Unum Group
Q4 2010 Earnings Call Transcript

Published: 3 Feb 2011

[Randy Binner:]

Jeff Schuman - KBW

[Operator:]

Good day and welcome to the Unum Group fourth quarter 2010 earnings results conference call. Today’s call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to the Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead, sir.

[Tom White:]

Great. Thank you Gwen. Good morning everyone and welcome to Unum’s fourth quarter 2010 analyst and investor conference call. Our remarks this morning will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the section titled “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in our Annual Report on Form 10K for the fiscal year ended December 31, 2009, and also in any subsequently file Form 10Q. Our SEC filings can be found in the Investor Section of our website at www.unum.com. Also remind you that statements in today’s call speak only as of the date they are made and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliation’s 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 Rick McKenney, Executive Vice President and CFO; and our business segment President’s Kevin McCarthy, Randy Horn, and Jack McGarry. And now I’ll turn the call over to Unum’s President and CEO, Tom Watjen. Tom.

[Tom Watjen:]

Thank you Tom and good morning. Not withstanding the short fall we experienced in the Colonial Life segment, I’m pleased with our fourth quarter operating and finical results. Unum US posed another strong quarter with solid risk experience and we are seeing encouraging signs of satiability and progress in our Unum UK operation. The short fall this quarter in result to Colonial Life relative to our expectations was clearly disappointing, but given its growth prospects, strong profit margins and healthy cash flows, we continue to maintain a very positive outlook for this business. Rick will provide more detail on Colonial Life fourth quarter experience and outlook in his commentary. Now let me make a few comments about the quarter. First, while we reported flat operating earnings per share of $0.66, our largest business Unum US continued to produce strong financial results with stable risk results. Second our financial results and strong investment performance has allowed us to build a very strong capital position. Our weighted average risk based capital ration ended 2010 at approximately 398%, which is at the upper end of our target range and our holding company cash and marketable securities position exceeds 1.2 billion, which is over four times the annual need of servicing both our interest and our common stock dividends. With the strength of our capital position and the confidence in our future, our board has authorized an additional $1 billion for share repurchase over the next 18 months. Third, while we saw very little change in the competitive environment this quarter, we did see some marginal improvement in the economic environment. After several quarters of declining natural growth of our business, that was less of a drain in this past quarter and we expect to see some continued benefit coming from slightly better employment - a slightly better employment outlook and perhaps some future wage inflation. Fourth, we continue to see good growth in our target markets, especially the voluntary benefit market place. Our Unum US voluntary benefit business sales grew 10% in the fourth quarter and 15.6% for the full year. In Colonial Life commercial sales grew 5.3% for the quarter and 8.2% for the full year. We expect growth in these markets will continue and with it you will continue to see our mix of business continue to shift to higher growth or stable margin businesses. And finally our investment portfolio remains in excellent shape. Our credit quality remains strong and although new money rates remain challenging, we are managing very effectively through this low interest rate environment. In summary, as we wrap up that was a strong 2010. Our outlook going into 2011 is a very positive one, which I think was frankly reflected in some of the decisions or the decision by A.M. Best last week to upgrade our financial strength rate. We have a solid business plan in place and the commitment to maintaining a disciplined approach to our market. The consistent predictable operating cash flow as we expect to generate will continue to provide us with tremendous financial flexibility. That financial flexibility remains an asset, both to support our business needs, allow us to capitalize on opportunities in the market place and also take steps like we announced yesterday to return excess capital to our shareholders. This will continue to be our playbook in 2011 and we have great confidence it will continue great value for our shareholders. Now I’ll let Tom White to provide an overview of our operating results this quarter. Tom.

[Tom White:]

Great. Thanks Tom. Net income for the fourth quarter was $225.8 million or $0.71 per diluted common share, compared to net income of $199.4 million or $0.60 per diluted common share last year. Included in the results for the fourth quarter of 2010 are net realized after tax investment gains of $17.2 million or $0.05 per diluted common share, compared to net realized after tax losses of $18.9 million or $0.06 per diluted common share last year. Net realized after tax investment gains for the fourth quarter of 2010 include an after tax gain of $16.1 million, resulting from changes in the fair value of an embedded derivative in a modified co-insurance contract, compared to an after tax gain of $22.7 million in the fourth quarter of 2009. Also included in net realized after tax investment gains for the fourth quarter are net realized after tax investment gains of $1.1 million related to sales and right downs of investments compared to net after tax losses of $41.6 million in the fourth quarter 2009. So excluding these items, after tax operating income was $208.6 million for this quarter or $0.66 per diluted common share, compared to $218.3 million or $0.66 per diluted common share in the year ago quarter. Turing to the operating segments, in total Unum US operating income increased $1.5 million to $206.1 million in the fourth quarter. Within Unum US, the group disability line reported another solid quarter with income up 6.1% to $77 million, driven by strong persistency and improved risk experience on a year-over-year basis. Within the Group Life and AD&D line, operating income increased 11.5% to $53.2 million in the fourth quarter. A solid improvement in premium income driven by strong premium persistency helped to offset a slight up tick in the benefit ratio this quarter. In the supplemental and voluntary line, fourth quarter income fell 8.2% to $75.9 million, from a record high of $82.7 million a year ago. The year-over-year decline was driven primary by higher active life reserves and long-term care and acceleration of amortization, resulting from lower persistency for certain issue years and certain product life. Moving to Unum UK, operating income in this segment decreased 21.5% to $48.1 million in the fourth quarter 2010. Operating income declined 18.9 % in local currency. While premium income and local currency was down 2.1% in the fourth quarter, it has shown sign of greater stability as we manage through the competitive market environment. The benefit ration of 71.7% was above the unusually low benefit ratio of the year ago quarter but adjusting for the impact of higher inflation on claim reserves associated with inflation index linked group policies. The benefit ratio for the fourth quarter of 2010 would have been under 70%. So concluding our core operations, Colonial Life experienced an 11% decline in operating income compared to the year ago period, largely due to unfavorable risk experience in the accident, sickness and disability line and Rick will elaborate on this in his analysis of the quarter. The Individual Disability Closed-Block operating income was $10.3 million in the fourth quarter 2010, compared to $5.8 million in the year ago quarter. The interest-adjusted loss ratio was higher at 84.7% this quarter compared to 81.6% in the year ago quarter, but was down from the 85.5% in the third quarter 2010. Premium income declined 3.4% and net investment income was eventually flat year-over-year. And finally the corporate and another segment reported an operating loss of $17.3 million compared to a loss of $16.6 million in the year ago quarter. Net investment income was higher, reflecting higher levels of invested assets and higher miscellaneous net investment income, while interest expense increased to $36 million this quarter compared to $31.1 million in the fourth quarter of 2009, reflecting the debt issue from September 2010. So with that review of our operating results, I’ll turn the call over to Rick McKenney for further analysis of this quarter’s results.

[Rick McKenney:]

Thank you Tom. I’ll touch on three topics for the quarter. The key profitability drivers of our business line; it’s a snap shot of the investment portfolio and a view of our capital position and actions. So starting on risk experience for our primary business lines, first within our Unum US operations risk experience remained generally stable this quarter. Our group disability performance remains quite strong, with the benefit ratio dropping to 84.2% for the fourth quarter and 84.4% for the full year. New claim incidents remain somewhat volatile and is up slightly this quarter, but is within the range of experience we have seen over the past few quarters. At the same time, claim recovery experience remains favorable. Looking forward we believe we will similarly consistent experience in the group disability benefit ratio, with longer-term improvement in profitability driven by the ongoing balance of our business mix to more core market and voluntary benefits. The Group Life and AD&D mortality experience was slightly elevated with a benefit ratio of 70.3% in the fourth quarter of 2010, compared to 69.9% in the year ago quarter. And looking within the voluntary and supplementary lines, voluntary benefits margins improved relative to last year, as risk experience was also generally stable and premium income increased by 7.3%. We did see lower margins out of our recently issued Individual Disability business as well as long term care. The increase in the benefit ratio for the long-term care line reflects the ongoing increase in active life reserves caused by higher persistency. Incidents and recovery trends within the LTC business were consistent and within our expectations and past results. We are in the early stages of our ILTC, rate increased by owing (ph) that we announced back in November. So far we’ve received 13 state approvals with an average rate increase of 18%. What we are seeing is consistent with our expectations and our experience the last time we went through this process. Moving to our Unum UK results, as we expected we did see some movement up in our benefit ratio in the fourth quarter to 71.7%. This compared to 66.9% in the third quarter and the unusually favorable benefit ratio of 59.6% in last year’s fourth quarter. We did see unfavorable mortality experience within our group disability line and higher benefits in the group life line. But after adjusting for the impact of higher inflation unclaimed reserves, associated with the inflation index claim policies, the benefit ratio for the fourth quarter of 2010 would have been under 70%. We are encouraged as well by the progress we are seeing in many of the operating initiatives that Jack McGarry and the team have been implementing. We are seeing positive early signs at our UK Claims Manager process, most of which parallel the changes implemented in our US operations a few years ago. I will end on Unum UK by noting that our pretax margin exceeded 30% and ROE exceeded 22% this year, a very healthy level of profitability. And finally results from the Colonial Life segment were below our expectations this quarter, primarily driven by adverse trends in the accident, sickness and disability line of business. Based on what we saw in the fourth quarter, we added $7.5 million of reserves to our AFD claim reserves that were related to second and third quarter claims. Going forward we expect that the Colonial Life’s benefit ratio, which was 50.7% in the fourth quarter once adjusted for the $7.5 million reserve addition, and 49.7% for the full year of 2010 will likely be in a range of 50% to 52%, consistent with our expectations of an increasing loss ratio. Our outlook for Colonial Life remains very positive and we expect to continue to see Colonial Life drive strong profit margins and cash flows. Now moving to the premium line, the challenges continue to exist in today’s economic and business environment. At Unum US, in the fourth quarter we began to see very modest improvement in the natural growth that we have discussed with you over the past several quarters. Our estimate is that natural growth was generally flat in the fourth quarter and represented a head win of approximately 1% for the full year of 2010. This was better than the negative 3% we saw in 2009, but with high unemployment and low wage inflation within our enforced customer base, the environment is still dampening our ability to grow our top line. We do see continued success within Unum US in the voluntary benefits market place where sales increased 10% in the fourth quarter and 15.6% for the full year. In addition, were able to grow our new customer base with key sales in group and voluntary benefits up 8% in the fourth quarter. Within Unum UK we continue to see greater stabilization of our premium income, and important operating trend as we work to restore our historical strong performance. Competitive market conditions persist and economic trends remain challenging in the UK. Despite that we are encouraged by the near term actions we discussed back in November, specifically around pricing that are beginning to take hold. Just as I discussed with our Claims Manager and processes, we have implemented similar best practices from our Unum US experience, by adjusting compensation to include a heavy reemphasize on improving the profitability of their block to business through discipline renewal and new sales activities. Although reported sales were down excluding the year ago sales related to the exit of the competitive from the UK group risk market, our fourth quarter 2010 sales increased by 35% in local currency. And finally, growth metrics in Colonial Life remain very positive. Sales in the fourth quarter increased by 1.3% and for the full year up 4.4%. Fourth quarter results remain solid in the commercial market, where sales increased 5.3% in the quarter and 8.2% for the year. Where these positive sales results in good persistency, we’ve generated premium growth at Colonial Life of 6.3% for the fourth quarter and 6% for the full year. Recruiting trends continue to be positive with new contracts up 22% this quarter. New account growth also remains encouraging, up 4.5% this quarter and 13.6% for the year, but our average new case size is lower by about 5%, driven by the economy and the tendency for our newer agents to have their initial success in the smaller end of the market. As you shift to the balance sheet in the investment portfolio we continue to see excellent results, both in terms of maintaining a strong credit profile and our ability to manage within today’s low interest rates and new money investment yields. During the fourth quarter treasury yields increased, driving the net unrealized gain position in our fixed maturity securities portfolio to $3.5 billion at quarter end from $5.1 billion in the quarter. For the full year we had net gains on sales and right down the investments of $3.6 million before tax and a level one through three securities on our bond portfolio, watch list is 1/7th the size it was a year ago. In 2010, we did a good job in navigating the lower interest environment, investing in asset classes where we saw relative value at that time. Our portfolio yield held up very well with our aggregate portfolio yield at 6.71%, comparing well to our yield of a year ago, which was 6.47%. The yield on our investment portfolio is backing our various product lines that showed similar stability. An example of this is in our long term disability business, where the aggregate discount rate came down faster than the portfolio yields and we saw this margin expand from 92 basis points to 99 basis points. So with solid financial investment results this quarter, book value per share continues to grow. The company’s book value per share was $28.25 as of December 31, an increase of 10.3% relative to a year ago. Moving to capital, our statutory earnings continue to be solid. Net income on the statutory basis for our traditional US life insurance subsidiaries in the fourth quarter was $158.5 million and $628.8 million for the full year. This healthy level of earnings continues to drive an excellent overall capital position for the company, giving us great financial flexibility. The weighted average risk based capital ratio for a traditional US life insurance companies was approximately 398% at year end, at the upper end of our target range. Holding company cash and marketable securities remains at very strong levels as well, totaling $1.2 billion at year end. All of these characteristics were noted in our recent upgrade from A.M. Best. Given that strong position and the ongoing cash flow generation characteristics of our business that we discussed at our November investor meeting, we announced an additional $1 billion to our share repurchase authorization. This authorization is in addition to the $144 million remaining on our previous authorization and now extends for 18 months. While our share repurchase activity slowed in the fourth quarter, we expect to be active again in the first quarter. This deployment contemplates utilization of our fee generation of $500 million per year, as well as reducing slightly the excess capital we have built up over the last several years. Additionally we will pay off the $225 million debt maturity as of March 1, 2011, which repeat funded in September. Our reported year end leverage ratio would have been 20.9% adjusting for this pay off. Including on our outlook for 2011 is unchanged from the outlook we provided at our November 17 investor meeting, which called for operating earnings per share growth within a range of 6% to 12%. Now I’ll turn the call back to Tom for his closing comments.

[Tom Watjen:]

Thanks Rick. As I said earlier, I was generally pleased with our overall results and believe it, the additional $1 billion in share repurchase authorization is a strong statement regarding our confidence in our future. The economic and competitive conditions remain challenging, but I’m hopeful that the slow gradual turn we are seeing in the natural growth of our business will continue. In the meantime, I believe we have a solid business plan in place and a commitment to consistent discipline execution of that plan. Our capital position and financial flexibility will continue to be an asset. An asset, which we expect to continue to use in 2011 to create value for our shareholders. Operator, this completes our formal comments, so please let’s go to the question-and-answer session.

[Operator:]

Thank you. (Operator Instructions) We will take our first question from Darin Arita with Deutsche Bank

[Darin Arita:]

Thank you. I was hoping to think about the US and the growth there and more comments about the employment pressures easing. I was wondering how quickly could we see that translate into some premium growth in the US?

[Tom White:]

Good morning, Darin. Maybe what I’ll do is ask Kevin to pick up on that, because I think it’s most affecting his business.

[Kevin McCarthy:]

Good morning Darin. Well as we talked about it, last year we had about a 3% headwind in 2009. 2010 was closer to a 1% headwind in terms of natural growth, which is basically the lack of job creation, lack of employment growth, lack of wage inflation. Fourth quarter and then particularly December, it sort of flattened out. If we continue to see that trend sort of from flattening and into the positive, it should flow through you know fairly quickly, because basically what it does is it increases payrolls on your enforced book of business and it flows through sort of directly to enforced premium growth. So, you know you start to see it sort of emerge pretty much as it emergence in the economy. In addition to that, not directly related to natural growth, over the last two years we have seen a fairly significant dampening of what we call MVOC (ph) or upgrades and benefits for existing clients and down significantly both in 2009 and 2010. I would expect that as the economy improves and consumer confidents improves and business start to reinvest we start to see some upgrade and benefits as well, which I think would benefit us on the sales side as well, but you wouldn’t see the year-end premium effective that until the subsequent year.

[Darin Arita:]

Okay great, that’s helpful there Kevin and then turning to Unum UK, I was wondering you know what the dividend potential is, that is that, with the returns of above 20%.

[Tom White:]

Let me just ask Rick to pick up. You are asking Darin about the dividend and capacity of our UK business? Yes, go ahead.

[Rick McKenney:]

So actually we were able to receive the dividend in the fourth quarter, so dividend flows do come out of our UK business. We are sitting in an excess capital position in that business and we expect those dividends and working with regulators etc will continue to flow out of that enterprise. You wouldn’t notice, as part of our overall capital claim we do expect some of the capital generation will come out of our UK business. That’s what we are seeing and that’s what we expect to see in the future.

[Darin Arita:]

Is there a typical realist guideline on maximum dividend similar to what we have in the US?

[Tom White:]

There are and working with the FSA in the UK, there will be different capital expectations that we’ll have through the different capital models, different pillar structures that they have, needless to say we are in excess position there. As we continue to generate the capital, you will see a local capital generation, fairly similar to what we see from a US GAAP prospective and those flows should look pretty similar.

[Darin Arita:]

All right, thank you.

[Tom White:]

Thank you Darin.

[Operator:]

And we’ll take our next question from Bob Glasspiegel with Langen McAlenney

[Bob Glasspiegel:]

Good morning everyone. As you sort of postmortem the Colonial quarter, is there any concern that maybe the sales, the good sales you had versus competitors may have sacrificed too much price?

[Tom White:]

Good Morning Bob. Actually I’ll ask Randy to pick up on that question about sales activity.

[Randy Horn:]

Yes, thanks Tom. Good morning Bob. We don’t have any strong concerns in that regard. We have a very disciplined pricing approach, still selling primarily individual products that again have been relative stable over time, so I don’t see a sacrificing margin or having to come down significantly on price to maintain sales momentum.

[Bob Glasspiegel:]

Okay, if I could switch gears, now that you got an A-rating for A.M. Best, you sort of have been balancing generating statutory earnings, which is maybe a dampener on sales, to maybe picking more that we’d be able to sacrifice that earnings for growth. I know its not either/or, but as you look at the continuum of stat earnings in the sales, could there be a little bit of a shift in focus going forward or is maximizing stat earnings your primary objective?

[Tom White:]

Bob, this is Tom. I’ll ask Rick to add to my comments. First off, we are very pleased obviously to get the A.M. Best rating. Its something that was important for no reason and I think certainly this company has come a long way and we think the performance of the company certainly should have led to a raised upgrade. I think we said in the past, commercially the only place I think we saw that rating somewhat helpful is in the public sector business and Randy’s business, so it wasn’t a big commercial victory, but I would say it’s a big victory in terms of being able to show the hard work that’s been put into this company, is what’s led to a rating’s improvement. And I don’t think Rick is going to fundamentally change though how we think about managing the business at all actually. We wanted the rating, but I’m not sure we actually compromised anything financially in order to get the rating.

[Rick McKenney:]

No, I think we have been running the business as expected and as we have communicated to you over the last several years. We were happy to get that, but I don’t think that was reflective of any change in the structure, and to pick up on your question around maximum stat earnings versus sales. I’d go back to our capital and say that as we generated this statutory earnings into our capital base, first and foremost we’d like to put that capital back into our new business. So we are not sacrificing on our new business front to generate more stat earnings is quite the opposite. We’d rather put more capital into the business to generate those returns. So I’d reverse your commentary round that I’d say. I’d much rather sacrifice a little bit on the stat earnings front and grow our good profitable businesses around the company.

[Bob Glasspiegel:]

Thank you.

[Rick McKenney:]

Good. Thanks Bob.

[Operator:]

And we’ll take our next question from Mark Hughes with Sun Trust.

[Mark Hughes:]

Thank you very much, good morning.

[Tom White:]

Good morning Mark.

[Mark Hughes:]

The natural growth trend through the quarter, I think you’d emphasize December. Is December steady or is December actually up a little bit in terms of natural growth.

[Tom White:]

Kevin, do you want to pick on that?

[Kevin McCarthy:]

Yes, it was the December was - December was better than the earlier part of the fourth quarter, but I mean we are splitting here as we are talking about the fact that it was basically zero plus or minus you know percentage point.

[Mark Hughes:]

Yes, the inflation index product, is that going to continue to have an effect on future quarters?

[Tom White:]

I think Mark you are shifting to the UK then. Rick do you want to pick that up please?

[Rick McKenney:]

I would say it, just remind you that the inflation index, it only impacts the benefit ratio. It’s what you’ll see equal and offsetting in the investment income line, similar volatility, but it is more of a reporting issue, that’s why we spike it out, because it is more how it comes to the benefit ratio as opposed to how it effects profitability, because we do have assets that back that same inflation index that flows against the same entities. So we will continue to spike it out, but it does cause a little bit of noise in our benefit ratio.

[Mark Hughes:]

Right and just an reporting issue rather than a income issue.

[Rick McKenney:]

That’s correct.

[Mark Hughes:]

Okay, the higher long term care rate, you are having success with you filing, when did that kick in, in terms of premium and then what should we expect in terms of losses when will that change or moderate and then does not have an impact on persistency as well that people - there’s a certain cohort to abandon the policies when you raise the rates like that.

[Rick McKenney:]

Yes, when you look at the long term care business, we did see an uptake in the benefit ratio. You will see it stabilize probably around that level over the course of 2011 the timing of the premium starting to flow through and affect the benefit ratio probably are more of a 12-month to 18-month time frame. So I think when you get towards the end of 2011, you will start to see that feather and over the course of early 2012. So that’s kind of the trend lines that you should expect to see there. With regard to persistency, I think that that we’ll have to see how that plays out. Previous rate increases have not affected persistency. They have been observed into the market and so we will have to see how that plays out. We don’t have an expectation that persistently takes up or I should say reduces as a result of the price changes.

[Mark Hughes:]

Thank you.

[Tom White:]

Thank you, Mark.

[Operator:]

And we will take our next question from Mark Finkelstein with Macquarie

[Mark Finkelstein:]

Good morning. Actually a follow up on the prior question. I guess with the rate increases in long term care and I understand that naturally the business is going to show higher loss ratios overtime off set by investment income, but if we look at it on a margin standpoint, would we expect that with these rate increases, that it would essentially improve the margin or essentially kind of freeze it where we are it, relative to the experience that we are showing and how dramatic would we expect that margin expansion to be if that’s the case?

[Rick McKenney:]

Yes, when you look over the next couple of years and it comes in - it’s also early to process, so I don’t want to over commit what the process will look like. But what you would see happening is it’s bringing in the expense ratio a little bit, but that continued headwind we’ve seen with high persistency, while continuing to push it up. So you’ll see those two computing forces happen within our benefit ratio, really all in the next two years and so you can think about that from a margin perspective. That’s how it will flow, but it’ll be somewhere in this range with the increase in active life reserves from a high persistency, being offset with some of the premium changes and that will play out over the course of the next eight quarters or a little bit longer.

[Mark Finkelstein:]

Okay, but you would expect the margin from where we are to-date, to improve with these rate increases?

[Rick McKenney:]

Yes.

[Mark Finkelstein:]

Okay.

[Rick McKenney:]

Slightly, no (inaudible).

[Mark Finkelstein:]

Okay. I guess just on the UK, it sounds like a lot of optimism around some of the claims management practices that Mr. McGary is working on, and I guess my question is what is it that we are trying to achieve and is there anyway of kind of quantifying what you think the inefficiencies and what is currently being done today; whether it’s in terms of loss ratios or improvements in claim recovery patterns or what have you. Maybe if you could elaborate on what you expect the outcomes to be as a result of these procedures.

[Tom White:]

I am going to pick up on that, but also may be add a little to what you are seeing in the marketplace with some of the top line growth prospects as well.

[Mark Finkelstein:]

Okay.

[Rick McKenney:]

Yes, I think the claims management processes really aren’t as focused on margin improvement as they are on consistency predictability and improving our value proposition in the marketplace. It’s about fairness, objectiveness, making sure that we are fully documented. We probably will see some improvement in the lost ratio. Its going to be a more expensive benefits organization, because we are going to apply more resources to it, both management claims people, as well as medical and vocational resources. I’m very consistent with the US. We face similar kind of headwinds in the UK around a kind of tightening regulatory environment and so we expect those things to net out as opposed to seeing really good profit improvement from there. We do expect to see significant profit improvement from our renewal efforts early days on those, but we are encouraged by what we are seeing in the market place and encouraged by similar to the US, the margin improvement potential from those profit movements, because the business that we are losing in the marketplace is significantly under price relative to the business we are keeping at least with the business we have renewed thus far. And again, we’ve seen stabilizing premiums. We actually have seen over the last two quarters, a pretty good increase in what’s called MBOC in the US, but its called up sell in the UK and that’s existing policyholders adding coverages and expanding coverages. We have a big push on in the UK, about encouraging employers to expand coverage and are optimistic about that and we have began to see some natural growth in the market as well.

[Mark Finkelstein:]

Okay, all right thank you.

[Tom White:]

Good. Thank you, Mark.

[Operator:]

Okay. We’ll go next to Colin Devine with Citi.

[Colin Devine:]

Good morning guys. I have a couple of questions for you. The first one, Kevin can you just give us a sense of how much of these, I guess up highs as Randy referred as and jack referred to them are down in the US, because that was quite significant I think for one of your competitors. And then for Randy, what is it about your agent comp program that is allowing you to be so much more successful than one of the other large firms out there that seems to be struggling mightily to it’s recurred agents.

[Tom White:]

Kevin you wanted to start?

[Kevin McCarthy:]

Yes, good morning Colin. MBOC or an up sell as they say in the UK. We are down 30% in the fourth quarter and down 16% for the year and that’s down from a 2009 level. That was also down by similar levels versus 2008. Typically, in more “normalized times,” about a third maybe are some of our group insurance lines would experience - their sales numbers would be from this MBOC. So when you are down by that much I think the fact that we came in with a flat fourth quarter and in some overall sales and with growth sort of a new business and new account acquisition I think was a pretty remarkable quarter.

[Colin Devine:]

That’s great, helpful. Thanks.

[Tom White:]

Thank you. Randy you want to pick up on the recruiting question?

[Randy Horn:]

Sure Tom. Good morning Colin. Our ongoing growth in agents is really not a matter of agent comp. It really comes back to performance expectations that we have for all of our field management group, so we have very clear expectations established, we have a great structure in place at this point that really maintains a very strong focus on new agent recruiting, on a continuous basis so we have very solid processes around recruiting a good support structure in place, both in the field and the home office and I think it’s just more about continuity, expectation, focus and we are getting good steady results. But Colin, it really is not a matter of compensation that’s driving that.

[Colin Devine:]

That’s also very helpful. I had one just quick one for Rick. You mentioned on the, I guess problematic individual launch on (inaudible) that you added through. I think it was in 18 states. I am curious of, well importantly, as to what percentage of the imports have you received deferrals on?

[Rick McKenney:]

That’s a good question Colin. I don’t know if we have plans on…

[Tom Watjen:]

Yes Colin, I think that’s just slightly under 20% at this point, so that’s 13 states. We have had two states that have denied our request that we’ll go back to, but I think of those states that have approved, it’s a little less than 20% of our overall program.

[Colin Devine:]

Great. Thank you very much.

[Tom Watjen:]

Thanks Colin.

[Operator:]

We’ll go next to Jimmy Bhuller with JP Morgan.

[Jimmy Bhuller:]

Hi guys, good morning.

[Tom White:]

Good morning Jimmy.

[Jimmy Bhuller:]

I had a couple of items. First, on pricing trends in the disability. I think you touched on this a little bit before, but a few of your competitors have been talking about raising prices. I just wanted to see if you could discuss whether you have actually seen some of the large competitors in the group, disability mark in the US raise prices or are they just talking and no action in the marketplace. Secondly, on buy-back, obviously you announced the additional $1 billion. Part of that is draw down of your existing excess capital position. So how should we think about the face buy backs over the next year, year and a half. Should a portion then be front ended or would you expect to do them evenly throughout the next year and a half.

[Tom White:]

Good. Lets just go back to your first question Jimmy, on pricing trend, Kevin do you want to pick up on that?

[Kevin McCarthy:]

Yes, good morning Jimmy. We really haven’t seen much change in the marketplace is what it comes down to. We have maybe seen during the fourth quarter a little bit more stability on pricing in terms of the large case into the business, then we have been experiencing in the past, but in the small or medium sized sort of core marketplace, we just haven’t really seen much moving at all on the pricing side. Industry pricing levels have been sort of flat to slightly down over the last 18 months, we haven’t seen any change in that. When we look at our 2011 renewal program, I think we are making good, solid and steady progress, but we recognize that income is continuing to their invoice books of business of - the short answer I guess is no, I haven’t really seen any change.

[Tom White:]

Then to shift to your second question, Rick do you want to pick up on the buy backs?

[Rick McKenny:]

I think the key question that was on the case of buy backs, so we expect to see over the next 18 months. I would think it would be fairly level in terms of what we would we would expect. We have the capital to do more today and given the right opportunity we would move it earlier, move in later, but I think its going to be more independent on what we see and being opportunistic on that front. So I think it’s a reasonable estimation and on a level basis, but expect that we will do more and less based on what the market dictates. It’s not a question of capital; we have that available to us today.

[Jimmy Bhuller:]

But opportunistic would imply the stock price, then if it were to correct then you would do more otherwise just at an even pace, right?

[Rick McKenny:]

I think that’s one in part of some.

[Jimmy Bhuller:]

Okay thanks.

[Tom White:]

Good, thank you.

[Operator:]

We’ll go next to Chris Giovanni with Goldman Sachs.

[Chris Giovanni:]

Thanks so much. A follow-up question for Rick on share repurchases. So at investor day you talked about, I guess $500 million of repurchases being included within your guidance. So I wanted to see if your affirmation of 6% to 12% growth in earnings per share include just $500 million or something bigger than that? And then you also talked about sort of $900 million as sort of capacity in terms of running down RBC and reducing some of the excess liquidity. Also want to see if we expect that in 2011 and then finally, if you can just talk some about sort of taking the foot off the pedal a bit in 4Q in terms of the buy back activity.

[Rick McKenny:]

Sure. Okay, we’ll start off in terms of our EPS guidance. You got the incremental and this is if you did level that $1 billion over the course of the year, you would see may be a percent, percent and half type movement in EPS. That’s still within our range, so we are not adjusting guidance for that, but I would assume that that is baked in, but it really depends on how this program plays out and we’ll update that over the course of the year. In terms of the capacity that we’ve got, that we laid out in investor day, we are generating $500 a year; came in a little bit heavier than that last year, so we are starting with this billion dollar to start to bring down our expectations a little bit of our holding company levels, which are still running. The 1.2 is running at almost five times our annual needs. We’ll run that down a little bit and our RBC ever so slightly, but we’ll still stay within our range of 375 to 400 most likely. With regards to the fourth quarter, we did do a small amount of buy backs in the fourth quarter. It’s around $29 million, but you are right, it was slower than what we did in the third quarter, which is closer to $200 million. When you look at the fourth quarter they are actually, there were not a lot of windows in terms of buying back shares. We have to remind you, we did our earnings in early November, investor day November 17, holidays and volumes drying up as we get into December. So it just wasn’t the opportunity there, you will see effect if you’re in the first quarter of buying back our shares and so you can expect to see that.

[Chris Giovanni:]

Thanks. Everything else was (inaudible)

[Rick McKenny:]

Good. Thank you Chris.

[Operator:]

And we’ll go next to Sean Darken with Wells Fargo.

[Sean Darken:]

Thank you and to follow up on Chris’s question, should we still view the operation earnings growth guidance of zero to 5% to be in place or in other words, it is not taking incrementally more share repurchase to get to the EPS growth guidance?

[Rick McKenney:]

That’s right. The zero to five will still be intact as well, so we’ve got a little bit of movement around there I think as we get into our final plans, but that zero to five is still good and we are keeping the 6 to 12, both in which these actions or I should say expectations are still within that range.

[Sean Darken:]

Okay, thank you, and just one more question about Colonial Life. There is a mix shift going on. Am I to think that you know that there will be higher utilization going forward based on the client base that’s buying the product now?

[Tom White:]

Yes, actually when you want to pick up on that, because again the mix shift is something you have been talking about for sometime and it relates to sort of your markets as well as your product portfolio. Let me just sort of pick up on that a little bit.

[Kevin McCarthy:]

Yes Tom and good morning Sean. Yes, it’s definitely a market and a product shift and we do see a little bit higher utilization and benefits on the public sector side of things and as we focus on that market we’ll see a little more shift there and also as we introduce new products that are more competitively priced is going to inch it up a little bit and then you’ve seen a mix within product segment, with more focus on the accident and sickness side of our benefit offerings, all coming together to kind of inch things up from a benefit ratio stand point, but still we feel very comfortable in terms of stability in that low 50s range that Rick talked about and we think it’s a very good place to operate our business from going forward.

[Sean Darken:]

Thank you.

[Tom White:]

Thanks Sean

[Operator:]

We’ll go next to Stephen Schwartz with Raymond James

[Stephen Schwartz:]

Hey, good morning guys.

[Tom White:]

Good morning Steve.

[Stephen Schwartz:]

Just to follow up on that, the message fees of the Colonial and risk result is not that necessarily that this is an adverse morbidity quarter that we had here. Its more on the lines of this is where we think things are given, our mix shift and we just did reserves accordingly. Is that the way to think about this?

[Tom White:]

Yes, Rick do you want to follow-up on that.

[Rick McKenney:]

Yes, I think that most of what you said, I agree with it. In the fourth quarter we did see some things, which were related to prior quarters and so we adjust reserves. You really should take some of that increase that you saw and spread it back towards second and third quarter. We didn’t see it at that point of time, that something didn’t emerge until the fourth quarter, but it is ultimately a higher incident and that’s why we said in the quarter, in and of itself was 50.7% which was higher than we have been in previous quarters, but still within our range of expectations.

[Stephen Schwartz:]

Okay and then if you may be follow up on a couple of things Rick. So the guidance now seems to be to look for that, not that it makes a whole lot of difference for the earnings or the EPS, but the guidance now seems to be looking to $1 billion of share repurchase somewhere in that range, so you’d have $500 million coming out from the insurance companies based on operating cash, of course that comes back in during this year taking another $500 million or so out of the holding company; is that correct?

[Rick McKenney:]

I would really look at a private moral that is split into the two years, because over the next 18 months we will actually generate $750 coming out of the insurance companies and so you draw down probably out of the holding company $250 and those are rough numbers, but gives you a sense, because we are looking out over 18 month.

[Stephen Schwartz:]

Okay and then to follow up on Collin’s question about the enforced rate increase on individual long term care. Could you remind us, what percentage of your book of business are you looking to take rate increases on?

[Rick McKenney:]

Tom, do you think…

[Tom White:]

Let me do a little home work on it real quick.

[Stephen Schwartz:]

Oh okay, alright okay.

[Rick McKenney:]

Well if you are willing to get back, we’ll check up on those as we are speaking here now.

[Stephen Schwartz:]

Okay, all right, that’s all. Thank you guys.

[Rick McKenney:]

Okay good, thank you.

[Operator:]

And we will go next to Randy Binner with FBR Capital Markets

[Randy Binner:]

Hi, good morning. Thank you. I guess the Colonial questions have been answered pretty well, but coming back to long term care, I just want to better understand Rick’s comment, that the benefit ratio would stabilize kind of later this year. I mean (a) I assume that you are talking about interest rate adjusted, but (b) I guess if I’m thinking about it, even kind of a little bit younger book I think than some of the peers and so if utilization is higher, when that causes a longer term increase there, I just wanted to understand why that would stabilize until that’s kind of naturally raising, not withstanding your comments on the re-raise.

[Rick McKenney:]

Yes, so when you look at the increase in the reserve, you would have to do it a little bit longer term trend. It isn’t about claims or things we have seen. We are actually - when you look at that, we are within our expectations around what we are seeing on the claims front, so it is purely the increase in reserves that were seeing as a result of high persistency. And so my comments around that is that the fourth quarter is probably a little bit higher than our expectation going 2012, may be around it, but to the higher end of expectations when you isolate a quarter, so you look in the kind of 82, 83 range. That is where we will expect it to run over the course of the year and as we get to the end of the year, we’ll start to feather in the higher premiums on the re-rate coming in, which will neutralize that ever increasing loss ratio as a result of the high persistency.

[Randy Binner:]

Okay, so the persistency maybe is driving it more than just kind of pure utilization, is that fair to say?

[Rick McKenney:]

It’s - I think you are going to say its all persistency that’s driving it.

[Randy Binner:]

Okay, and can you remind us of what’s the average age of someone that’s coming on claims is and what the average age of the whole block is?

[Tom White:]

I think first, as there may be Kevin, do you have a sense of that?

[Kevin McCarthy:]

Yes, in individual long term care I think the average age on claim is in the 70s somewhere. The average age of the term in-force block I think is in and around age 60 or so; whereas in group long-term care the average age is in the sort of high 40s in terms of in-force. But as Rick said, this is in about claim utilization. We are not seeing any deviations in terms of expectations around incident patterns and recovery patterns or morbidity. It’s all about expected persistency levels and adjusting active life reserves for that.

[Randy Binner:]

I understood, thank you very much.

[Tom White:]

Thanks Randy. Yes, just before taking this question, do you have a…

[Tom Watjen:]

Yes, just a follow up on Steven’s question. The block of individual long term care business we are looking for rate increases on represents roughly 40% of the total individual long term care block.

[Tom White:]

Okay, thank you Tom.

[Operator:]

(Operator Instructions) We’ll go next to Jeff Schuman with KBW.

[Jeff Schuman:]

Thank you good morning.

[Tom White:]

Good morning Jeff.

[Jeff Schuman:]

I wanted to come back to the UK. I think I understood Jack to say that the claim management function there has been under resourced and that you are going to put more resources there in search of a higher degree of fairness and consistency. I guess that begs a fairly obviously loaded question, which is, were there some issues there historically? Are you taking a look at some other historical claims practices there?

[Tom White:]

Jack, you want to follow up on Jeff’s question.

[Jack McGarry:]

Excuse me.

[Tom White:]

I just said, Jack do you want to follow up on Jeff’s question?

[Jack McGarry:]

Yes, we have gotten actually a pretty exhaustive review of the claim decisions over time. It uncovered no issues historically with claims decisions. A piece of the focus is on the consistency and predictability of results that we need to improve. Another element is that even though the claim decisions themselves were accurate and according to guidelines, we didn’t have the same rigor of controls in place around them to assure that that would always be the case going forward and so a real piece of what we are doing is putting in similar controls in the UK that we have in the U.S.

[Jeff Schuman:]

Okay, that’s helpful, although it’s still hard not to know of your use of the word fairness before. So was that may be not the right choice of word?

[Jack McGarry:]

I think it probably wasn’t, because the decisions had been fair before, it wasn’t the right choice of words, but probably it’s more around documentation and standards.

[Jeff Schuman:]

Okay.

[Tom White:]

And Jeff, I can - I surely, one of the shorts going through your mind is trying to draw the parallel between the U.S. and U.K.

[Jeff Schuman:]

Of course.

[Tom White:]

We have found it. The FFA has consistently felt good about the claim practices that we have personally followed. I think with Jack’s arrival, amongst the other things I think we found there is actually a better a way to do things. Any guess what this is all about? Taking a good process and making it better.

[Jeff Schuman:]

Okay, that’s understandable. Thank you for that. And one other thing I want to ask you about is how we should think about market sharing competition in US group at this point? You observed some competitors that some of them clearly have been under priced and that’s coming through in their results, but your commentary is that you are not seeing a lot of firming of pricing. I guess you sort of add this two together and it would suggest that there is still maybe some level of inadequate pricing in the market. So given that, is there a way for you still to kind of hold share as the market kind of recovers grows here or is that going to be a little bit challenging unless pricing moves from here?

[Tom White:]

Kevin, you want to pick up on that?

[Kevin McCarthy:]

Yes, thanks. Good morning Jeff. Well, there is a market share, first of all over the last 24 months we gained share in terms of case sells if you will pay share. We’ve also gained share in the core market during that period of time. Our struggles in terms of top line notwithstanding because of the economy, those struggles has been less than many of our competitors in the industry in total. Our growth rates were much less pressured than the industry in total. So, now I am not sort of - first off all, I am not overly focused on gaining share. I am mostly focused on achieving sort of rock solid difficult in financial results that meet our business objectives and to the extent that we are gaining share, that’s great. But I think our value proposition has worked very well. Our focus on the core market, the growth of our core distribution system, the expansion of our enrollment capabilities, the integration of simply the Unum into the marketplace, all of those I think bode well for share gain sort of overtime.

[Jeff Schuman:]

Okay, I guess what you are saying is that you can still find your spots where you can lift the pricing?

[Kevin McCarthy:]

Absolutely. I think it’s to the extent that the market continues to shift from sort of historical, for the employer pay to sort of shared funding with employer and employee. Our voluntary capabilities are our ability to integrate group and voluntary I think play well.

[Jeff Schuman:]

Okay, thank you.

[Tom White:]

Thanks Jeff. I think operator we’ll take one more call. We know there is another company call just coming up here shortly. So we want to be able to close promptly. So this, we’ll take one more question.

[Operator:]

And we’ll take our last question from Mark Hues with SunTrust.

[Mark Hues:]

Thank you. In the UK business you had a tough comp this quarter. On a normalized run rate, what should sales growth look like as we look over the next twelve months?

[Tom White:]

Jack, do you want to take up on that?

[Jack McGarry:]

Yes, we did have a tough comparison, because the aeon (ph) business was in the fourth quarter in 2009. Our expectations are that sales will be down slightly next year because of the rate actions we are trying to take and put into the market place. We would expect that to be more acute in the beginning of the year and as rates harden in the marketplace, which we are optimistic they will to us until the end of the year.

[Kevin McCarthy:]

Thank you, which I think again as Rick is consistent with the guidance you provided actually on the investor day, we are sort of holding to that guidance that we gave on the investor day. I think it was down in I guess the local currency about 10%.

[Tom White:]

Yes, about 10%.

[Mark Hues:]

Thank you.

[Tom White:]

Well, thank you all for taking the time and join us this morning, and again, we are all staying right here for further questions after today’s call, but I think at this point operator this will complete our fourth quarter 2010 earnings call.

[Operator:]

Thank you everyone. That does conclude today’s conference. We thank you for your participation.