '10. So, the first question is, should we expect that to be a little bit higher at the current level going forward? And then, just if you could talk about how the economy and competition might be affecting the sales outlook for those products in 2013?

Maybe we'll flip the two around actually, Randy, and ask Randy Horn to speak to the business and the operations and the economy. And then, maybe, Rick, you could just touch briefly on the outlook side of things. But, Randy, just want to set the stage with the environment?

Sure, Tom. Good morning, Randy. Overall, the economic environment does continue to provide some headwinds, as Tom said in his opening comments. But we continue to see significant opportunity in our target markets, which is that small to mid-size employer on the commercial side and then the public sector. A lot of the pressure we saw in 2012, and continuing into the fourth quarter of last year, was in that large case commercial account, greater than 1,000 employees. We see a lot of volatility there. And, it is not a strong area of emphasis for us.

So, we feel by staying strongly focused on our target markets that there is still a lot of under-penetration in those markets, and we see a lot of opportunity there. We have very strong results in the public sector, as Rick mentioned. In the fourth quarter, we were heavily focused on the local government and education side there. And, even though, again, the economy is still not our friend, Randy, overall, we still see a lot of opportunity in highly under-penetrated markets.

And, just on competition. Aflac had 0% to 5% sales growth, which is probably consistent with what most of us are looking at Colonial. Is there anything -- this is an area of the industry that doesn't change that much, to be honest, from a competition perspective. But, didn't know if a better economy or rate pressures in other parts of businesses have changed who you are seeing from a competitive perspective?

Not seeing any significant change there, Randy. There certainly are new entrants to the voluntary benefits marketplace. But, it has been fairly gradual over time. In our target markets we are still seeing primarily the same competitors, Aflac, Allstate, American Fidelity. Really pretty consistent on that side of it.

Rick, want to pick up the profitability benefit ratio piece of that?

Yes, certainly. Actually, Randy, when you look at it, our benefit ratio of 52.5% is really on our expectation. It is slightly up over the last several years. But, I'd take you back to the type of returns this business is seeing, it's 15% to 17% is what we put out in our investor day type of return. We expect 2013 to be pretty stable on the benefit ratio side which continues to generate very good returns.

Okay, fair enough. Thank you.

Thank you, Randy.

Chris Giovanni, Goldman Sachs.

Good morning, I guess the first question for Kevin. We saw some good sales growth, a lot of it -- or all of it was really driven by the large case market versus your core market. I think some of this is driven by your partnership with United Healthcare. But, I guess, how should we be thinking about this 30% growth outside of your core market?

Yes, good morning, Chris. As you know, from over the last three or four years we've had a consistent philosophy in large case which was basically to just grow at the average rate of the marketplace over time and to be pretty disciplined about how we pursue cases, be opportunistic. So, you see some quarters where we have strong large case sales, you see some quarters where we have see weak large case sales. We look for steady sales growth in our voluntary and core market business, but we look for opportunistic sales growth in our large case national client group business.

Our partnership with United Healthcare has gone great. In our national client group, large case sector, we have been aggressively targeting primarily the healthcare sector at our partnership with United Healthcare. More than 50% of our sales -- around 50% of our sales in the fourth quarter came from that health sector and United Healthcare partnership. We didn't write any jumbo cases, so we wrote a good volume of, if you will, of large cases as opposed to one or two big large ones. So, I would say that it was a very, very good quarter for us. I wouldn't necessarily expect it to repeat itself in any following quarter. I think it's going to be as it has been for the last several years, hit or miss depending on whether we see good disciplined pricing opportunity out there for long sustainable relationships with clients.

Okay. Rick, you gave some pretty good insight in terms of the near to intermediate term strategy for the UK. When do you expect we see that shift from stabilization to growth? Is that something we could see a year from now or could it take longer than that just given the duration of some of the rate guarantees that you guys have out there?

No, I think we would actually expect it to turn. We would be hopeful that we would see a turn in the course of 2013, although, we haven't really built that into our plan. I think we are being pragmatic in terms of how we expect that to come through. There is more to play out but we certainly would look to see it as we get out into 2014.

Okay, great. Then just one last quick one. Regarding your hedging strategy, curious if you can comment at all on any implications from Dodd-Frank around collateral requirements? Or if it causes you to increase your cash balances at all?

Yes, certainly we are looking at that. I mean, there's one area in the business that we would look to hedge as rates get up. And, that is going to be behind on our long-term care business. So, we are certainly staying close to the Dodd-Frank implications. But, when we look at the actual amount, the pure nominal amount or notional amount, of hedging that we do it would actually be relatively modest relative to the size of our overall investment portfolio. It is something we'll stay on top of. But, although it may be impacted across the financial services industry, it is not something we are overly concerned about.

Okay, thanks. That is all I have.

Mark Hughes, SunTrust.

Thank you, good morning.

Good morning, Mark.

With the price increases in the closed block coming in later in the year is that going to lead to declining loss ratios?

Rick, you want to talk just to the outlook for the closed?

When we look at the closed block, and it's two different pieces, our individual disability block has been very stable, actually pretty good results we have seen over a period of time. We'd expect that to continue. In particular, to the LTC side, which I think is what you're getting at, we would actually expect it to be fairly stable. We have put a high 80s number out there. This premium change that we are going to see flowing in through these price increases are going to take place over quite an extended period of time. And so, that's how we look at it. It is going to take awhile for it to be overly noticeable and stability, I think, is what we are looking for behind this loss ratio.

Got you. The involuntary, within the US business, that growth has decelerated a little bit. What is the outlook there?

Kevin?

We still look to grow at about 150% to 200% of the marketplace given our position, our ability to package products between voluntary lines and group lines. As you know, we have a well stated, well articulated strategy to enable employers to share funding with employees through combinations of employer paid and employee paid products. About 10% to 15% of our group products come with voluntary lines attached. In our mid market, 20% of our business that we sold in 2011 came with voluntary benefits attached. We would expect to grow in the 10% plus or minus range in voluntary going forward. Marketplace tends to be more in the 5% to 7% range right now. I think we are very, very optimistic about it. And, I think the trend of employers sharing funding with employees will only increase, it won't decelerate. And, that bodes well for both Unum US and affecting strategy for Colonial.

One final question. Have you started to see any movement in that natural growth? More people, higher wages with your existing customers?

Not yet. Not, at least, in any way that you could see flow through the numbers. I think there are good signs out there that employment may be stabilizing, that this employment growth starting to show up in some industries. We'll see what happens with the economy during 2013 if GDP holds up. If it does, then you might start to see a little of wage inflation and I think both those things will benefit us on the normal or natural growth side.

Thank you.

Thanks, Mark.

(Operator instructions)

Steven Schwartz, Raymond James and Associates.

Hey, good morning, everybody.

Good morning, Steven.

A quickie first. Rick, earnings came in, I think, a little bit better than everybody was looking for. There were a few items here or there. What do you think -- what would be the base for the growth for 2013, I guess, in your mind is the question I want to ask?

The base we are using is we lay out our outlook for next year as reported. So, you think of the $3.15 as we talk about our 0% to 6% growth. If you look at it from a run rate perspective, it is probably a couple of cents lower than we expected and that is more from a projection perspective. I don't want to discount the fact we had a very good quarter and exceeded earnings. But, when you look forward, I think you would probably pull it back a couple of cents for the really good tax rate we saw in the fourth quarter and extrapolate out from that. But think about our baseline of $3.15 and 0% to 6% is what we put out there how we expect to grow in 2013.

Okay, great. I want to go back to Unum UK, make sure I understand what is happening here. The reinsurance is on which line?

The group life line, purely.

It's purely the group life line?

Yes.

And, it is 50% of the in-force, is that correct? Or is it 50% of new business?

No, that's correct. It is the in-force and new business.

Now, I want to tie into 4Q '12 and 3Q '12. In 3Q '12 you stated that you thought there was just some volatility, that the normalized number in pounds was still GBP20 million to GBP25 million. I understand from Tom -- so, you reported about GBP22 million. I understand from Tom there was about a $5 million hit from a write down of software assets that is in the expense line there. That would get you to GBP26 million, GBP27 million, somewhere in that range. Are you still thinking that, that GBP20 million to GBP25 million is the range for this year? And if so, how does the reinsurance play into that, if it does at all?

The reinsurance we have incorporated in terms of our outlook. So, when you think about that overall, GBP20 million to GBP25 million is still the range and it takes you back to an earlier question we had on the UK. I'm hopeful that it could be better over the course of the year but we built our plans that it will be relatively flat year-over-year as we see some of these pricing increases take hold in combination with what we see from an overall perspective. UK had a good quarter. But, I think as we look forward, we are still expecting a flattish type plan. And looking to see if some of these good results we saw in the fourth quarter can sustain.

One thing to clarify there, Steven, is the software impairment was GBP3 million, which is roughly $5 million, just to get the currency straight.

All right. Sorry about that. And then, on Colonial, I don't know the answer to this. How much of Colonial's business is individually underwritten versus group underwritten?

Randy, you want to pick that up just a little bit about your block of business?

Yes, the vast majority of our business is still on an individual basis. It's north of 90%, in that 90% to 95% range is individual business and is underwritten.

The reason why I ask that is that, Randy, you may or may not be aware that the EBSA came out with an FAQ regarding group indemnity insurance and whether or not it would be exempt under ACA, certain types of products.

Yes, I am familiar with that, yes.

So, it sounds to me like that doesn't affect you at all, but would it generally affect the market in a major way?

I think that is still an open issue on that. And, certainly our trade organization is taking a hard look at that. But, from our perspective today we feel our products are all what we call HIPAA excepted benefits and are not subject to the healthcare reform legislation.

Okay, thank you, very much, Randy.

Thank you, Steven.

Mark Finkelstein, Evercore Partners.

Good morning, Mark.

Good morning. I also want to go back to the UK just to make sure I understand it. I guess the way I'd ask the question is, I think, Rick, you opened it up as describing it as smoothing. I guess my question is, is the ultimate loss content unchanged with this transaction? And, it is just the emergence of the losses? Or does it fall into more of a true risk transfer type structure?

No, this is true risk transfer. I would have to go back to the transcript. I certainly did not use the word smoothing in talking about it. It is something where we are taking roughly 50% the book and reinsuring that out, pure risk transfer as we look at that, and we will -- I should say our reinsurer will take 50% the risk, 50% the benefit in terms of how it comes through.

The other thing I would add is part of that reinsurance transaction is also in excess of retention strategy. Some of what happened to us in group life was that we got hit with some fairly significant high severity claims. We've backed off our retention a little bit, which allows us to reduce the volatility from that high severity claim incident. That should be a positive impact to us going forward.

Okay. I got on late. I apologize if I misinterpreted you. The other question I was thinking about is just looking at the persistency of group life and the sales levels of group life in the UK, how tied is the group life product to disability in the UK market? And, how cognizant do you have to be in terms of declines in group life overall vis a vis the disability business?

Yes, Mark, I think a fair amount of it is certainly tied. But, I don't believe that the actions that were taken in group life should have any at all negative effect on our group disability strength in the UK. We are far and away the largest part of the marketplace there in terms of market share leadership. We are the market leader in terms of setting product design, market penetration expectations, distribution and enrollment strategies, service strategies, claim management. And, I would expect that none of what we are doing in group life will have any negative effect on group income protection.

All right, thank you.

Good, thanks, Mark.

Jeff Schumann, KBW.

Good morning, Jeff.

Good morning, thanks. I'm sorry to do this, but I think I'm going to come back to the UK for the ninth time. It's probably been well explained but I didn't quite follow it. What I think I'm hearing is that you are ceding a significant amount of the volatility and you're ceding some of the capital requirement, but you are keeping the earnings, which sounds like a great outcome. But, maybe I didn't quite hear that right.

No. Maybe I can try and clarify that so we don't get number 10 coming through. It is actually full risk transfer. We are ceding off the business when you look at that. The reason it is not a heavy income impact is because there is not a lot of income in the business right now. So, when we take that out, what we are actually able to get from the reinsurer is very similar to the profit levels that we earned at least over the last several quarters. So, we'd like for that to improve. But, that is why the three of those things work together.

Okay. So, at this point, they are participating in the modest level of profits, which is not much of a give up. But then, going forward, they would also participate in some of the upside, is that --?

That's correct. So, as we go through these repricing actions we have to factor that in.

Okay. And then, one high level question. I think I heard Kevin say that -- Kevin was asked a couple of questions about US corporate America and the employer situation. And, it sounds like you are not necessarily yet seeing a lot of emerging strength. Thinking back a few quarters, I think at one point last year your premiums started to lift a bit and I think Tom was cautiously optimistic that maybe you were on the leading edge of seeing a little bit more strength in some of the employment markets. Is it fair to say now that maybe that it is a little early to identify that strength?

Yes, hi, Jeff, Kevin here. I would say it's bounced around a bit. We -- in the old days, pre-2009 or whatever, we'd get 2% to 3% of top line in-force lift from wage inflation and employment growth. Over the last four years it has been basically plus or minus 0%, I think there was one year it was actually slightly negative. This year our top line growth came primarily from a combination of a strong sales year and a very strong persistency year, plus that persistency held up in spite of moving prices up. That's what really helped our top line. In terms of whether the economy has turned or not, I'm no economist, I'm just saying that it isn't showing up right now, nor are we counting on it.

Okay, that's helpful. Thank you.

Thanks, Jeff.

Seth Weiss, Bank of America Merrill Lynch.

Hi, good morning, everybody. Quick question on the LTC. I was just a little bit confused by the recent remark that the improvements in earnings would be gradual over time. I thought you had mentioned earlier in the call that you are 60% of the way through this process and that we would see effects flowing through late 2013, 2014. Maybe if you could just help me understand the dynamics of that? Thanks.

Yes, good morning, Seth. We are 60% of the way through the seeking approvals process. The actual execution of the rate increases doesn't start until -- during basically -- somewhere around the second quarter of this year. Those will roll-out gradually across the book. And then, the effect on earnings from that top line incoming from the rate increases will emerge also gradually.

So, I think as Rick mentioned that we'd start to see a little bit of that effect at the end of 2013. A little more of that affect in 2014 and then going forward. It will emerge gradually. And, we would expect, therefore, the loss ratio to stay within that range, stabilized range of 85% to 90%.

Okay great, thanks. If we think about this cycle of how long it takes to reprice the book, is it a two to three years? Is that a fair assessment when we start thinking late 2013 as a starting point?

About two years I would say, 2013 into 2014. Then you start to see the emergence following that. I think it is going to be a iterative process, I don't think it's going to be a onetime thing. I think constantly we are going to have to monitor interest rates and the pressure of interest rates. We are going to have to monitor our merging experience. We talked on investor day, this is a very, very young line of business. Most of the claims, if you will, is on the reserve side of the business not on the paid claims side of the business. We are 2% or 3% into the life cycle of this product. We'll continue to monitor industry experience trends as well as our own and then we'll continue to make pricing adjustments to accommodate what emerges.

Okay, thanks. That's very clear. Just one high level question on capital, you have been pretty consistent about signaling $500 million next year. I know that will still have a pretty nice cash cushion. When we think going forward, what is the main trigger in terms of bringing that down? I believe you said macro events, if we think about main macro triggers maybe you could help think us through that?

Rick, you want to pick up on that?

(multiple speakers). In term of bringing that down, I think when you look at -- yes, the access. I think the way we look at that, we have been very consistent over the last several years and we just don't see the environment yet where we want to take those down to certain levels. You can look at what is going on in the economies around the world, there's just a lot of unknowns out there. We feel very good about the $500 million that we have been able to do over the last several years. We think it's a good use of our capital. I think as we look forward, as we even said going into 2013, we don't expect to take down those levels of excess capital in any meaningful way.

Great. Thanks, a lot.

I think we have one last question.

Sean Dargan, Macquarie.

Good morning, thanks. Most of my questions have been asked and answered. When I look at the tax rate and the corporate earnings relative to where our model was, it seems that the corporate loss was higher but the consolidated effective tax rate was lower. Should we expect to see what you reported in first quarter as a guide for what we'll see -- I'm sorry, in the fourth quarter as a guide for what we'll see throughout 2013?

Certainly, when you look at -- actually we report on a before tax basis, so even our corporate segment is on a before tax basis. We have some items that are tax benefiting. And, on a before tax basis actually cost us money. I think to cut to the chase, you should expect our quarterly run rate will look similar to what we saw in the fourth quarter.

Thank you, that is all.

Thank you, Sean. I know it has been a busy morning for many of you. So, thank you for taking time to join us on this morning's call. This will complete our fourth quarter 2012 earnings call. Thank you.

And, that does conclude our conference for today. Thank you all for your participation.