Unum Group (UNM)

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Unum Group (UNM)

Q4 2011 Earnings Call

February 07, 2012 9:00 am ET

Executives

Thomas A. H. White - Senior Vice President of Investor Relations

Thomas R. Watjen - Chief Executive Officer, President and Director

Richard McKenney - Chief Financial Officer, Executive Vice President, Principal Accounting Officer and Chairman of Corporate Development & Capital Management Committee

Kevin P. McCarthy - Chief Operating Officer, Executive Vice President, Chairman of Enterprise Operating Committee, President of Unum Us and Chief Executive Officer of Unum Us

John F. McGarry - Executive Vice President, Chief Executive Officer of Unum UK and President of Unum UK

Analysts

Robert Glasspiegel - Langen McAlenney

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

Jay Gelb - Barclays Capital, Research Division

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Ryan Krueger - Dowling & Partners Securities, LLC

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Eric N. Berg - RBC Capital Markets, LLC, Research Division

Nigel P. Dally - Morgan Stanley, Research Division

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Randy Binner - FBR Capital Markets & Co., Research Division

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Edward A. Spehar - BofA Merrill Lynch, Research Division

Presentation

Operator

Good day, everyone, and welcome to the Unum Group Fourth Quarter 2011 Earnings Conference Call. This call is being recorded. And now for opening remarks and the introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Tom White. Please go ahead, sir.

Thomas A. H. White

Great, thank you, operator. And good morning, everyone, and welcome to the fourth quarter 2011 analyst and investor conference call for Unum Group. Our remarks this morning will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements.

Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the sections titled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2010, and in our subsequently filed Forms 10-Q. Our SEC filings can be found in the Investors section of our website at unum.com.

I remind you that statements in today's call speak only as of the date they are being made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on our website also in the Investors section.

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

Thomas R. Watjen

Thank you, Tom, and good morning. I want to touch on 3 areas in my comments this morning before handing things over to Tom and Rick for more details on our quarter. These include our solid underlying operating results for the fourth quarter and full year 2011, our decision to exit the long-term care business and finally, our outlook for 2012, which is, as you see from our release, has not changed from what we outlined at our November investor meeting.

First, regarding our fourth quarter and full year operating results. I'm very pleased with the results and the momentum that implies for 2012. For the quarter, we reported operating income, excluding special items, of $0.78 per share, versus $0.66 per share in the fourth quarter last year, or an 18% increase. For the full year, we reported operating income, excluding special items, at $2.95 per share against $2.69 per share in 2010, or a 10% increase. We continue to benefit from both the solid operating performance across all of our core operating businesses, including the improvement in the fourth quarter results for our Unum UK business, and from our lower share count as we repurchased 25.4 million shares this past year. It was generally a solid quarter across all of our operating areas. At Unum US, we continue to see stable risk results across all lines of business, while also growing the business lines we have targeted for growth. I'm especially pleased with the very strong sales and premium growth in our core group and voluntary businesses. The Unum US business segment, which now excludes the Long-term Care line, produced solid operating earnings growth of 7% in 2011, and a 13% return on equity. Unum UK's operating results recovered nicely from a weaker-than-expected third quarter, as claims activity returned to more normal levels. We are also encouraged by the pricing trends we are seeing in the U.K. which has opened up more sales opportunities than we have seen in previous quarters. New sales grew 15% this quarter in persistency, which was below year-ago levels, remained above our expectations. Despite a difficult environment in the U.K. and the third quarter shortfall, Unum UK produced a 20% return on equity in 2011.

At Colonial Life, results remained steady, with operating earnings rebounding nicely from last year's fourth quarter. Premium growth was just under 6% this quarter. Sales trends remained positive with overall growth of 4% this quarter and 8% growth within the core commercial market. Margins remained very strong in this business segment, and this business segment produced a return on equity in 2011 of 16.5%. In addition to these strong operating quarter results, our investment performance in the quarter remains solid. The credit quality of the portfolio remains strong and we continue to effectively manage through this difficult low-interest rate environment.

Finally, our capital position remains very strong even after the actions taken in the fourth quarter, which I'll discuss in a minute. We closed 2011 with risk-based capital at our traditional U.S. insurance companies, slightly above the 400% level, and withholding company cash and marketable securities at $756 million. Our capital position continues to be an asset and gives us a great deal of financial flexibility.

Now turning to my second point, our decision to exit the Long-term Care business. Hopefully this is not a surprise to anyone. As we indicated back at our investor meeting in November, we've been reviewing the Long-term Care business for some time to determine if it fits with our business and financial objectives. As you can see from our announcement last night, based on our review, we have elected to discontinue selling any new group Long-term Care policies and place all of our Long-term Care business into a closed block, much the way we handled our older Individual Disability business back in 2004. While there is no doubt a tremendous market need for Long-term Care coverage, in an extended period of low interest rates and at a relatively immature product with difficulty in projecting future loss costs, it simply does not have the risk and return characteristics we find so attractive in our other businesses. You can see from our release that we took a $561 million after-tax GAAP charge this quarter associated with this decision. Rick will touch on this further, but I would just say that it's important to keep in mind that this action has no direct impact on our statutory capital position or the cash generation capacity of our company. Also remember that a portion of that cost is the write-off of DAC, a portion of which would have been written off with the accounting change to be implemented in the first quarter.

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