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Unum Group (NYSE:UNM)

November 16, 2011 9:30 am ET

Executives

Peter O'Donnell - Chief Financial Officer and Director

Kevin P. McCarthy - Executive Vice President, Chief Executive Officer of Unum US and President of Unum US

Roger L. Martin - Former Chief Financial Officer and Senior Vice President

Randall C. Horn - Executive Vice President, Chief Executive Officer of Colonial Life and President of Colonial Life

Unknown Executive -

David Parker - Senior Vice President of Finance and Risk Management

Richard McKenney - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

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

Breege A. Farrell - Chief Investment Officer and Senior Vice President

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

Thomas Watjen - Chief Executive Officer, President and Director

Analysts

Colin W. Devine - Citigroup Inc, Research Division

Donna Halverstadt - Goldman Sachs Group Inc., Research Division

Ryan Krueger - Dowling & Partners Securities, LLC

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

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

Unknown Analyst

Robert Glasspiegel - Langen McAlenney

Edward A. Spehar - BofA Merrill Lynch, Research Division

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

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

Thomas A. H. White

My name is Tom White, and I'm Senior Vice President of Investor Relations for Unum. And we appreciate your attendance here at our Annual Investor Meeting. I think we could expand it to banker, investment banker, credit analyst. I didn't see any of my rating agency friends, but it's good to have everyone with us here this morning.

I will dispense with the reading of the Safe Harbor statement, but I will ask you to note that and take a quick look at the agenda.

We'll run our meeting as similarly to how we have in the past. We'll start out with a corporate overview from our President and Chief Executive Officer, Tom Watjen. We'll take a brief Q&A after that, then we'll move to the operating segment reviews. We'll run that a little differently than we have in the past. We'll focus first on the growth opportunities for our 3 businesses, and each of those presidents of those operations will cover the growth opportunities. And then we'll move to the risk management, and the CFOs of the 3 businesses will cover some of the risk issues, some of the claims trends and talk about some of the influences on our business in the last few quarters here. Then we'll do a Q&A after that session. I'd ask you to kind of keep your questions focused on the business operations at that point because we will conclude with a financial overview with our CFO, Rick McKenney. And also, Breege Farrell, who is our Chief Investment Officer, will talk about the investment portfolio. And then we'll have plenty of time at the end for a Q&A for the whole management team.

So we'll try to conclude around noon, and we will have lunch down on the third floor. No formal presentations at lunch, but we will -- our management team will be available. And we have some other members of the management team here who will not be presenting, but they will be available to you at lunch.

So with that, why don't I turn the program over the Tom Watjen? Tom?

Thomas Watjen

Well, thank you, Tom, and good morning, everybody. Let me add my welcome. It's certainly a pleasure to have everybody here. There's obviously a lot going on in this environment and, obviously, some important things going on with our company. So it's good that you took the time to spend this morning with us to have us put things in perspective.

As you can imagine, I still feel very good about our business mix, our business strategy and our financial foundation, and I think that sets up for, from my point of view and I think our team's point of view, a pretty good outlook for 2012. Don't get me wrong, the headwinds we face with the economy and low interest rates continue to be a challenge. But I think as we look ahead, we feel that we're pretty well positioned for 2012 and beyond to continue to build up -- off the momentum that we've actually built up over the last several years.

As Tom said, I want to talk -- really start with talking about our business actually. And as you know, really our focus has been, and will continue to be, working with employers to provide benefits to their employees in the workplace. We think that's a good business and, as you'll hear me talk about, actually, we think, is even -- has some really interesting long-term growth potential trends attached to it, actually. And really, again, we think it's a business that actually has a great deal of connection with some of the political developments that are happening in this country right now.

So that's the focus. It's been the focus for quite some time and will continue to be the focus, is the workplace and providing very basic protection products in the market. As you know, we do that through 3 platforms, each 3 of which has -- continues to have a leadership position in their markets. And even though we don't set market share goals for the company, it's nice that our disciplined approach to the market has still allowed us to be a leader in most -- many of the products and services that we sell in the marketplace. And again, we think that leadership position truly is an asset as we think forward.

I mentioned the growth and discipline. Sometimes, as you look at our history the last several years, it's hard to see we're -- that we actually are a growth company. And I want to take a moment just to sort of share with you a few perspectives that I have on why I think we are a growth company. We're not trying to grow across all businesses and all products, but, as you know, we've been very targeted about certain growth aspects of the business that we think actually present both good growth but also good profit margins that are manageable in these more challenging economic times.

And just look very briefly, you'll hear more about this actually as we go to the operating reviews. But just look at the Unum U.S. results. And this shows the growth rates going back to 2007, to the 12 months ending at the end of the third quarter. And you can see, I think one of the things we've talked to you about very consistently is the fact that we think there's great growth in selling group products to small employers. That's up -- should -- that's actually up 29%-ish result. And also good growth in selling Voluntary Benefits in the marketplace. That's the 41% growth rate.

We've -- we continually have a large case practice. But again, that's very opportunistic. And as you can see, actually over that time frame, actually the sales in that particular segment of the business is actually down. So we're proud of this. And so this shows that the commitment we made, the disciplined growth is working. The places where he actually see growth that could be -- and where we can write that business on a profitable basis, we are -- you can see we're very active. The places where we have to be very opportunistic, we're very much taking that opportunistic approach to the marketplace.

If you look to the U.K., it's a little -- the U.K. is a little more in transition. And you'll hear from our U.K. team here in just a few moments that much of the focus in the U.K. is getting the LTD business and the Group Disability business growing again in part by actually expanding the marketplace. And so there's been a little less of an obvious pattern as you look at the growth characteristics in the U.K.

But if you split quickly to Colonial, again a very consistent theme to what you saw in U.S. Again, the commitment we had in Colonial was to grow our basic small employer marketplace, which again was up about 11% over this period of time. Also, we saw some good growth opportunities selectively in the public sector, which is also up, but again being very careful about growing the large case business. And again, this, I think, portrays a very -- this strategy that we follow is working for us. Again, it's getting us to the pockets of the market which we think have good growth prospects. But as you hear some of the operating reviews, that's also having a positive impact on our profitability and our margins and why again we think we're well positioned as we look at a more challenging 2012 and beyond.

Now interestingly enough, when you look through the morass of some of the difficult economic and financial and political issues right now, I still firmly believe there's a tremendous need for the sorts of things that we do. So I want to digress for a couple of slides actually just to talk about my long-term views of this marketplace because I truly believe that the benefits being provided in the workplace is a growth business. And again, we're going to take -- probably take a couple of years until the economy begins to turn for us to see even more clear evidence of that, but I strongly believe this is a growth business. And it starts with the fact, whether you're talking about the U.S. or the U.K., frankly, and whatever measure you look at, let's face it, most consumers are in very fragile positions as a result of financial crises we've just been through. So they don't have the savings, they don't have the equity values in their homes, they don't have the pension funds to the fall back on. So many consumers are sitting in very fragile positions right now.

If you flip over in terms of the insurance often can be a source of protection for those who have those kinds of exposures, you look at the fact that whether you talk about the U.S. or the U.K., many consumers don't have basic disability and life insurance protection. Again, that's both -- that's true both in the U.S. as well as the U.K. And so again, there's an underinsurance issue that's being dealt with here right now.

The third piece of this puzzle, too, is the market -- the employer. And from our point of view, the employer is the best, most efficient way to get information and low-cost product to many consumers. And so -- and the statistics bear that out. If you look at the number of the disability contracts and life insurance contracts that are being purchased in the workplace, it's a significant percentage. Almost 90% of the disability insurance is purchased in the workplace in the U.S., and almost 40% of life insurance is purchased in the workplace. And so again, the workplace has proven in the U.S. to be a very viable source of a sales distribution outlet for people that are well positioned in those marketplaces.

The same, by the way, is true in the U.K. If you look at the U.K., 56% of the disability insurance is purchased in the workplace, and 37% of life insurance is purchased in the workplace. And I would add that even though we've been through the financial crisis, even though we had the economic travails, even though the discussions about health care, we in our business see no indication that the employer does not want to continue to play a valuable role in providing access to benefits in the workplace. And obviously, those -- sometimes, those benefits, as we know, are paid for by the employer. Sometimes, those benefits are paid for by the employee. Sometimes, it's a little bit of both. But there's no evidence the employer wants to step away from that commitment to provide benefits in the workplace, which again, we think, is a very encouraging sign as we think beyond some of the challenges we face economically in the next couple of years.

And last but not least, as we all know, every government we work with, whether it's the U.S. or the U.K., is facing some interesting deficit challenges. And just as a point of reference, the Social Security disability plan in the U.S. actually has grown from paying out $18 billion in 1970 to $124 billion here in 2009. So tough for the government to step into that role, providing a very basic protection for consumers when they're facing those same -- those kind of deficit issues. The same issues, by the way, exist in the U.K., where in fact the working benefits, as they're called in the U.K., budget has actually grown from GBP 63 billion to upwards of GBP 87 billion right now.

So kind of picture, I guess, I'm trying to paint here is one where you've got a consumer who's in a very fragile state where many don't have the basic insurance protections that they need, but the workplace continues to be a very viable way to sell and market and distribute product. And frankly, there's no evidence that governments are going to step in and provide that service right now. And that's a good thing for us as an industry and for our business.

And so again, if you look beyond next couple of years where, again, we recognize there's tough economic challenges, there's tough interest rate challenges, these are the kinds of things that I think are driving us and, I guess, giving us great confidence that the strategies that we've laid out for ourselves are in fact good strategies.

Now the other part of this is, how does this all get caught up in some of the political dialogue? Excuse me. And that's hard, obviously, to predict. But I must say we're very actively engaged in political dialogue both here in the U.S. and in the U.K. And if you just look at the very simple message that we would be saying and delivering, for example, in the political world today, it's around the 3 points you see right here of a large portion of Americans, frankly, don't have the ability to sustain their households if in fact they lose their ability to work. That's an important point. Second point is only 1 in 3 consumers actually have disability insurance. And the last piece is based on a study that we had done by Charles River, the fact that people actually have private disability insurance. Probably last year, about 0.5 million families were prevented from going into poverty because they had their disability product to draw from. That saves the government about $5 billion a year. So again, a very, very strong connection between what our industry and our company does and some of the political debate that's happening in Washington right now, which again gives us great comfort that despite a lot of political uncertainty out there, we feel pretty good that this industry and this business actually is frankly positioned pretty well to navigate pretty well and maybe advance a little bit in the course of some of the political dialogue that's happening right now.

And again, the same -- it's -- exactly the same issue in -- is -- exists in the U.K. as well, where, again, most consumers are living paycheck to paycheck. In fact, it's even a little more dramatic in the U.K. where, as you can see from the statistic, the average employee in the U.K. can actually live for a couple of months on their savings. As we've said before, the U.K. market is actually more underpenetrated for disability insurance than it is in the U.S. Only 1 in 10 actually have disability insurance. And again, if you look at the value of that disability insurance in terms of what it does for protecting people from drawing from poverty programs or, as it’s called in the U.K., means tested benefits, there's a pretty substantial savings to the government by more private activity in this particular marketplace.

And so again, I know that near term presents some interesting economic and financial challenges for all of us. But if you look beyond that, these things are things that we think are very much ones to pick up and build from. I think you'll hear that in the course of some of the operating discussions that we'll talk about after my discussion.

Now the second piece of the story, obviously the financial foundation. So I said before, I think we feel very good about the fact that our business mix is truly an asset. It goes without saying I also think our financial foundation actually is an asset as well. I think you know the trends well. If you look at just the earnings per share pattern that we've seen in here over the last 5 or 6 years, including the year-to-date results this year, again we're seeing good earnings per share growth, relatively consistent earnings per share growth. What's interesting, though, of course, and you know it well, those that follow our company, is the composition of that growth is obviously shifting a little bit. In the early part of this period of time, much of it came from operational improvements that we're making in the business. More recently, much of that earnings per share growth is coming because we have excess capital that we can deploy in share repurchase programs.

And I must -- I'm jumping ahead of this, but let's look at the outlook for 2012. It's going to be another tough year in terms of generating operating earnings growth. But in terms of our EPS growth, we fully expect to see good, solid EPS growth because again, we've been an active repurchaser of our shares at prices which we obviously think are very attractive right now. So this is a -- obviously an important theme. We're very proud of the fact we continually show earnings per share growth, even despite the fact it's a tough environment for some of the reasons we'll talk about as we go through the course of this morning with you.

Now the other piece of the equation, obviously, is the part we've shared with you before, which is distributable cash flow. And if you look at statutory earnings that we've had over time, as you can see they've been relatively predicable when we have a nice corridor of sort of $600 million to $650 million per year in statutory earnings. And Rick will touch on this in some of his comments in a moment. But if you bring that 650-ish or $600 million to $650 million over into our distributable cash flow model, we -- this gives us a fair amount of consistent capital that we can be using for things like dividend increases and share buybacks. And so again, even though the economic outlook continues to be clouded, even though the interest rate environment continues to be challenging, this basic model in terms of distributable cash flow continues to be at the heart of our company's success and, frankly, at the heart of our company's future going forward.

Now the other part of it, too, is we feel good about the balance sheet, whether it's the risk-based capital position the company has or, as Breege will talk about, in terms of the asset quality. We continue to be in a position where we feel quite good about the strength of the balance sheet to support the businesses as we look ahead.

Now one thing that's worth stepping back again on a little bit here is as good as we feel about the business, as good as we feel about the financial foundation of the company, we also recognize that this is a challenging environment. We have to continue to challenge ourselves to re-think things we do, re-think how we put capital to work. I'll just sort of draw your attention to the fact if you look over the last 6 or 7 years, I think, hopefully, this is a management team that has an action-oriented bias. And so whether it's looking at businesses we should buy, whether it's looking at how we re-structure businesses that we're in right now, whether it's continuing -- discontinuing certain businesses, there's very much a bias in this management team to keep looking at the facts in terms of the outlook and what's happening in the environment. So I just say that because again, as we go to 2012, inevitably there's things that none of us can expect. But I guess this has been a group that's actually been unafraid to make some tough decisions and to either put capital to work for shareholders or get out of businesses that we don't think can be ones that fit with our long-term strategy. So this is, I think, an asset, too, that we're very much a group that is not afraid to make some tough calls. I'm sure we'll talk today about some businesses that people have questions about, but no commitments today about those businesses but just know we have a bias to action. And that bias to action, obviously, we think, has delivered some pretty good results over the last several years. None of us like to see a year-over-year negative comparison in terms of stock performance. But obviously, on a relative basis, we continue to do well with the year-to-date results and even on some of the longer horizons as well. So the things that we do, we organize, truly are paying good total returns for our shareholders, which obviously is very much a priority in this management team.

Now I'll just make a couple of comments about the outlook. And again, we'll get more deeply into this in some of the presentations which follow. Let me, though, start like I did last year, a little bit looking back to the past year just with a little bit of an eye towards a critique of how we did. And again, there's a lot of things that work very, very well for us, but there are some places, frankly, that we're a little disappointed. I'll -- I want to be sure I touch on both of those.

In terms of the things that work, I touched on one of those already, the commitment to focus on growth in a disciplined way, finding pockets of opportunity to build and grow our business. That very much has worked pretty much as we expected. And so again, we're seeing good quality growth in markets that had both good growth prospects but also had good margins as well and -- as well as good returns.

You'll hear from Breege, too. We're obviously very pleased with how the investment portfolio has held up in this environment and how we've actually managed the interest rate challenges that exist in this environment. And again, there'll be more to come on that in just a second.

The fact that we continue to generate that consistent operating cash flow and put that to work both with share buybacks and dividends again is something we very much counted on in 2011 and has played itself out very much as we had expected.

And last but not least. It doesn't get a lot of attention these days, but the fact that this company and this industry can continue to be a -- building its reputation and maintaining a stronger reputation is incredibly important in times when, obviously, there's been a lot of criticism of business and financial institutions in general. So I think those things have actually worked very, very well from my point of view, and obviously provides a springboard for even more good things in 2012 and beyond.

As we look to the things that frankly maybe didn't quite meet our expectations, certainly a couple of businesses that we've talked about on the earnings calls have certainly been a little bit below our expectations. I would point out, though, that these are our 2 highest ROE businesses. And so even though we talk about not meeting expectations that we set for ourselves, they're still generating very, very high returns. And so we fully expect those returns to stay high and to improve, actually, going forward.

So the other thing that didn't -- we talked about last year was the fact if you look at the whole portfolio of product lines that we're in right now, there are certain pieces of the business that frankly are not moving some of our ROE targets. And most specifically, in the Unum US, Supplemental and Voluntary segment, as you know there are 3 product lines in there. Two of those product lines actually saw an improvement in ROE in 2011. One didn't. So obviously that's going to be an area of focus as we think about 2012 and beyond.

And sort of last but not least, this is a very, very competitive and challenging environment with the economy, with the competitive dynamics, and with the interest rate environment. So even though I think we've done all we can do to position ourselves for this environment, that's a never-ending sort of journey, as we all know, to be sure that you take the kind of the things that are happening in and around you and make the changes necessary to position yourself for the future. And again, I think we're -- you're going to hear from each of our presenters. We have a good grasp for the risks that are in the business, and I think we have good plans underway to deal with the issues that are out there that are confronting us.

And I won't go into the outlook in detail. I think you'll hear that from each of the business presenters. But just to reinforce the point I had said earlier, look at the composition of growth for 2012. I'd focus your attention on a couple of lines here from operations. You're going to see premiums relatively flat in 2012 again because some of the headwinds we're seeing in each of the business. We'll talk about those headwinds. You're also going to see relatively modest operating earnings growth. Having said that, capital management will continue to be a big piece of the earnings story for 2012. And again, we're still seeing over [ph] 6% to 12% earnings per share growth in 2012. But again, the composition of it is a little more skewed to capital management than it is to operating improvement because of the environment. And as I said, each of our presenters will go through in more detail some of the things that are happening in those businesses and really profile more than ever just some of the risk factors that we face in our business. But again, I'm very proud of this outlook, actually, because again, it reflects a consistency that we've actually, I think, strived to put in place 5 or 6 years ago. We've had that consistency in terms of performance. We've stayed the course. We've delivered on the commitments. And again, we'll go into each of these details a little more as we go through the morning session.

So I guess as I close, a couple of things. Again, as you can sense from me, I think we're in some good businesses. Our business mix really is an asset right now. By being in the protection business and not having some of the more volatile interest rate and equity market exposures that some other companies have, that truly is a significant asset of our business. As I said before, the other good thing that comes from this is that we really do think there's growth prospects in this business as we look at a couple, 3 years given the dynamics of the consumer, given the dynamics of what's happening with individuals' need for protection, given the role the employer continues to play in that whole equation and the fact that the government can’t step up and actually fill that void right now. So the private sector has the chance to fill that void, and we think we're in a very interesting position to take advantage of that.

You'll sense, too, that we're committed to disciplined growth. Every one of our businesses could grow more rapidly if they chose to lower their standards in terms of underwriting standards and profitability and margins. But we're not going to do that. That maintenance of discipline and being sure that we actually manage to certain profit levels has paid off very, very well for us. And again, as you saw from one of my previous exhibits, we are seeing very nice growth in the segments of the marketplace that we've actually chosen to focus our energies on. And those are good, sustainable growth rates that we think carry over very nicely into 2012 and beyond.

Again, the financial foundation of this business is an asset. I think, hopefully, we've shown to you that we're willing to use that financial base to continue to create value for our shareholders. I think again, as we look to 2012, you're going to sense some real cautiousness, which gets to my next point actually where we're pretty realistic about the outlook. We just don't see a lot of good things happening in 2012. So as we think about capital management, there's no doubt we have that roughly $0.5 billion that comes from distributable cash flow we want to continue to put to work to support kind of some of the things we've done in the past. We're going to be a little more cautious about drawing down some of our excess capital in 2012 just because of that outlook. And I think Rick will touch on that in some of his comments in just a second.

But last but not least, if you think of the 5 or 6, 7 years that this management team has been in front of you, we've delivered on our commitments. And so I think we've tried to create realistic expectations to the Street, very clear about the things that we're trying to do and I think tried to deliver on those commitments. And as my exhibit earlier showed, those are deliverables of what's very good value for our shareholders, and we're confident the things we're going to talk about today are going to create even further value for our shareholders in 2012.

And so with that, again I was supposed to go quick because we've got a lot to go through behind me. And actually, Kevin, I'll ask you and the team maybe to come up to the podium. But as you're doing so, as Tom said, let's take -- let's see if there are some -- a question or 2 that I can answer now before passing it on to Kevin and the team. There'll be more time for Q&A at the back end of this morning, too. So if you don't get your question now, we'll have plenty to time to get to that later. But as you guys are coming up, any questions from the group just to get things started? Yes?

Question-and-Answer Session

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

Do you have a mic?

Thomas Watjen

Yes. Mic, yes.

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

It's Randy Binner from FBR. So yes, I guess the caution on capital deployment felt a little bit new from a commentary perspective. So if you could elaborate on that a little bit more. And just, what is it specifically that's bad about the 2012 outlook that gives you that kind of newer caution?

Thomas Watjen

Yes, and if I gave you something you new, I didn't mean to. I think Rick will probably get into that in more detail. I think what I'm trying to say is I think just as a macro level, we just don't see any improvement in the employment picture. We just are going to assume interest rates remain relatively low. And I think that caution has woven its way through everything we think about in terms of how we structure the operations of the business but also how we think about re-deploying that capital. I think last year, I think we all sat here today with a little more optimism about the economy and interest rates and things like that, which I think gave us more comfort perhaps to begin to draw down that excess capital. And so I think I'll probably leave Rick to answer that in more depth in his comments, if that's all right. Any other sort of last questions? Otherwise, what we'll do, again there'll be plenty of time at the end of the session to go into a little more Q&A. But as you know, Kevin McCarthy is the President of our Unum US operations. But what many may not know is Kevin is also running the internal operating committee, which is the vehicle from which we bring all of our businesses together not just to help run those businesses better, but also look for ways to improve the efficiency across all of our business, and Kevin is going to lead this panel. So Kevin?

Kevin P. McCarthy

Okay, thanks, Tom. Good morning, everyone. Let me just quickly introduce the panel here. We have Roger Martin, CFO for Unum US; Jack McGarry, CEO, Unum UK; Peter O'Donnell, CFO at Unum UK; Randy Horn, CEO at Colonial; and David Parker the CFO at Colonial.

The way we're going to approach this panel is that the 3 CEOs from the businesses are going to talk a little bit about strategic performance and direction, operating performance, financial performance and give you a sense of outlook. And then we're going to take a step back, and the CFOs are going to talk a little bit about some of the risks that face our business, some of the headwinds and how manageable we think those headwinds are and what actions we're taking to mitigate any of the pressure on our business performance.

All right. So just in terms of Unum US. I think the key things that I'd like to have you focus on, taking away this morning, is that first of all, we continue to be extremely disciplined about the way we approach the business. We think that we're doing very well in the face of these economic headwinds, but we recognize that we need to be continued with -- and disciplined around the way in which we focus our sales performance, the way in which we underwrite the business, the way in which we price the business and manage claims performance, et cetera. That said, we think that our strategy still seems to be showing up. You'll see some of that in terms of our core market growth rates, our voluntary growth rates, the degree to which our core group and voluntary benefits are integrated and sold as packages. And I think evidence continues to emerge in the marketplace that our view of a defined contribution-type strategy for employee benefits is paying off, and the investments that we're making in our distribution system and service structures are paying off as well, they’re well positioned.

From a business mix standpoint, maybe one of the most fundamental elements of our discipline strategy is to manage our business mix. We've talked about this a lot in the past. At first, if you think about in terms of earned premium, back in 2003, 48% of our business was on the disability side. In 2011, 44% of our earned premium. That's a fairly modest change, but you have to keep in mind that we did all that in terms of repositioning our inforce structure, moving away from the large case business and repricing a lot of our business. And so a lot of the persistency effects and rate increase effects are dampening that change rate, but it clearly shows up in terms of increased operating earnings. It's more -- much more visible here if we look at sales premium by segment. Back in 2003, 56% of our business was disability sales. In 2011, year-to-date, 38% of our business is disability sales. So still a very, very strong disability company, still a leader in that field, but a much more balanced and diversified sales portfolio.

And then if you take it one step further and think about it strategically, back in 2006, 59% of our business was in our core group and voluntary business. In 2011, that's 72% of our business. And our objectives in the -- in our core and strategic segments, core group and voluntary, are to grow at 1.5 to 2x the market growth rate. And during the course of 2011 in the group business, the market's growing at slightly below 0, slightly negative. Our growth rate during the course of the first half of this year has been a very solid 9% in group and 5% in voluntary. So very, very solid performance, growing where we want to grow, growing where we want to strategically invest and position ourselves and very solid performance in terms of growing where we think we can generate the right kind of profitability.

And that shows up in terms of a couple of operating metrics. First, the continual improvement over many, many quarters and years of our benefit ratio and, at the same time, continuous improvement in our pretax operating earnings and return on equity.

It also shows up in terms of our customer relationship management. We have continuous improvement in a number of customer satisfaction: likelihood to recommend, likelihood to renew measures. And it clearly shows up on the financial side as well in terms of solid and continuous improvement in group persistency and very stable persistency in our voluntary business, while at the same time, growing our strategic sales. And if you look at that growth rate from a rolling 4-quarter basis from 2007 through 2011, through third quarter of 2011, you grow from $350 million of sales for the rolling 4 quarters, at the end of third quarter '07 to around $500 million for the rolling 4 quarters and third quarter '11. So very solid, strategic growth.

And as we've generated that growth, we've continue to focus on operating efficiency as well by a number of measures, operating expense ratios, but also maybe a very easy metric for us, pretax operating earnings on a per-employee or a per-insured person basis, continuous growth and improvement over the last 5 years.

So in terms of sort of looking forward, given that solid foundation, how do we continue to build upon that foundation? And I'll point you to maybe 3 or 4 key things. First, in terms of risk management discipline. We continue to manage volatility through the tools that we've deployed over the last 5 years. A very, very strong performance in terms of renewal implementation, placing rate increases, making adjustments as we did recently in the discount rate, all in order to manage volatility and enable us to continue to deliver the kind of earnings performance that we've been able to deliver in the recent years.

And I'll also point to expanding our product portfolio, continuing to diversify our product portfolio, expanding our voluntary benefit offerings. We continue to experience growth in packaging as well. Every year, greater and greater percentage of our employees buy not only multiple lines of group business from us but also packaged group business with an increasing amount of voluntary inside of those employee benefit packages. And recently, we began piloting the introduction of a dental product, and we'll continue to expand and introduce that product into our portfolio during 2012.

On the distribution side, we have very, very strong reputation with our brokerage distribution system, but we continue to look for ways to expand our reach in distribution. We have health care partnerships that we're beginning to develop as we watch the evolution of what's happening with health care reform, and now benefit administration partnerships as we think through how our employers are going to change the way in which they procure employee benefits in a health insurance exchange and a health insurance environment. So we continue to expand our distribution reach and our distribution partnerships.

And finally, we continue to invest in technology, leveraging technology globally, where we can, across our entire enterprise across all 3 of our businesses to try to make sure that we can lower unit costs and improve quality and efficiency and delivery. And we'll continue to, at the same time, look at business segments within our businesses to make sure that each segment and sub-segment of our business operates the way we want it to, that it's strategically where we want to be so that we can we manage the risks the way we want to? Can those segments grow and generate growth for us and can we operate them effectively, efficiently and competitively? And so if you think about our forward outlook, we continue to look at these 4 major categories as ways that we can continue to grow our top line and our bottom line.

And so from an outlook perspective, just focusing on Unum US, in 2012, we expect about a 5% to 7% growth rate in terms of sales. That's down a little bit from what I would call our normal expectation of maybe something close to the 8% to 12%, primarily driven by the difficult economic environment and the fact that we're placing mid-single digit rate increases on our inforce portfolio to make sure that we manage that volatility and risk that we talked about. On the earned premium side, pretty small growth, 1% to 3%. Again, that reflects stable persistency, but it also reflects a laggard economy in terms of wage inflation and what we call national or normal growth from the employment growth. And finally, pretty modest earnings growth, 0 to 3% versus maybe a more normal environment of 4% to 6%. And that's driven primarily by the adjustments that we made in discount rates and LTD that we'll be making in individual disability income as well, which dampened our ability to grow earnings in 2012 over 2011. But all in all, I think a really well-positioned strategic business that we're running in Unum US, generating solid and continued growth in earnings and strong customer relationships and well positioned when the -- for growth as the economy turns in the future.

So that's quick and dirty in terms of the Unum US story. Let me turn it over to Jack McGarry to talk about the U.K.

John F. McGarry

Thank you, Kevin. In the U.K., clearly our key messages are very similar to the U.S. We believe in 2011 that we stabilized the business and established the foundations for future growth. As Tom's slide show, our top line have been shrinking for several years. 2011 was the first time that we saw signs of an uptick in the top line.

We face economic headwinds that are a real challenge. They challenge our bottom line, and we believe we have risk management actions in place that will be able to mitigate the effects. But it's more difficult to mitigate the effects from a growth perspective. And so going forward, we are going to face growth headwinds, although we do believe we have good plans in place to get growth in this business in a profitable way despite the economic challenges. And we remain confident in our strategy to expand the U.K. income protection market through product -- new product offerings and education.

Just a quick re-cap on our U.K. strategy. Two key focuses for us. The first is expanding the income protection market. It's an underpenetrated market that we're looking to increase penetration on. We are looking to bring new employers into the market and explore complementary offerings. We're looking to strengthen our leadership position, a key focus on maintaining margins in the income protection market. We have strengthened our claims proposition, which should lead to better stability and claims results as well as improve our value proposition in the marketplace with employers, brokers as well as claimants.

And finally, we continue to explore product offerings. I'll give you an example in the U.K. Statutory sick pay is a mandatory offering from employers over a certain size, and yet in the U.K. there is no short-term disability market at all. And so if you think about the U.S. under 100 lives, 200 lives, most people in the U.S. insure their short-term disability. So we're looking at bringing some of those market dynamics to the U.K.

We're continued -- committed to being a well-managed company, looking at superior financial controls and risk management, having improved metrics and analysis and, again, a focus on profitability. We're also investing in our people because in the U.K., we have a fair number of expats in the U.K. currently. We are investing heavily in our talent, both bringing in new people as well as developing the people we have, so that as those expats go back to the States, having brought best practices from the States to the U.K., they're able to be replaced with local talent.

So why are we still talking about growth in this environment? And the driver of that is on this chart here. If you look at the U.K., there are about 24 million employees in the U.K. 6 million work for the public sector, which is largely self-insured. 6 million work for uninsured employers. 6 million employees work for employers that Unum income protection schemes in force. 6 million work for our competition that have income protection schemes in force. Of the 6 million that work for us with income protection schemes in force, we only insure 900,000 of them. The same is true of our competitors. If we were in the States, that's about 1 in 7. The comparable number in a state is 4 and 7. And the dynamics are the same, the needs are the same in the U.K. And yet the marketplace has spent the last 20 years trading the 900,000 between carriers rather than trying to go after the 5.1 million that are currently uninsured. And that's where our focus is. We have a coordinated strategy that do that. It starts with a promotional campaign. There was a big public relations campaign that happened in the first half of the year. We started a social media and television advertising campaign in the second half that actually rolled out during October. Are there any Downton Abbey fans in the room? That's must-see TV, by the way, in the U.K. where we've rolled out our promotional ad. I assume most of you guys haven't seen this, so I thought I'd take a second to show you what we did do.

[Presentation].

John F. McGarry

So that showed in the most popular TV show on Sunday nights in the U.K. for the month of October. We're very pleased with the results of that. We showed 2 ads during that campaign. On YouTube, they've had over 0.5 million views, or they've had about 0.5 million views on YouTube. If you look at the ad, it's focused on driving people to backupplan.com. More than 60,000 people have gone to backupplan.com based on one month that's showing in that. The click-through rate from backupplan to our websites is 43%. We -- actually, if you look at what they're saying, they're saying to rank-and-file employees you can get this through their employer. We had 3 telephone calls from employers in the last week saying, "My employees have come in asking about income protection. Can you show -- tell me where I can get some information about it?" So the initial phase -- the initial purpose is coming through. It takes more than that, though, to really make this work. It's a coordinated strategy.

On the product front, we need to make the coverage affordable. We're targeting a GBP 200 200-quid price tag to cover the rest of those employees. We present that as it's the price of a pint of ale on your way home from work Friday night. We're doing shared funding so that employers and employees can split that, and we're expanding the suite of offerings again around short-term disability, looking at ill health early retirement plans.

The distribution mechanism is aligned. We're using our resisting distribution. One of the great things about this is that we're not doing this alone. Not only are we looking at it, but the distribution mechanism that we go through employee benefit consultants are under pressure for revenues, too. And so they're looking for sources to grow -- for growth, and they've caught on to this as a great opportunity for them as well. So there's an alignment in the marketplace.

We're also going to be looking at alternative ways of reaching the small to mid-size employer, which is underserviced by the current distribution system, and we're aligning incentives with it. And again, the key message to this is that we are pricing to maintain margins. So when we make a plan that's more affordable, we're doing it by changing the plan design, not by changing the profitability.

From our financial results, as Tom said, we had experienced pressure, largely competitive pressure, in the U.K. over the last several years. We've begun to turn that around. Premiums have stabilized in 2011 and begin to move up largely as a result of pricing discipline, which we'll talk about -- a little bit more about later in the risk management second. Pretax margins have stabilized. We had a tough third quarter. We were very happy with our results going into the third quarter, and we've been very happy with the results coming out of the third quarter. So it does look like it was a blip of volatility in results. But very solid profitability, even with that third quarter in it, where we have a 27% pretax margin and 19% return on equity and growing earned premium. So we do believe that we've turned the corner.

Our outlook going forward as our -- on the backs of that expansion campaign is to have 6% to 10% sales growth, 0% to 3% premium growth and 0% to 3% earnings growth and to maintain an 18% to 20% return on equity.

So with that, I'll turn it over to Randy.

Randall C. Horn

Well, thank you, Jack, and good morning, everyone. Let me start out with some of the key themes for our business. I'll move through this relatively quickly, but I would like to point a few things out. Colonial Life does remain extremely committed to disciplined growth in our target markets, with our primary focus continuing to be on those customer segments that are interested in our turnkey approach to product, enrollment and benefits communication. That is the Colonial Life value proposition in a nutshell. And we feel we can most effectively reach those target markets through our agency distribution model, and they work both directly on the sales front, but also they partner and work with brokers also.

We have spent a lot of time on our agency development programs and training regimens, and we feel like that is really enhancing the reach and effectiveness of our agency distribution system. And as employers continue to shift more and more of the benefits responsibility to employees, we feel our value proposition again around filling gaps in the financial safety net but also providing good benefits education through face-to-face benefit counseling is more important than ever. And our financial foundation and outlook continues to be very, very strong.

Some of the key differentiators that we see for Colonial Life, and I'll get into some detail on the slides that follow on these, but it starts with our strategic focus on those target markets where we can be most successful, and that's the core commercial and public sector markets. Growing distribution continues to be a key theme and a differentiator for us, and we feel there's tremendous opportunity to keep growing that distribution. And that also gives us significant firepower on the enrollment side and the ability to do more benefits counseling. Our risk management and profitability is firmly embedded in our model and our approach to the business. And again, as I said, our face-to-face benefit counseling is a very, very key part of our value proposition and, we think, gives us strategic advantage in the marketplace.

Taking a little deeper look at our target marker -- target market focus, again this is the -- or our focus is on market segments that are most receptive to our model, that are less competitive intense. And that intensity in general on the voluntary environment is rapidly increasing, but these are markets we feel we can maintain strong profitability as well.

And those bubbles you see in the green are where we're primarily focused. That's the commercial market, less than 1,000 employees. But most of our agents on any given day are in the small end of that market, working, say, in the less-than-250-employee part of that market. But we're also focused on the public sector. As Tom Watjen mentioned, a focus there is at the state and local level, but that also includes the educator market in the K thru 12 segment.

There are good opportunities for Colonial Life in the 1,000-plus that's the yellow bubble you see there, again where our value proposition lines up with what the employer is looking for. But we are very selective. We pick our spots very carefully there.

We continue to grow our agency system. As I mentioned earlier, we've also re-tooled the agency development program so that we can get to both reps and managers up and going much more quickly and improve their success rate going forward. Very pleased with the early results from those agency development programs. And we're continuing to see a good recruiting pipeline, which is so important to any agency distribution system. And that's both at the rep level and the district manager level also. You can see a nice increase continuing in our producing offices and also in our new rep contracts that after -- following several years of 20-plus percent increases, we still have a nice, steady 6% increase here in 2011. And our goal, very simply, is to keep expanding our agency footprint, and we think there is significant opportunity to do that.

Our business model is very stable from a risk management standpoint, very well diversified from both a product and a market perspective. The types of benefits we sell are very manageable in terms of risk management and predictable levels of benefit costs. We sell standard-rated products, or manual rated is also used. And they're priced with a very conservative view of interest rates, as you can see, over a long period of time. So no short-term pressure from the current interest rate environment. And we continue to focus on employee pay benefits sold at the work site. That's what Colonial Life is all about.

Value proposition, as I mentioned earlier, yes, we continue to fill gaps in the financial safety net of working Americans. You can see an example here for small employers and how that gap has continued to increase on the health insurance side. This shows deductibles of $2,000 or more and how rapidly those deductibles have gone up over the last many years. But again, that comes right into our wheelhouse, and we're here to help employees with that shift in responsibility and to help fill those gaps through a variety of our products. And all of our research continues to strongly support the need to understand benefits. That need is greater than ever. Most employers readily admit that their current communication programs really don't fit that need very well. So we're here to provide that face-to-face benefit counseling that we think is so important to improving employee understanding and, ultimately, employee engagement.

Looking at our financial performance over the last several years, we've had consistent premium growth in the 6% to 7% range. We've had solid pretax operating earning growth during this time period. All that -- all of the growth rate has flattened over the last couple of years as our benefit ratio has ticked up. David Parker will talk more about that here in just a few minutes. But we've maintained strong ROEs in the 17% range.

As we move to 2012 outlook then, given some modest improvement in the economy, continuing to grow our agency distribution system, successful execution of our other growth initiatives, we have the opportunity, we feel, to be in that 6% to 10% increase rate for sales, premium growth in the 4% to 5% range again in 2012, earnings in that flat to 3% area. Again, that assumes our benefit ratio that we saw in the third quarter continues into 2012 and also reflects some pressure coming from our portfolio yield rate, but maintaining strong ROEs in the 16% to 17% range.

So again, certainly some challenges out there, as the other speakers have talked about, but we think there are also very significant opportunities going forward for Colonial Life.

So with that, I will turn it back over to Kevin.

Kevin P. McCarthy

Thanks, Randy. Let me shift gears a little bit here and talk about risk management and, in particular, talk about some of the headwinds that have been embedded within some of our outlook projections.

This is not a good news slide. The right-hand side, I think, is very straightforward. Continued high underemployment in both the U.S. and the U.K. and continued lack of GDP growth, both of which put pressure in terms of top line growth in the shorter term. On the left-hand side, a little bit different story. Declining interest rates definitely puts pressure on earnings, at least in the short run, both in terms of dampened net investment income and the need to make, in a couple of our product lines, adjustments in our discount rates, which then, in turn, affect pretax operating earnings in the fourth quarter 2011 and into 2012.

On the other hand, what I'd say about the -- these elements here is that they're very manageable within the context of our business. We don't nearly have the kind of pressure that a number of other insurance product lines and insurance companies have. Very, very manageable in terms of the ability to take price actions. And then the lower left-hand side on the wage inflation side, again we talk about normal growth and the opportunity for normal growth, and that's dampened to some extent by lack of a wage inflation. You can see it significantly in the U.S. and in the U.K. The U.S. line here is interesting because it's the employment cost index. So it includes both wages and the cost of employee benefits, when you think about the fairly significant continued inflation rate in health insurance in the 5% to 10% range, and yet still the employment cost index declining in the United States.

So all of these pressures face our business create headwinds. And yet, hopefully, what you've seen in the conversation up to now is very, very strong financial performance, very, very strong discipline, a very strong focus on operational discipline and strategic growth opportunity.

And so from here, what we're going to ask the CFOs to describe for you is in each of the businesses how we're dealing with some of these pressure points, how manageable and within scope they are, and what kind of actions we're taking and what we expect the outcomes to be. And with that, I'll turn it over to Roger Martin.

Roger L. Martin

Thanks, Kevin, and good morning, everybody. I'm going to cover 3 topics this morning. First, we'll talk about our long-Term care business; second, we will talk about our IDI businesses, both recently issued and the Closed Block, excuse me; and then finally, I'll close with some comments on our long-term disability business.

So starting with long-term care. First, let me cover our individual long-term care business. As you all know, we've filed a rate increase recently in all 50 states and the District of Columbia. The rate increase covered approximately $240 million of inforce premium on about 130,000 policyholders insured. We expect that premium to emerge over the 2012, 2013 time frame, and we expect it to be in the range of $26 million to $28 million of additional premium.

To date, we've achieved 91% of the asked for rate increases on those states where approvals have been given. Overall, we're about 61% of our overall goal, and still have 3 out of the top 6 largest premium states outstanding that we continue to work with.

Implementation has begun. In October, we mailed the first 10,000 letters to our policyholders with rate increases. We've heard back from 4,000 of them. Of those 4,000, 98% have agreed to accept the rate increase, with the remainder either buying down their coverage or lapsing their policy altogether.

Turning to group long-term care. We are preparing to file new rates, along with a new rating algorithm. From a new rates perspective, we have completed a comprehensive study over the last year of our key assumptions including voluntary lapse, mortality, incidents, terminations, and obviously reflecting the low interest rate environment. And in doing that, we factored in both our internal experience, as well as a recently published Society of Actuaries industry study.

The new rating algorithm is sort of the innovative approach here that we're introducing. And what we're introducing is a rating algorithm that allows us to modify our new business rates as interest rates move. It'll likely be at the tie to the treasury rate, and we'll have the opportunity to move our premium rates, approximately every 6 months, depending upon the move in the interest rates, and that will help, combined with our hedging strategy, that will help really insulate us in terms of interest rate fluctuations on this business.

As you all know, the complexities and inherent risks in the Long-term Care business has always dictated for us a pretty significant focus of financial actuarial and business support on this business. Recently, however, as I'm sure you can imagine, the focus has intensified, given the low interest rate environment, the emerging trends that we're seeing across the industry and in our own business with respect to loss trends, and the low level of lapse has caused us really to increase the focus on this business over the last year or so.

Turning to our Individual Disability businesses. On the top half of the page, you see claim trends for both our recently issued IDI business, as well as our Closed Block individual business. From an incidents perspective -- these are actual to expected incidents and recovery rates by the way. From an incidents perspective, you can see flat to declining trends in both our recently issued and Closed Block business. I will note to each of you to remember though that the expecteds here are different for a recently issued and IDI. And so for example, the absolute incidence rate in our recently issued business is about 1/2 the rate that we experience on our Closed Block IDI business. So a materially different level of incidence levels.

Turning to recoveries. The actual to expected recovery trends have been relatively stable over the last 6 years or so. The IDI recently issued business is smaller, and therefore a little more volatile, and did benefit from some onetime actions in the 2005 to 2007 time period, but since then, has been relatively stable. The result in the lower left-hand corner is the reported interest adjusted loss ratios, and you can see stable interest adjusted loss ratios for our Closed Block disability, and declining interest adjusted loss ratios in our recently issued business.

However, as we are looking at the outlook of this business going forward, we have decided, as we look to this prolonged period of low interest rates, we've decided to lower the discount rate on new claims for our recently issued Individual Disability business by 40 basis points.

[indiscernible] prepared, if necessary, to file new rates on our new pricing for the individual disability recently issued business going forward.

On the Closed Block, we managed that spread, the difference between the portfolio rate and the average discount rate, at an aggregate block basis, given that it is a Closed Block. We expect very little new cash to invest, slightly under $200 million on a $10 billion portfolio. And therefore, did not anticipate any material issues with respect to moving the discount rates around or the spread between the portfolio yield and the discount rate.

Finally, turning to long-term disability business in the U.S. While it's clear that we continue to face headwinds related to wage inflation and job creation, we have seen success, as Kevin had mentioned, in sales growth and persistency. Our sales growth in our group disability business on a year-to-date basis is up 8%. It's up 11% in our core segment. From a persistency perspective, group disability persistency is hovering around 90%. That is one point greater than where it was at year end 2010.

Turning to the upper right-hand chart, you can see the LTD claims performance. As we've noted, over the last couple of quarters, we've seen volatility in our LTD incidence rate, including a slight uptick in the most recently reported third quarter. However, if you look at the long-term reported trends here, you can see that the actual to expected paid incidence rate has been relatively stable and below 100%, where 100% represents our pricing expectations.

Recovery performance has remained strong and continues to improve through this economic period.

Turning to the lower left-hand corner, you can see here the spread between our portfolio yield and our liability discount rate. As a reminder, we did lower the discount rate 25 basis points in the third quarter on new claims, but our spread maintains very strong at 98 basis points. As a matter of fact, that widened 2 basis points in the third quarter.

Again, though, as we look forward and we anticipate this prolonged low interest rate environment, we then decided to adjust our group disability pricing. We're looking at placing increases in the 5% range, mid single-digit range for both our new business and our renewals, and we have confidence, given our track record and history of being able to deliver on those renewals and on those new business price increases in a way that will allow us to maintain the sales growth and the earned premium growth and the persistency that we have been achieving historically, as well as what's built into our outlook for 2012.

So with that, I will turn it over to Peter to talk about the U.K.

Peter O'Donnell

Thanks, Roger, and good morning. Just to manage your expectations, no videos from me, so I've got to follow Jack. But I will try and show my European roots by representing a French historical character, so you'll have to wait for that for a minute.

So let me just talk, first of all, building out what Roger says. I think you're going to see some common themes here. Let's talk about pricing, first of all. Jack referenced sustained top line pressure, which we saw in the U.K. through '08, '09 and '10. And 2011 saw us turn a quarter. We've managed to place rate into the market, plus we managed to get some growth in earned premiums. How do we go about that? Well, we talked last year about pricing discipline, and there were 3 aspects to that program. One was the renewal program. So basically, towards the end of 2010, we went through and priced all our business with improved rates, and then placed them into the market. Secondly, the sales force remuneration. We've changed the remuneration process for the U.K., moving them not to be just rewarded on persistency, i.e., how much business they renewed, but also to be rewarded on the rate that persistency was renewed at. And thirdly, MI. We brought weekly and monthly MI to the management team, and we meet weekly and fortnightly and monthly and daily, if it means on certain cases, to look at those cases where the price to decide whether or not we're going to move on rate.

I think it was challenging. It's been challenging, but I think you can see from the persistency chart on the top that we're actually seeing some momentum. So in Q1, quarter 1, the competitors filled their boots [ph]. So they took business from us, we felt it was poorly priced, they are welcome to that business. However, we think they've seen some sense as the years moved on, and actually you can see that chart come through in our persistency. Our persistency is improving. I think the other aspect, I'd say, where we've seen the challenges around new business, new business has performed below our expectations in the first half of the year, but again, we are seeing gathered momentum on new business and we are beginning to see a good pipeline and we're going to hit our plans on that. The other key thing that we saw in Q3 was one of our major competitors announced that they were going to be placing 5% to 15% rate increases into the market. So that was a key indicator for us that things were changing in our market.

Start over [ph], I think it'll still be challenging moving forward. We're still seeing some, what we would consider irrational pricing, particularly amongst large schemes. However, we do think that we changed the trajectory of the market during the first half of 2011.

Looking forward, 2012 is going to have a different challenge. Roger referred to the interest rate environment and new money rates and long-term yields. And if you look at the long-term yields for 10-year bonds, they've came down significantly towards the second half of this year. We will be reflecting that change in pricing. We believe our competitors should reflect that change in prices well, and we are planning to put through mid-to-high single-digit increases on our income protection book to reflect the interest rate environment that we're facing. Again, we don't believe that should change the competitive landscape because we think everybody should be doing that. And we're certainly going to be making that noise in the markets through our media and advertising as well.

Turning to claims. This is where I'm going to get my French historical reference in. You'll notice we've got 3 Asterixes, for those of you who don't know is a French hero, a comedic hero. And actually the last Asterix on the recoveries count and value should not exist. So if we could get rid of one French hero that'll be very helpful on your charts. Thanks very much.

So we've got the Q3 volatility, and I'm showing 2 charts here, which hopefully demonstrate what we talked about on the call. The first is on admitted claims. So we baselined our admitted claims at Q1 2010, and we've shown you there the counts and value. And you can see in Q3 '11 -- that actually, that spikes. So both -- we have a higher number of counts and higher average value per count. That is very unusual for us.

The second thing that was unusual to us if you go down to the second chart was declines, where we saw our decline counts is okay, but basically the average value of our declines was much lower than our normal averages. The combination of those 3 things was why we saw the spike in our admitted claim, our inceptions, and therefore why our benefit ratio went up.

The major part of that spike actually occurred in August. And since August, we've seen that trajectory return through September and October to more normal levels. So all our indicators are telling us this was volatility.

Looking forward, I've shown on the chart at the bottom a more longer-term trend on recoveries because we tend, actually, to try and manage our claims over a 3- to 5-year period to see really what's happening. And what we've been doing in the first half of 2011 is investing very significantly in our claims functions. So we brought in a lot more headcounts. We've increased from 107 CMSs, which is our claims management specialist to 116. We almost doubled the number of medical staff by nurses and doctors and psychiatrists coming in, and we reduced the spans of control. So that was all happening during the first half. We think we're seeing now, just at the end of 2011, some benefit from that. So the recovery performance actually you can see through 2010 and 2011 is actually on the up, and we believe -- and our plan is to maintain that momentum. What are we going to do with those staff? Well, obviously they're going to be managing the claim much better, but there are 2 key areas where 2 key initiatives which we're are rolling out in tandem with the sales and marketing function. The first is direct contact. At the moment, we would have direct contact through the employer with the claimant. We want to change that, so the minute they go on claim, our CMSs are talking to the claimant, managing their expectations upfront about how long that claim will last, what the expectations are, what support they need, and that will change the dynamic and trajectory of our claims recoveries moving forward. The second is the tail of the book, where we would like to invest some of our resources and looking at the older claims, the other ones that take more work, more time, as the claims function really didn't have the resources to do that during '08 and '09. And actually, we brought a lot of resources and specialism into that, and we're basically replicating the U.S. model where they've been doing that for a couple of years now and have seen some reasonably good pickups in the performance there.

The other element which we're doing is building all the MI and processes from the U.S. into the U.K., and they were up and running during Q2 and Q3. So we really stir up the start of this journey, we've invested in the claims function and we would hope to see the payback of that through 2012 and 2013.

Finally, what I'm going to talk about is operating efficiency. The U.K. management took some very strong actions during '08, '09 and '10 to respond to the falling premium income. And you could see there that expense ratios has basically -- expenses are falling in line with premiums, and we want to maintain that very strong discipline. However, we are investing in a couple of areas. Jack's talked about the marketing campaign, and you can see we are seeing a modest increase in our expense ratio in 2011 from that. And the second area is on headcount. You can see the headcount has slightly increased. That's all about managing that claims function. We believe that's essential to managing the environment. We do believe there are areas of growth within the U.K. because of all the things Jack talked about. So that marketing campaign is going to open that up to us. And we do believe that the claims -- having a world-class claim function in the U.K. will pay off in terms of bottom [ph] line.

The third area, which we referred to, Kevin -- working on the operating committee, we're also working with the group to look at opportunities where we can get synergies from working, doing the best thing once in the right place. And we would hope to see some of that come through in 2012 as well.

So I'm going to hand over to David.

David Parker

Thank you, Peter, and good morning. Only going to make a couple of brief comments on the interest rate environment, and then discuss the key drivers of the Colonial Life benefit ratio trend.

So the interest rate environment within Colonial Life, if you look at it over the near term, that rate volatility has a limited impact on the Colonial Life performance given our product portfolio as primarily short-term benefits on an individual platform. We price our products with a conservative interest rate assumption over the long-term so that we can withstand these short term fluctuations. And from a balance sheet perspective, we’ve maintained a healthy 150 basis point margin between our reserve discount rate and the current portfolio yield.

From a new product introduction perspective, within the accident, sickness and disability line over the past few years, it's created some upward trend in the benefit ratio while also impacting positively our sales growth. Our medical bridge products are meeting market demands, given the health insurance environment and are priced with a higher benefit ratio than accident disability products. Our most recent accident product was introduced in the first quarter of 2010 and was priced to be more competitive, and the benefit ratio will run higher than prior accident products. These products will represent about 35% of our premium within accident, sickness and disability line of business and within the next 2 to 3 years, and that will impact our benefit ratio, approximately one percentage point. However, ongoing product and risk management actions, along with continued focus on our expense management will mitigate this upward trend in the benefit ratio.

As an example, if you look on the next slide with the cancer and critical illness line of business, it has contributed to our overall benefit trends in recent periods. However, that pressure is primarily from the older block that has not been marketed since 2001, and represents only 3% of premium within this line of business. We are taking rate actions on this block on a regular basis, and also, evaluating ways to provide policyholders with more affordable coverage options. Performance of the currently marketed cancer product is in line with expectations, and this product represents about 50% of our in-force premium within the line of business, and will grow another 5 to 10 percentage points over the next 3 to 4 years. In addition, critical illness is a product that continues to gain market acceptance, and it also has a more stable risk profile and therefore, a lower benefit ratio. We expect these products to be approximately 25% of premium within the line of business over the next several years. And as a result of these actions and these general trends, the total company benefit ratio should be positively impacted by about 25 basis points by the actions in this line of business.

If you look over the recent years, over the past 5 years in fact, earnings growth has been nearly double that of premium growth, and this margin expansion has been driven by the downward trend of the benefit ratio. And that trend has been influenced by product management, pricing and underwriting actions, but more importantly by new accident disability products that were introduced that performed better than expectations in pricing. It's just discussed the product mix shifts and new product introductions are moving the benefit ratio up. However, we're mitigating that impact by taking very specific actions such as ongoing pricing changes within disability through risk classification updates, rate actions on the order of cancer products and sales and set of [ph] changes to align product level profitability.

And continuous improvement in our operating efficiency also helps mitigate the profit margin impact. Our expense ratio is down 100 basis points since 2009, and we expect ongoing improvement there. So looking forward, earnings growth will be driven by top line growth and strong expense management as the upper benefit ratio trends stabilizes in the near term.

So I'll hand it back to Kevin to do -- kind of a wrap-up on Risk Management section.

Kevin P. McCarthy

Thanks, David. Hopefully, from the discussion that we've been having here this morning, you had a sense of both the strength that we have in terms of operating performance and discipline, the strength that we have in terms of strategic positioning and preparedness for future growth, and particularly, the strength that we have in terms of a focus and discipline around risk management, paying attention to all the levers within our business and making sure they were willing to take actions whenever necessary to make sure that we can continue to generate reasonable top line growth and bottom-line growth.

And so I think my takeaway in looking at the entire presentation here is that I think at an operating level, we're on top of our business. We're well-positioned for the future, and we're going to continue to generate the earnings performance that you've come to expect from us. With that, let me open it up for a few minutes of questions.

Right here, Mark?

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

Mark Finkelstein, Evercore. First question is you didn't really address long-term care reserves, and I guess by now you have an outlook on 2012, you would know it probably the cash flow testing, whatever exams you would have done, you probably know the answer to. Can you give us an update on where we're at with that?

Kevin P. McCarthy

Roger?

Roger L. Martin

Our practice is to review reserve adequacies for all of our lines of business during the fourth quarter. Long-term Care will obviously be a part of that process. From our comments this morning and the comments we've made throughout the year, including our third quarter conference call, I think you're pretty well familiar with the challenges that we have outlined with this business. Blocks rates remain very low, which causes us to build reserves faster than on this product than that hits the income statement. Loss trends, particularly in 2011, have been volatile, and with the low interest rate environment, that place is more pressure on this business. We're clearly going to take all of those things into consideration as we complete our reserve adequacy and cash flow testing for the fourth quarter, and we'll have more to report about that when we complete that work at the end of the year.

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

So we don't have an answer that yet essentially?

Roger L. Martin

That's correct.

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

Okay. Actually there was an interesting slide that you have in here, I think it's Slide 53. And I guess what surprised me -- I just want to make sure I'm interpreting this correctly. So through this whole crisis, your paid incidents has not been above pricing, so you've actually threw out [ph] the whole process, but your recoveries are clearly better than pricing. So if I think about that, I mean, does that suggest that the loss ratio that we're showing right now is favorable relative to your own pricing and your own expectations? We want to try to reconcile, Roger, between the incurred loss ratio versus GAAP.

Roger L. Martin

Yes, absolutely. So what you see here is our GAAP sort of reported loss ratio, and what you're seeing is the benefits of the recovery rates being above our pricing expectations. Those are on claims that were incurred over a long historical period of time, right? So as we think about pricing, we think about pricing for today's premiums and today's lives and the claims that we'll incur today that will impact kind of the reserves going forward. So I think the way to respond to that is to the extent that these long-term, above-expectation recovery rates continue, then we should continue to see favorable results relative to our pricing expected loss ratios going forward. And we don't count on that, obviously. When we price the business today, we price it at our pricing expectations.

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

So you're not seeing anything that changes those recovery patterns as of now?

Roger L. Martin

We are not, no.

Edward A. Spehar - BofA Merrill Lynch, Research Division

Ed Spehar from BofA Merrill. A question on the U.K., I think you referred to rate increases in 2011, the trends have been better in terms of competitors following. There seems to be -- if that's the case, then the expectation of rate increases in '12 to offset interest rate declines, you would think competitors would react as well, yet you have 0% to 3% earnings growth in your outlook, especially when you consider the third quarter was well off of the normal trend and you've identified that as just a blip. Why wouldn't all of these factors suggest better growth in '12 versus '11?

Peter O'Donnell

Yes. Take the first point. We are seeing some competitors respond to rate increases. I would hope that because a number of our competitors have other products that will be affected by the interest rate environments and all the planned annuity providers that they will look at the interest rate environment and respond across their product portfolio. But that's an aspiration. I don't think we know that's true yet, so we'll have to wait and see. In terms of why it doesn't all come through in 2012, effectively what's happening there is, and Rick referred to this a little bit. We've got 2 things going on. One is it takes us a while to get the rate through the book, so we actually earn the premium over 2 years, not in one year, and the interest rate environments in terms of when we're investing the money. We're investing money next year, which we'll have to take in at lower rates. So it's the combination of the money that you're actually investing and how long it takes you to get rate through. We would expect to take it about 2 years to get the full rate through to offset the interest rate reduction and the new money rates. So that's the sort of the simple answer. And as I said, Rick will talk about more of those dynamics in his section.

John F. McGarry

I would say, just stating that a little different way, we expect that the positive impacts of the rates increases to be offset by a reducing discount rate from reserves.

Roger L. Martin

Very similar to what we have in the U.S.

Edward A. Spehar - BofA Merrill Lynch, Research Division

So this -- the outlook takes into account some change in the discount rate next year versus this year.

John F. McGarry

Yes, absolutely.

Edward A. Spehar - BofA Merrill Lynch, Research Division

I think you showed a chart in here, could you tell us what 100 basis points is -- you need 6% price increase for 100 basis points?

John F. McGarry

Yes.

Edward A. Spehar - BofA Merrill Lynch, Research Division

So, should we be assuming that discount rates are coming down by at least 100 basis points?

John F. McGarry

The 6% is on a kind of a block issue of new business. The discount rate's on the portfolio, so they're not really necessarily comparable.

Edward A. Spehar - BofA Merrill Lynch, Research Division

So discount rate changes in the U.K. would be on the whole portfolio reserves, not just on...

John F. McGarry

Yes. That's right, yes.

Edward A. Spehar - BofA Merrill Lynch, Research Division

So it's different in the U.S., right?

John F. McGarry

Yes. Yes.

Edward A. Spehar - BofA Merrill Lynch, Research Division

Can you give us some sense of the impact that you factored in for just that for next year?

Peter O'Donnell

The discount rate's coming down -- can I get back to you on that? I'll just get the exact number. I just want to get the exact number before I quote it.

Edward A. Spehar - BofA Merrill Lynch, Research Division

Okay, but is that a meaningful -- it would seem like that could be a meaningful number than in terms of earnings headwind.

Peter O'Donnell

Yes. It's around about $10 million of earnings headwind that wasn't covered.

Colin W. Devine - Citigroup Inc, Research Division

Colin Devine, Citi. Kevin, 3 questions. First, I was wondering, you guys, a couple of years with social security, when you changed your claims process, you went to -- social security approves the claim, you approve the claim. Can you give us a bit of a look back on that, how that has played out, how much social security offsets are reducing your claims? That's question one -- or what you're paying out. Two, with respect to the Long-term Care block, am I correct that the average age of your block is only about 52 so it's considerably younger than the industry, which should give you more time to get rate hikes through and the benefit of that? And what sort of actual incidents do you have on the Long-term Care block? I would think it's pretty low. And then finally, for both, new issue IDI and Long-term Care, what are the ROEs on those blocks today, and what are you targeting over the next 3 years?

Kevin P. McCarthy

Yes. Let me try to take pick them off one at a time here. On the offset side, we've had continued solid performance in terms of offsets. We're running well above 100% in terms of actual to expected offset performance with an LTD as a result of our focus on social security. And we benefited from, I think, a fairly liberal period of time in terms of social security approvals in comparison to maybe back in the 1990s. And so that's flowed through into earnings and claims performance and lower loss ratios for us. That was the first one. Second one, your average age, I don't know if it's 52 or not in total, because it's quite different between group and individual. Group is, I think, in the high 40s.

Unknown Executive

43.

Kevin P. McCarthy

Age 43. And individual is probably in the 60s, it's somewhere...

Unknown Executive

65.

Kevin P. McCarthy

65. No, so I think probably as we incorporate the 52. So there's quite a significant difference in terms of average age, much longer period of time for us to get rate increase impacts in, in terms of group Long-term Care. Group Long-term Care also has slightly different lapse rates because it's tied to the employer's contribution, employer's involvement versus individual. In terms of instance, instance rates are really, really low. I mean the most of the movement in the Long-term Care loss ratio has been driven by a buildup of active life reserves anticipating mortality, morbidity and interest rate pressures.

Colin W. Devine - Citigroup Inc, Research Division

And ROEs?

John F. McGarry

So IDI ROEs, if you think about the recently issued business, we're looking at ROEs that are sort of in the low double digits. Think about them in sort of the 11 to 13 sort of percent range. And then in terms of the Closed Block disability, that business went through a gross premium valuation back in 2004. The assumptions remain appropriate for that so therefore, the returns that we achieved on that business tend to be low single-digit ROEs.

Colin W. Devine - Citigroup Inc, Research Division

Just the ROE on Long-term Care, I think that's the other missing piece here.

Richard McKenney

The ROE on Long-term Care, you'd think about in terms of high single digits. And right now, different between individual long-term-care and group long-term care, and individual Long-term Care being in the low single digits and group Long-term care being in the 15-plus percent range.

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

Randy Binner with FBR, just a couple on the U.S. First with IDI, is there any kind of update on potential strategic solutions there? I feel like that was something that was maybe talked about more in the past, but is there anything that can be done with IDI?

Roger L. Martin

Yes, we managed the IDI business as what we call one of our value businesses. We look for sort of moderate growth, primarily because it occupies a fair amount of capital. It's also a very targeted business around sort of the executive carve out kind of businesses. And so to the extent that we can, we packaged it up with group, but I think for the most part, that business, I think, maintains a fairly small and unique niche part of our portfolio. The distribution system also is kind of a niche part of our distribution system. It's not as broad as our group brokerage and voluntary distribution system. And in terms of product changes for the future, I think we're sort of strategically evaluating, where do we go with IDI from here? Do we maintain sort of that approach to the product that it's currently designed, or do we maybe start to think about broadening the definition of what our individual portfolio looks like?

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

I guess I should have said the Closed Block in particular, if there was anything that can be done with the Closed Block in particular.

John F. McGarry

Remember when we segmented the block back in 2004, we put up the insurance contract in place, which is effectively accumulative stop-loss reinsurance arrangement that capped our total benefit exposure on that book of business that remains in place. And then in 2007, 2008, somewhere around there, we did the IDI Closed Block securitization and the purpose there was to free up as much capital as we could that was sitting behind that business, and that was very successful. Today, in terms of other options, so we've capped the risk, we've taken out as much capital as we can out of the business, we'll continue to look for other opportunities to remove more capital from that business, we’ll find ways to further enhance the reinsurance. But right now in the marketplace, there's really not a lot of business out there.

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

One more in the U.S., if I could. It sounds like there's more price increases coming in the group just filling the area up. If you said it, I missed it, I apologize, but do you anticipate competitors following along with that? Are they there already? Are they going to catch up with you? And just kind of a high-level commentary on where pricing is in U.S. group DI.

Roger L. Martin

You would expect that all of our competitors are experiencing the same pressures on discount rates and interest rates that we are. A number of competitors over the last year have mentioned in one form or another that they need to move rates up and expand their renewal programs. We've seen some evidence of that. I think on the third quarter call, I mentioned that in the small and midsized market, I thought we saw some level of hardening there. But I'm not going to get sort of wild and crazy s in terms of predicting what competitors are going to do. I expect that they're facing the same incidence volatility and interest rates that we are in, that they would act on it.

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

Steven Schwartz, Raymond James. A follow-up first on the social security offsets. You mentioned that, Kevin, that there was a relatively liberal period. I think it was the New York Times, maybe it was Wall Street Journal, there was an article about some judge, I think, down in West Virginia...

Kevin P. McCarthy

Kentucky.

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

Who was approving everything. Do you see that changing, given where deficits are, budget problems, do you see that changing?

Kevin P. McCarthy

It's hard to tell. I mean, Social Security's got a lot of work to do in terms of modernization of its systems and its processes. There's a wide variability by region of the country and by social security office as to how they handle and process disability claims. I think the political pressures swing both ways in terms of Social Security efficiency on the one hand, Social Security approval rates on the other. I think there are a number of bills either being considered or in the process of being introduced around changing the administration law judge process, but it's way too early to sort of predict how that's going to go, and I think our focus is on just continuing to do the right thing by our claimant beneficiaries in terms of making sure that they get access to social security benefits if they deserve them, because it affects not just what they receive from us in terms of LTD, but it affects their Medicare eligibility and their future social security retirement. But I wouldn't want to predict what's going happen with Social Security from here.

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

And then on group LTC. Now I'll admit it, maybe I don't understand how the pricing of this works, I haven't bought it, and I understand how the individual works. Suppose I'm a 57-year old guy at Raymond James. I bought a product 5 years earlier, I was 52. What am I going to see as this comes through?

Richard McKenney

In terms of your rates?

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

In terms of rate increase, as somebody who's already got a Unum policy, am I going to see a rate increase? Can Raymond James say, "No, we're going to go to somebody else, we're going to go to Met." How is that all going to work?

John F. McGarry

So the group long-term-care rating structure is very similar to the individual long-term-care rating structure in that it is level premium, age based premiums. So as a Raymond James employee at the age 52, if you bought the policy then, that is the premium that you would expect to pay for the remainder of your life, unless the insurer files for a rate increase similar to the individual Long-term Care line of business. As we go into file rate increases in all the states and get approvals in those states and as those states provide approvals to do those rate increases -- and you need justification so just can't say, "Okay, I'm going to go out and raise rates." You've got to show that your experience is not emerging as your pricing would have expected. And then once you get that approval for that rate increase, you can then contact the policy holders and the employer and let them know that there is a rate increase coming through. So it's fairly similar to other individual guaranteed renewable products.

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

Okay. So on our intranet, I've been paying x for 5 years. Suddenly, I'm going to pay 1.3x to 1.5x x, assuming the state of Illinois allows your rate increase, and my HR department is going to tell me -- does my HR department then go and go to MetLife or somebody else and go, "Hey, what are you doing here?"

John F. McGarry

They absolutely could. Just like any other coverage, they could choose to shop that amount. I think the difficulty with Long-term Care from the an individual perspective or an employer perspective trying go out and shop that coverage is it is issue aged based. So over that period of time, you've aged 5 years or 7 years or 10 years, and the rates for somebody 10 years old are going to be higher at that point anyway. That individual or employee needs to compare what is the increased premium that I would have to pay or my employees would have to pay, staying with my existing carrier to go into a carrier at new issue age rates.

Kevin P. McCarthy

In a group set, we go through a renewal process discussion with the employer as well. And in all likelihood, much like we do in individual, when we adjust rates, we also give the consumer the option to buy down the benefits as opposed to accept the rate increase. One last question.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Chris Giovanni, Goldman Sachs. Question on the U.K. The governor of the Bank of England was out today, talking about, I guess, some markedly weaker economic growth in the U.K. as we go forward. So I wanted to see why the expectations are sort of loss experience abating from here and then sort of the 6% to 10% sales growth. How can that be achieved in that backdrop?

Peter O'Donnell

We have not seen a big impact from economic pressures in the U.K. on our loss experience. Our insured base is significantly different than the economy at large. It's largely white-collar, management level. We just haven't seen it to date, to the extent we did see it, we would continue to react to it in pricing. Another mitigating factor is the investments we're making in our claims operation and the new processes we are putting in place should be a good offset to that going forward as well. So we've seen significant deterioration in the U.K. economy already, without impacting our results in an appreciable way. And so we would expect that the impact going forward would be manageable as well.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

And then, just for Kevin. If we look at the lowering of the discount rate on the group disability, as well as the IDI book, it looks like that slows earnings by 2% to 3% as we move forward here. So as we look at your guidance for growth last year versus this year, is the remaining delta just pressure on interest rates from an investment income standpoint, or where do we pick up the additional sort of 2 to 3 points?

Kevin P. McCarthy

The additional pressure is a lack of top line from that lag or sort of normal growth compared to what were thinking it was going to have last year. I think last year, we came into this same kind of day and thought we'd be at the 1% to 2% sort of normal growth rate. Instead, year-to-date, I think we're negative 0.4%. And so, we're now sort of much more conservative projecting that forward in terms of top line effect, so that dampens earnings. And then lower net investment income as a relatively low reinvestment environment.

Thomas Watjen

Okay, thank you, all very much. We'll take, I guess, a 5-minute sort of stretch break. Don't get too far away while we transition to Rick and Bruce. Thank you very much.

[Break]

Richard McKenney

Okay, thank you. Let me introduce myself, Rick Mckenney, the CFO of Unum. I'm going to take you through the financial overview today. I'm going to do it in a couple different parts, talk about some trends that we see in our business today. Going to talk about the outlook. Breege Farrell, our Chief Investment Officer is going come and talk in some detail about the credit and our investment portfolio, and then I'm going to spend some time on interest rates and capital management and wrap it up with Q&A.

Let me start out with some key messages. If we went back a year to our investor day last year, we're dealing with a little bit different environment today. Certainly, the economic headwinds we would not have expected to persist as they have. The employment picture is still pretty tough as was mentioned a couple of times in with the low interest rates. I think it's important to note that as we go into that, our results have actually been very consistent through that period of time. As we talk about the company today, it's important to also know what we don't have in our portfolio, the overall insurance industry is having some challenges against it but we have very limited exposure to what's going on in Europe today. Our credit exposure looks very good, that Breege will take you through. We have virtually no equity market exposure in our business. And then when we go through interest rates, I'll take you through in some detail, a very manageable view in terms of what we can do with regards to interest rates, our portfolios on multiple fronts in terms of how we manage through them. Through that period of time, most importantly, I think we've actually maintained a very good capital position. We've maintained strength, at the same time we view that strength to a response to a pretty dynamic environment. We've been able to buy back our shares at a discount, as an action and overall, I think it's served us very well. Despite actually having that capital strength, that return on equity is still quite high, and I'll take you through that in a little bit of detail but we're still generating overall good return on equity with those positions, and we believe, our excess capital. And then finally, most importantly, you heard from our business members today, we are investing for growth of the business. So as the economy turns, making sure that we're well positioned across the board to deal with that growth. We're still putting money directly into our business, at the same time, returning that capital to shareholders.

So let me take you through a little bit of a view of 2011, shape on a variety of fronts, how our earnings look. As I mentioned, our EPS is on track, 6% to 12%. We would've mentioned that on our third quarter call, despite these many challenges that we have in front of us. The earnings generation, capital generation of the business is still quite good. As you go through and talk about the risk experience that we saw in the third quarter, I think our team did a good job of taking you through some of those details. We did see a little bit of volatility. We are in a risk business, but I think we see some of the settling down as we get here towards the back end of the year. And you will see volatility in our business, but still continuing very good returns across the board. When we look at what we've got for the overall return to shareholders, a very stable revenue base. I'll take you through that, some good solid risk results and then also to expense management in conjunction with risk management continues to be our hallmark.

So let me take you through on the financial front, starting with the earnings. You've seen this chart a number of times, continuing to generate good earnings growth across the board. Year-to-date, we've seen 7% earnings growth in the business, so we still see a very good trajectory. I think importantly, we always mentioned this as the -- we went through the credit crisis and still saw these earnings trajectories grow within the business. It gets back to our stable results that we've seen and the protection businesses that we write. You also see it through the last 12 months, capital redeployment, as we mentioned last year at investor day, has been an important part of the earnings growth that we've seen today, the EPS growth that we've seen. So that stable environment with good capital generation as has been, certainly over the last 18 months, how we continue to generate growth in the company.

Taking you through on the sales front. You heard a little bit about this, but when you look across the board, our Unum U.S., and we're breaking this into our growth segments, our Unum U.S. core and voluntary business has seen some good growth over last several years despite what we've seen in the employment picture. We'll continue to look to invest in the growth of these 2 businesses. We see it as a very important part, as Tom mentioned earlier, serving a great need in the U.S. On the upper right hand side, a different story in Unum UK that you've seen. We saw some very good growth if you go back to 2009, but I think what I'd highlight is if you look at where we are today and run rates that we're at today, our sales [ph] run rates right around the 2008 level. So still we're seeing good sales growth, we had a couple of years where sales grew a little bit faster than you'd expect. And then Colonial Life, right around that 5% premium growth, a little bit more challenging growth on the sales side, but importantly, even within the Colonial Life business, there's really 3 subsegments, and the core subsegment that we have continues to grow very nicely.

I want to take a couple of pages to take you through premiums. So we talk an awful lot about sales getting back to premiums, you'll see as we aggregate across the board, premium's pretty flat. I think you need to disaggregate that a little bit to understand where the premiums are growing within our business. First on the Unum U.S. side, the group benefits, what you would see going back to 2006 is the rundown of the large case business. You've seen that start to flatten out here as we've gotten into 2010, 2011, and we'll see that running at about the same level. But that's the story in terms of the premium challenges we've had in our business on that front. On the voluntary side, you'll see very good growth. So the premiums continue to grow in that business, we think that is where the markets are going to continue to grow, and we'll be a part of that growth trend. And on both of these, you'd see persistency levels that have been very stable. So talk a lot about sales, but it's equally as important in terms of what we're able to keep from a business perspective, you'll see that on the group benefit side as well as on the voluntary side, very good and stable persistency levels. A little bit different story when you go to the U.K. We have seen premiums come down over the last several years, that's really a price story. It's not actually as much about the amount of business that we have on the books, but the team there has worked pretty hard to turn that corner on that front, and so we've started to see the premium line turn around. And you've seen persistency through that period of time, very high in 2010. It's come back in a little bit, but I think we're in a range of persistency that we think is a good balance between our sales and premium levels, and what we're keeping on the books. And on the right-hand side, very solid, above 75% of persistency in Colonial Life and a premium that's consistently growing right around that 5% range at very good profit levels.

Turning then to the next piece, which is the benefit ratio trends, and what's happening on the loss side. You've heard some of the details about this, but I think if you go back over the last several years, starting first with Colonial Life, you'd see we're at a 52% level. We saw very good years through 2007 through 2010, back up in that 52.5% range that we saw in the third quarter, but it's still very profitable business. So when we think of that trend, we expected the trend will flatten out from here for a variety of reasons but, still, once again, we talked about the returns on this business are very good, very high and very stable.

This yellow bar indicates what's happened in the U.K. over the last several years. Once again, through that 2007 to 2010 period of time, we really were seeing losses that were unsustainable, loss ratios are unsustainable. I think we articulated that pretty well at the time. We're back a little bit higher in the U.K. than we expected, in the low 70s, so that's something that we're continuing to deal with from a pricing perspective, the team's dealing with there, but still very good returns. And as we mentioned, these are ROEs that we're still seeing on the high teens to 20% type returns.

And then when you go to the U.S., 2 lines here. The top one is our long-term disability line of business, so a loss ratio of that year-to-date is down around 85% just below. And then combined with our life businesses as well as voluntary in the 75% range, a good consistent trend line that we've seen on the way down. It's stabilizing now where it is today, but generating good returns overall for the business.

So that takes us to where we're seeing from a total return on equity. Start first with our core lines of business. You can see our core lines of business generating right around 13% return on equity overall for the business. Next slide, I'll just aggregate this a little bit. But when you look actually with our total core, with the excess capital that we're holding with the holding company, as well as blended in with our closed Individual Disability block, still generating an 11% return. So when you take out some of that excess capital, which we're still holding today, you're still seeing very good returns for our business overall.

And then when you take it down by product line, here on Slide 75, there's a couple of segments here on the left-hand side. We have 3 major segments of our business that are generating over 15% return on equity. Very strong returns we've seen over that period of time. The next line, our Group Disability line, over 13%, or right around 13%, still above our overall aggregate level. Good returns on that line. And then when you go to Supplemental and Voluntary, good businesses within there, but also within there, we're depressing those return somewhat as our Long-term Care business. And then on the far right, you see closed disability block at 2%. So overall, we have a balance of return on equities within our business, generating right around the combined level of around that 11% and the core business closer to 13%.

So with that, I'm going to take a pause here and turn it over to Breege Farrell, our Chief Investment Officer. Breege has been with us for the last 6 months and let her take a deep dive on credit. I'll come back on interest rates and capital shortly thereafter. Breege?

Breege A. Farrell

Thank you. Thanks, Rick, and welcome to our guests. The next few minutes, and not too many slides, I'm going to spend time talking about our investment portfolio. And it's kind of a neat thing to be doing right now. This morning, when I was talking to my youngest, she said, "What are you going to be talking about today?" And I said, "Investments and what we're doing in the markets, and how it's going." And even though she's 10, she said, "Oh, my gosh. That's like the worst thing happening in the world." And I said "No, actually, I got a greater risk of boring you because we don't have that much exciting going on.” That's because we do have an extremely stable, strong portfolio, which is generating some very good net interest income for us and will continue to do so for the foreseeable future. So it's kind of an ironic thing to be standing here with everything going on in the markets and have blessedly boring story to tell you.

Before I dive into that though, I do want to underscore for those of you who may not have heard it, and I'm new here, so you may all know better than I do, but we are a credit shop. And you'll see that underlying most of what I talk about. And you've heard it mentioned by others. And that is a significant underpinning of why things are fairly stable right now. That's our core expertise in it for the foreseeable future is where you'll probably see us investing.

We're going to start with looking at the net interest income over several years. And as you can see, this tells you the story of a stable, not too rapidly changing income stream. The things I think you should take away from this though or looking back several years into the '07, '08, '09 period, this is where the benefits of being in the portfolio we hold really showed up, because you didn't see the kind of losses that you would see from portfolios that were much more diversified into different types of asset classes. And then more recently, if you'd look at what's going on, you see that stability continues to hold in. And that is a function, again, of not being in some of the things that are more problematic right now and also the fact that our yields on the overall portfolio are holding up fairly well.

This slide shows you the yields over a decade. And as you can see, they have slowly trended down, mostly as a function of interest rates in general. But you will notice that in the last 3 periods where we're showing you 2 years and then the 4 quarters through September, the overall portfolio yields are holding up much better than you would expect given what's going on with treasury yields. And Rick will go into this in a little more detail later, but the primary reason behind this is the fact that our portfolio tends to run off fairly slowly. And he's going to look at it by business line. But you'll see that our investable cash flow each year is a very small percent of our portfolio, so it takes quite a number of years before a low interest-rate environment brings that overall yield down. Another benefit we have is that we have a hedge program that we put on, I believe, in '08, a 5-year hedge, which is protecting us somewhat from interest rates, and will continue to do so through the end of 2013.

The next slide is a fairly standard group of charts that any investor would show you, particularly in the fixed income markets. The first one is the default experience. I don't expect anyone to get terribly excited about the low default rates we're seeing currently. The entire market has seen low default rates. But as you can see, looking back at the period of much higher defaults, '08 and '09, we had significantly better performance than the market. And this, again, is singularly attributable to the kind of investments we hold. We tend to be in sectors, as well as type of securities even within the fixed income market where we have most of our investments, which didn't experience much to defaults. And we can certainly go into that more detail later if you'd like.

The quality of the portfolio which we measure by the weighted average rating score, something a lot of people track. You can see we hover right in there about the mid-A3 level. It's trended down very slightly over the last couple of years. And the reason for that is that we had a much larger percent of our holdings in AAA MBS and government agency portfolios. The rest of our investments, which are primarily corporates, we've held at the same quality level. But as those get repaid, it's still having a slight impact. And we've run this out several years, and it takes a long time to make too much difference. But we watch that closely. And then our watch list is the other thing that we look at. And as you can see, you can't make -- you can't ask for sort of a better story. I guess the only thing I would say is that whenever I look at the watch list of investors, I always ask the question, "Well, okay, did your watch list decline because you wrote it off or you sold it, or did your watch list decline because actually, there wasn't a problem?" And we have studied that. And, in fact, if you were to go back a couple of years and look at what was put on the watch list during the financial crisis, a significant amount and well over half was never turned into a loss position in our portfolio. It just simply came off the watch list as there was a recovery and less panic in the market.

So the next slide gives you an overall look at where we're invested. And as I said, credit is us. That's what we do. That's our strong suit. You can see the predominant investment for us is in investment-grade corporates, just under 60%. But if you add it together the things that we consider the hard-core credit asset classes, so investment-grade corporates, private placements, high-yield bonds and commercial mortgage loans, it would get up to 80% of our total portfolio. So this is what we do. And it's not atypical for insurance companies, but even relative to other insurance companies, we would have a much greater percentage of our total assets in those sectors.

The portfolio mix, which is shown on the right side, is predominantly in the sweet spot of the A, BBB, which gets you to that A3 average, and that would be what you would expect to see given our corporate investments as those predominantly do come in, in the BBB space and the lower A space. The little box at the bottom for those of you who -- it's a little hard to see on the side, but it shows you that we're more weighted to the 2 upper tranches of the BBB space versus the lower one. That we don't have a box, but that would also be true in our high-yield portfolios if you were to look at the mix. It would be much, much more heavily BB weighted versus a B rating.

And then I'm going to move on to another measure, which we get to start from Moody's. This is kind of interesting. I didn't see this as often before the financial crisis, where investors and insurance company, money managers were looking at risk assets as a percent of equity. It used to be a percent of assets and then suddenly, when things got so bad that people actually had some real problems, they started looking at it as a percent of equity or percent of capital. And so Moody’s has produced this chart which demonstrates looking at the broad peer group where we stand, and you can see that we are in the lower-percentage weighting of high-risk assets. It's important to ask when you're looking at this “what's in there?” Because generally, these measures would include anything that's not an investment-grade bond or investment. So it would have equity. It would have alternatives. It would have high-yield bonds. A big mix for us. It would predominantly be high-yield bonds.

This slide allows us to give you a little bit of an insight into how we invest. And some of this is driven by our liabilities. They tend to be somewhat longer and that skews the sectors that we pick. We do go for some of the sectors, the classic one big being utilities, where you get the longer issuers to match your liabilities. But away from that, what this predominantly reflects is our outlook. And you'll see the overweight in the utilities, in the consumer non-cyclicals, energy, capital goods, that kind of thing. We like asset-rich type companies. We like companies that tend to be less volatile with recessions. And that's true in our U.S. and U.K. and European investments. We have, for several years, been significantly underweight financials or consumer cyclicals for obvious reasons. You know as well as I do, this is a very tough time, and we're not looking for significant growth. So we stick where we think you'll have a little bit more safety.

And then the next slide, actually, the next 2 slides, we're going to dive a little bit deeper into the commercial loan portfolio and then into the euro zone because those are topics of interest that we get questions on. The commercial loan portfolio is not a huge percentage of our book, but it is still important to us. And the regional one, which is on the right, shows you we are pretty diversified across the country. And then the pie chart on the left shows you where we prefer to be, and it's predominantly office and industrial space versus retail or apartments. And again, this is reflective of the fact that we view the retail and apartment space as much more volatile with the economy in general, and the office and industrial space being somewhat longer-term leases, a little easier to peg and a little safer place to be. I would tell you that within all of those categories, we are fairly conservative investors in the sense that we would only do loans, generally speaking, to established real estate in partnerships or investors, but we wouldn't take on construction risks or that kind of thing.

And then lastly, maybe this is the most exciting part, is the geographic investment exposure. As you can see from the chart, we are predominantly in the U.S. Three quarters of our investments are in the U.S. Looking at the euro zone, specifically, just under 10% is in the U.K. And this makes a lot of sense because obviously, we have a big U.K. business. So that's where you'd expect to see some assets. The chart on the right breaks down into a corporate sovereign and financials where those assets are. And the U.K. investments would mirror the U.S. investments. We predominantly are in corporates, very, very little in financials. We do have more government exposure in the U.K., and that's primarily driven by our U.K. gilt portfolio, which matches our inflation-sensitive product there which we don't have that in the U.S.

And then looking away from the U.K., the other euro zone, excluding the PIIGS, is very similar. So France, Germany, we would have predominantly corporates, fairly low government and financial exposure. And then when you delve into the PIIG countries specifically, we have only corporate exposure. And that's been true for a while. We haven't -- we didn't have sovereign exposure or any direct bank exposure. And within that, if you dove in, we would predominantly be in either utilities, national telephone companies, that kind of thing, or in companies where you don't have the bulk of the revenues being generated from the country. So we consider that to be very manageable exposure and something we're obviously very happy to have right now given everything that's going on. And then other international, which is 11%, would be Australia, New Zealand, Brazil. We have stuff, sort of very small percentages all over the world.

So I think I've given you the picture. We're -- like I said, we're almost boring in the sense that credit is us, we like it that way. We don't plan to take any, or make any measured changes in the portfolio, so you're not likely to see us going into any large way into alternatives or equities, away from our core expertise and where we think it's safest to be, which is the U.S. and developed the world, stronger countries, and we continue to like the corporate market. And we continue to watch the risk assets very carefully. We monitor that watch list, but so far, things are going fairly well. And the fact that we still U.S.-based is helpful because, as you all know, U.S. companies are in a fairly strong position and not quick to change that because they're just worried about as the economy as we are. And we expect that the investment portfolio will continue to contribute that net interest income. And where we get a long term, lower interest rate environment, if we do, which is still a little bit hard to call, but if we got a very long-term lower interest rate environment, we expect we'd be able to make some changes in the business which Rick will talk more about. Thank you.

Richard McKenney

Thanks, Breege. Let me take you directly from the credit side of investment portfolio and talk a little bit about interest rates and our exposure there. I think the most important thing when you look at our interest rates -- now this is a challenge across the insurance space, financial institutions at large with low interest rates we've seen today. We can certainly manage through that in the near term. And even over the longer term, our products actually have characteristics which allow us to manage this business for a longer-term impact of sustained lower rates.

Four reasons. Let me take you through those 4 reasons. I'll do it quickly with bullet points, and I'll give you examples of each. One is the limited amount of cash flow that we have to put to work behind our business. As Breege said, "We invest in whole for the long term," so we don't have a tremendous amount of cash flow to put to work relative to the size of our portfolio. Throughout the credit crisis, we were net investors in this markets, so we allowed our margins to build up over the last several years. I'll take you through some examples of that. That certainly provides us some near-term cushion as we go through a more challenging interest rate environment. Third, when you look at our interest rate exposures, we do have hedges on. We wish we had more, and that they lasted for longer, but those hedges, certainly in the near term, help us out across most of our product lines, and I'll take you through that. And then lastly and most importantly, when you think over the longer term, we can price for this. So you heard that from Kevin and from the team talking about putting those prices through. It doesn't happen overnight. You've got to push them through the market. But when you think of the longer term, we can price for this and bring it through to our book of business. And I think that's probably the most important thing.

So let's take this apart in a little bit more detail. First is, when you look at our overall portfolio on the next slide, we have about $43 billion in assets and out of that $43 billion, we have new money to invest to about $2.9 billion last year. It's a little bit higher than we had this year. We had about $2.5 billion this year. But when you break that down, you're looking at about $10 million per investable day. And for the business that we are in, it's very manageable. It allows us to be very choosy, and we'll show that to you on the next page.

When you think about backing specific product lines, 2 that I would note, long-term care is one that is asset-intensive. But when you look at the $650 million we have to invest in the year, about 1/3 of that is hedged at high rates today. So think about those high rates that we have, those hedged at today and 1/3 of the book coming in at those higher rates. If you blend in some more challenged lower rates on the next 2/3 of the investments, we certainly, over the next couple of years, can achieve our targets on that front.

On the Unum U.S. LTD business, about $670 million, as we mentioned on the pricing side, I think the important thing here is hitting our targets, being choosy. Also, a couple of asset classes that fit well with this are going to be our mortgage loans we put behind us and some of our private placements which have a very similar tenor. So that's how we'll hit our targets on the LTD side. And then the next 3 things to note, first will be the closed block, which we talked about. Effectively there, think about cash flows in, paying claims out. So very little cash flow, about $170 million to put to work there. $100 million in the Individual Disability recently issued, so low levels of cash were required there. And then Unum U.K. at $400 million, a lot higher this year just given some of the maturities that we have there, and so we'll have to continue to work through that. Peter and Jack talked about some of the pricing actions that we'll take to accomplish for some of that. So when you think about the cash flows we have to put to work today, Breege and her team certainly can manage this in getting -- being very choosy, getting good assets over a period of time.

When you think about that, I'd show you the next slide on Page 91, which shows what's happened really over the last 3 years in terms of what we've gotten for purchase yields. So even third quarter of this year, you're still looking at pretty close to a 6% -- type purchase yield that we've had. Part of that, back in fourth quarter of 2008 in the depths of the credit crisis, we were bringing in assets, good assets, good A-type assets at very high rates. Going forward, this will be a little bit more challenging, but I'd go back quickly to us being very choosy in getting good assets. And so, even as we've been here over the last month, 1.5 month in some of these, we're still able to get some pretty good assets to meet some of our returns. I would certainly say though that it is more challenging as rates have dropped dramatically from the end of the second quarter.

And then the example is the margins that I mentioned that we have. So this is our Unum LTD block that we have right now, sitting at around 100 basis point margin. And what this chart does is roll out over the next several years in terms of maturities coming off and cash flows coming in relative to our discount rates. The asset is harder to get the yields in our portfolio, although we show over this period of time and actually remains markedly stable, but at the same time, it was discount rates that are coming down. And this isn't because of changes we've made in the last quarter, it is just the blending of discount rates that are coming down over time. And so we're actually going to see, on the block we have today, this margin increase to 140 basis points given what we expect today. Now, you have to add into that new business and new levels of discount rates, which were going to come in lower, which will blend that down in aggregate. But this is what we have on the books today, and so we feel very good about the margins we've built up and that those margins can sustain themselves as we look out over the next 5 years.

The next piece to talk about is actually in our blinds of business, and this gets back to the pricing. So on a qualitative basis, you actually can see across 2 grids. One of the left-hand side, our interest rate dependency. How dependent are these products in terms of interest rates we bring in to the margins overall. And across the bottom, the repricing flexibility. So when you look at these, these are many of our major product lines as David Parker mentioned in Colonial Life, as well as in our Group Life business in the U.S., these businesses don't depend tremendously on the movements in interest rates. So we actually -- although they can't be repriced very quickly, they don't have a tremendous amount of interest rate dependency. And as I mentioned on last page, the closed disability block, which is in the lower right-hand corner, we can't reprice that business, but the interest rate dependency where claims are paying off -- or should I say, new cash flow is paying off claims. We feel pretty good about. So that's kind one big chunk of our overall portfolio.

The next piece I'd put out there is our long-term disability blocks that we have both in the U.S. and the U.K. You would have heard both of those businesses talk about the repricing flexibility. And so over longer-term we have the ability to do that. So we -- they would be high. And their interest rate dependency is pretty high. And so when you look at that over time, we do need good interest rates behind that block of business to ultimate pay off the claims.

And then the next category is our Long-term Care or our Individual Disability recently issued. And this is the challenge when you look out there, Long-term Care does have a high rate of interest rate dependency. The repricing flexibly, although we've gone through 2 rounds of repricing, and we'll continue to push on that where appropriate, it is a little bit more challenging, and it does require more on that front, that is clearly the challenge. But I think if you go back to the last 3 examples in terms of why we feel okay about that, that's how we're going to battle back on the LTC. It's as we put bonds behind it, making sure they have the right spreads and continuing to do that.

So let's put that into quantitative terms and talk about what the world will look like for us over the next 5 years in doing some sensitivity analysis, particularly to what we see from the interest rate environment today. I'll take you to Slide 94. So if you look on the left-hand side, you'd see a normalized growth rate of around 6%. Last year in Investor Day, we would have told you, normalized is around 5% to 8%, so all we're doing is reflecting the fact that over the next 5 years, that next year is going to be a little bit slower, but we'd expect that to come back over the 5-year horizon. So if we took the forward yield curve at 9/30, which we put on it today. If we put the flat curve, you'd see about a 1% decrease in the growth rate of the business. And that gets back to the overall interest rate sensitivity we have in the business.

If take took 9/30 flat, which is a 10-year treasury of 192, a little bit lower than where we are today, you'd see over the same year, 5-year horizon that it was going down to about 4%. So it is impactful to us. However, it's very manageable. And it's so -- it's really about our reduced earnings rate trend as opposed to any real interest rate problems created from an overall earnings perspective.

So that's on the interest rate side. Then let me importantly turn very quickly to the capital management side. When you look at capital management overall, it continues to be something that we've done very well. We actually look at a very sound capital base. We chose to actually build up our capital levels through some of the tougher times. And then since that period of time, we've actually been able to use some of that excess capital to buy back our shares at very attractive rates. We continue to look out there for attractive opportunities from an M&A perspective. We certainly want to put money right back into our business and get some of those high returns we mentioned, but we have shown there our capacity to go out there and buy back stock to redeploy our capital both through share repurchase and through dividends over the last several years.

When you look at that, take it across a couple of dimensions. First is on our risk-based capital. When you look at our risk-based capital today at the end of the third quarter, right around 400%. If you're going back to 2002, it's about double the levels we would have seen back in that time period, and 400% for our mix of business is actually a very, very strong number. If you look at the holding company cash flows, if I take you back to last year and we've highlighted here where we actually did some pre-financing of debt right around the $1 billion of cash and securities at the holding company. We've seen that come back in a little bit this year, but that gets back to our capital deployment, which I'll show you the in the next page. But the orange line is important, which is one year, fixed coverage of interest and dividends, and we're still maintaining about 2.5x that level at our holding company. And we think that's a good place to be given some of the challenges that continue in the marketplace.

On the leverage front, a very stable 21% to 22%. The blip you saw last year was that pre-financing that we did of a security that actually we refunded in February of this year. So still holding, we think very low leverage, right around 20%, 21%, gives us a lot of flexibility there and utilizing this leverage when we see the need to do so. I mentioned the debt maturity that we actually retired in earlier this year, and I think the key thing to note here is on Slide 100 that we go out to 2015 until we see our next maturity. So nothing refinancing and then given some of the rates that we see out there, that may actually be a positive thing today. But certainly, from a rollover perspective, we actually don't see anything out there until 2015. And you could can see the deck stack that we have out there is actually very well laddered.

So it takes you back to the page that Tom mentioned, capital generation model and our statutory earnings. This year, we continue to see very good earnings over $600 million, $600 million to $650 million that we talked about. Despite some of the challenges in the market and the world around us, this capital generation models is very much intact. We still have good statutory cash flows both here and the U.S., as well as out of our U.K. business. We're using money for the holding company. Our actual use for growth in the business is pretty flat as you look at it today as we would expect. And so that $500 million per year model stays intact, and then we'll talk about that in terms of how we see in the outlook.

But as you take that model, I think it's important to actually go back over the last several years and show what we did with that model. So you take over the last 3 years going back to the beginning of 2009. We've generated a significant amount of capital, as we've talked about. We've used that capital on a couple of fronts. One is we bought back almost $1 billion of stock at very attractive prices for that period of time. We've paid out dividends at an ever-increasing rate to about $309 million, and then we put $250 million in the pension, given were interest rates have gone as well. So we've taken that capital, put it to work and at the same time if you look at the right-hand side, we've also built up the capital within the company. So from an RBC or in our U.S. subsidiaries, capital's gone up over $600 million, and our holding company levels have gone up for over $100 million. So you'll see a good balance here of good capital generation, utilizing that capital and returning it to our shareholders and continuing to remain very sound capital levels at the overall.

So let's talk about what where we're going to do next year. Last year you would recall, I brought a slide out which talked about our excess capital levels and where we see them trending down over time. Actually there was question earlier, I don't think anything has changed on that front. We looked out over a multiyear timeframe. We talked about our RBC levels coming down to a level of 350%. We talked about our holding company securities coming down to a level more like 2x to 1x over a period of time. But I could tell you relative to last year, we have done some of that this year. But as we look out next year, we probably won't actually bring down these excess capital levels. And you'll see that as we go through our projection. I don't think, actually -- Randy had a question earlier, I don't think anything has changed. It's just that as we look out to the risks around the world today, we think now is not the time to be actually pulling down those excess capital levels. But at the same time, we will utilize and we will redeploy the capital that we're generating on an ongoing basis.

So to do that, let me remind you the actions we've taken through 2008. I kind of showed it in an aggregate in the capital generation model, but going back over the last several years, we have certainly been willing to buy back our shares at a discount. We've done so actively over the course of late last year, as well through the rest of this year. And at the same time, we're also increasing our dividend at a very steady rate. We think giving back our capital to our shareholders as we generate it continues to be a very important thing.

So to take you through that operating mechanism, let's look at the capital level of this year. So we expect to end this year, as we've said all year in the 375% to 400% range. Leverage right around 21%, 22%, right in that area, and then ending the year with holding company capital of $600 million to $800 million or roughly up to about 3x our annual needs.

As we look forward to next year as opposed to bringing these levels down, we actually expect that we'll maintain them in the 375% to 400%, reflecting the environment around us. Leverage will go up a little bit, and this is really a result of some of the accounting changes that are going through as of 1/1. And then the holding company cash and marketable securities still maintaining a very healthy level. So as we go through that, we feel good about our capital generation. We expect we'll still buy a fair bit of stock in 2012. But as we go through that period of time, we'll maintain a very, very healthy capital levels, reflective of the environment around us.

So let me take that to the overall outlook and give you some of the points key to our outlook and what we're looking at next year. We've talk to you about the DAC impact that we have coming down. Next year, it will look very similar other than that to what it did this year. We're not expecting a tremendous amount of natural growth in the business. We probably are expecting more going into this year than we're expecting going into next year. We do expect to buy back $500 million of stock in 2012. And then we'll see our tax rate come down a little bit and some of our low-income housing tax credits we purchased over the last several years get funded and will bring the tax rate down a little bit. But I think the bottom line is we expect the year very similar to this year in terms of our earnings per share growth in the 6% to 12% range driven more so this year by capital. But as we go forward, we'll look for the core earnings growth.

On Slide 108, just a -- is quick housekeeping item. To give you some of the details around the DAC changes, just as a reminder, actually we will be -- as part of that implementation, everyone will be recasting last year's results. We'll give you by-segment view. The growth rates that we talked about in the business are off of those recast views. So I think that should help you in terms of looking at what we see as the underlying fundamentals in each of our business lines. But you can see a very small impact to earnings and the $400 million a $600 million of assets impact that we see overall. So this gives a little bit more detail on that front.

As I wrap up around the outlook, I think it's important to say as you look at our outlook for the end of this year, we expect very much to be in our earnings per share range of 6% to 12% as we've said. Our return on equity will be right around that 11% level as we would have expected. And premiums right in the middle of our range, probably a little bit slower than we expected, but right around 1%. So we actually think that we're very consistent in what we would have seen at Investor Day despite all the changes that occurred in the world around us over the last year.

And then in 2012 you've seen a couple of times, we are expecting earnings growth in our business units to be a little bit slower this year in the low single-digit type level down to around 0%. Our closed block, as you wrap that in, still about 0% to 3% earnings growth fundamental. And I would mention that part of the slowdown on the earnings growth is also the amount of capital that we're pulling out of the business and taking investable assets out to actually buy back our shares is actually depressing that somewhat. But you can see that coming through in the earnings per share where we still see that growing about 6% to 12% with some of the capital management that we're doing and ending the year 2012 right around 11% to 12% return on equity.

So I'll wrap it up the same way that Tom began the day. When you look at our business, we have very good fundamental trends in the business in terms of demographic shifts that we have both here in the U.S. and the U.K. The disciplined growth is going to be key. You've heard that throughout our earlier comments. Now we certainly are reflective of the environment that we're in today and our pricing for such. The financial foundation is strong today. We're not going to deplete that. We think that having a strong financial foundation gives us a lot of flexibility as we get into 2012. And then we also have very realistic outlook for the future. So as we go through that, we think we're reflecting what we see on the horizon and putting it through all of our financial results.

And then finally, Tom mentioned, we have a track record of meeting these commitments. You would have seen that in our 2011 results that we're putting together this year, and we'll look for that again in 2012.

With that, I will stop and turn it over to questions and answer for myself, Breege or Tom as well.

Richard McKenney

We'll wait for microphone.

Donna Halverstadt - Goldman Sachs Group Inc., Research Division

Donna Halverstadt from Goldman Sachs back here. I feel like there's a little bit of disconnect in my perception of 2 different sets of comments. On the one hand we had Tom's, we have a biased action speech. And then on the other hand. we have Rick's comments about 2012 is not the year to drive down to 350% RBC and 1x holdco coverage. So I was wondering if we could just have a bit more color on the -- we have an action to biased speech and what the message really was there?

Richard McKenney

Yes. I think very much what Tom said, we have biased action, but a biased action does initially mean that you change your capital position from a strong position in a pretty difficult world. And I don't see those inconsistent at all. I think it's very consistent. And sometimes the best action is actually is to stay in path. And so our bias is to action, but in this environment, I think it's going to be buying back $500 million of stock. Let's be clear. That's still a very big number in this environment where our shares are trading at a discount. But it'd still action-oriented, but we may not go as far down as we would have thought going back a year or so.

Donna Halverstadt - Goldman Sachs Group Inc., Research Division

And just as a quick follow-up, any sort of additional action we should be thinking about on the business side beyond the strategies already discussed in detail?

Thomas Watjen

Actually, let me pick up on what Rick said. Actually, if you think about that list of biased actions, it did represent share buybacks, dividend increases and things like that. But it also represent looking at lines of business and deciding are all those lines of business appropriate for the new world? Are the pricing actions that need to be taken it those lines of business. I think, Rick, it's not just the share buybacks and dividends, but if you look at the whole litany of things we've put in that list, there are things we have to decide on as we go through to 2012. Do they fit with the new world? So I think that's where the biased action is very much a part of that message.

Ryan Krueger - Dowling & Partners Securities, LLC

Ryan Krueger with Dowling. Rick, on the 2012 EPS guidance of 6% to 12% growth, should we think of that off of a recast base for 2011, so with 2011 adjusted for the DAC impact?

Richard McKenney

You should. That's why I brought that comment out with some of those details. So it's about -- I mean, if you look at the DAC impact, it's less -- it's 1%, roughly somewhere in that range. So I still consider that fairly immaterial. And we'll be somewhere within that larger range of 6% to 12%.

Ryan Krueger - Dowling & Partners Securities, LLC

Okay. And then on statutory cash flow testing, when you run the year end test, if you come up with the deficiency in one product, are you allowed to, or is it Unum's practice allow redundancies in other products to offset? Or do you treat each product kind of as a standalone?

Richard McKenney

Yes. We certainly treat each product as a standalone. It has to have -- or looking at a set of people in terms of that. We certainly looked at these products on a standalone basis in the past, and are, I believe, required to do so.

Unknown Analyst

In aggregate, [indiscernible]

Richard McKenney

Yes. So I'm getting a different response, which is as you can -- you can aggregate. When I think about cash flow testing, it's -- we have about 6 legal entities as we look at. So within those legal entities you are able to aggregate across that.

Unknown Analyst

[indiscernible]

Richard McKenney

No, it's actually in multiple entities. In 3 different entities. Yes, Bob?

Robert Glasspiegel - Langen McAlenney

Just following up on what you just said, Tom, on Long-term Care, the message before, I think, had been we don't really like individual that much, but group was a product line that you liked a lot. You're now raising rates 30% to 50%, taking very strong action and getting approval. Whether the product is salable or not is not clear. Do you have the foot on the gas pedal, the brake or is this just open for review as you suggested?

Thomas Watjen

Yes. I think, Bob, it's in the latter category. It's open for review. I think that's -- I think Roger Martin mentioned in his comments, as you look at the Long-term Care business, obviously we've always been very close to it and testing ourselves in terms of the logic of staying in the business, if so, in what from? Does it fit with our commitment to the employer? I mean, all of those are things we've looked at on a fairly regular basis. There's no doubt, I think as Roger said in his comments, the most recent drop in interest rates and some other things, I think, has accelerated that review. I think that's where I want to go back to the biased to action. We're not afraid to look at those kinds of things with a new set of glasses as the environment changes. So I'm not going to speculate now on the kinds of things that may come from that, but just -- that should be -- you should assume that's one of the areas we're looking at very carefully.

Unknown Analyst

On buybacks, you've been somewhat opportunistic in the past. You've done more when the stocks gone down. So assuming if the stock prices around this level, should we assume that you have front end more of the buybacks in 2012 as you get the dividends from the subsidiaries? Or would you -- are you planning on spreading them out throughout the year?

Thomas Watjen

I would just stay consistent with what we've said. As prices are low, we will buy more and as prices go up, we'll buy less. And I probably won't give you more than that. I think it will come unevenly over time. I'd also remind you we have different windows in terms of which we can buy, which impact us relative to free trade within the market. And thus far, aside from an ASR that we did earlier the year, we've been in the open market in buying back our shares.

Unknown Analyst

And then on -- obviously, your name been mentioned in terms of M&A in the press. But what's your view on M&A because you have been buying back at a decent pace. So does that imply that there aren't deals out there or -- because as we talk to other companies, it seems like a lot of companies are interested in group benefits markets. They're just aren't as many sellers out there. But are you looking for deals? Would you -- there, would you look at geographically, would you be willing to expand beyond markets here and what you're seeing in terms of the environment out there?

Thomas Watjen

Yes. I always start the answer to this question with we like our 3 business. Hopefully, you took away from the 3 discussions we had about each of our businesses. We have some pretty good growth opportunities even within those businesses. Having said that, we also have been very active in looking at transactions that could complement the businesses that we're in either from a product and distribution point of view or from a geographic point of view. And there's not that much to look at, to be honest with you. But I think we're looking at everything that's out there, that's available, that frankly fits the general characteristics we are looking at. Having said that, given the fact that you haven't seen us do anything, hopefully, you sense we're being very disciplined about doing that because we measure any transaction like that against our ongoing business plan and the ability to put the capital we have to work in a way we're doing it by buybacks, which is a great leverage, as you know, in the EPS growth and some of the returns in the business. So I'll say, we're looking -- we think we're in the flow of most of the things that are relevant to our space, but again, incredibly disciplined. And I'm not always sure that we're going to be the best buyer because we're frankly a pretty careful buyer in terms of not willing to overpay. And again, measuring any transaction against the ongoing business plan that Rick laid out. So that's a pretty high hurdle actually.

Unknown Analyst

And then on the Long-term Care, I think you mentioned in the previous comments that 91% or 90% less of people who've -- there you've applied for rate hikes have accepted higher prices instead of maybe lowering their benefits. That's a lot different than what we've seen from other companies that have done rate increases in the past. So is that somewhat of a negative sign in terms of potential loss development down the road?

Thomas Watjen

It's -- you have to look at it on a couple of different fronts. One is that to those stats are about right in terms of 90% of accepted rate hikes. I would note that our rate hikes were probably lower than what you've seen from others in the marketplace. So as we get into that rate hikes, the first 2 are not as much of a shock rates that people would be more willing to accept that. But I wouldn't translate that initially into any kind of loss development down the line. Yes? Steve?

Richard McKenney

Yes, next one to Ed -- or Steve, yes.

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

Rick, Steven Schwartz, Raymond James. Just to a follow-up on Ryan's question. So if an LTC reserve charge for on a -- let's assume, I'm assuming it on is that basis, okay? So if you got LTC in 3 different companies, 2 companies may be on the aggregate, the cash flow adequacy is fine even with the LTC. One may not be, you take the reserve charge in of that one?

Richard McKenney

Yes, you would. That's speculative, but, yes.

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

Yes, I'm just formulating the...

Richard McKenney

Yes, yes.

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

Okay. And then on a GAAP basis, is it -- it's going to run through DAC first, is that correct?

Richard McKenney

That's right. So when you look at -- first of all of you look at the overall business and then part of your net reserves, you look at is on a DAC basis, so you'll be writing off your DAC.

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

Okay, so all right. What should we think about the guidance that you gave if a charge were to happen in the fourth quarter? Does that change anything? Or you just ignore it and keep on going on and on?

Thomas Watjen

I think very much we're going to keep going. I talked about capital generation model. We see that very much intact as we continue to go forward and so, you're talking about something that is a little bit speculative, and I wouldn't go there. But we look at our business very much the same way as we go into 2012.

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

Okay so that's 6% to 12% would be off of whatever it was without it? That's kind of what I'm getting at.

Thomas Watjen

I wouldn't answer that.

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

All right. Breege, do you know off the top of your head what your financial exposure is in France?

Breege A. Farrell

Let me see. No, I have to...

Richard McKenney

We can get that very quickly.

Breege A. Farrell

Just give me a second. Do you have [indiscernible]?

Richard McKenney

That's fine. Give me a few minutes.

Thomas Watjen

Actually, give it to Ed. [indiscernible]

Edward A. Spehar - BofA Merrill Lynch, Research Division

Out of curiosity, is there any impact on the 6% to 12% earnings growth from many additional hit, either in earnings or from additional contributions into the pension plan?

Richard McKenney

Well, we wouldn't have done much on the pension plan in terms of the expectation around what the earnings trajectory would be around that. It's still a long way to go in terms of as we get towards the year end. And it is very point-sensitive in terms of where the year end ends up from both equity market and total return of our portfolio and the discount rates we've assumed.

Edward A. Spehar - BofA Merrill Lynch, Research Division

So this does not incorporate any additional...

Richard McKenney

Any change.

Edward A. Spehar - BofA Merrill Lynch, Research Division

Or any additional funding into the pension -- the underfunded piece of the pension plan.

Richard McKenney

That's correct. And I would mention that earlier in the year, our pension was up around 96%. So it's kind of that 3 to 6 months. So our pension is pretty well-funded notwithstanding some of the challenges that seen over the last couple of months.

Edward A. Spehar - BofA Merrill Lynch, Research Division

Right. And then I guess just thinking a little bit more about the RBC, officially 500%, 400%, the excess at the holding company over the level, I mean, we heard a fairly strong presentation on the quality of the investment portfolio. We heard a lot about the underlying businesses and a view on that. And I guess when you think about not taking it -- the excess down in 2012, and I understand that the world is very uncertain right now. But is it more a question about a change in the investment portfolio? Is it more a change in the liability structure/ the underlying businesses? Like, what is it that gives you -- when you think through all the different risks, what is it that you're thinking about most deeply?

Richard McKenney

Yes. I wouldn't isolate it on one risk. I think Breege did a good job taking through the investment portfolio. I don't have worries about our investment portfolio. I think our credit is very sound on that front. And then you go through all the other pieces. I wouldn't isolate anything. I think you have to be reflective of the world that we're in today and buying back $500 million of stock next year is still a pretty good pace of stock buyback, and we think that's fine through 2012. We like having our capital at stronger levels in these periods of time. It gives us tremendous flexibility to buy back more stock at some point in the future or M&A or whatever it might be. And so the thing now is it still the time to have good capital strength and good financial flexibility.

Thomas Watjen

Rick, we got an answer on the...

Breege A. Farrell

Yes. The total exposure on 9/30 in France is 561. I would imagine the question, which you'd ask after that, which is one we were asking, which is, “what is the exposure to French banks?” And within that, at that time there were exposure to 3 French banks, which totaled about $40 million, although I will tell you that we sold that down once we took a look at who have the most exposure to Greece and...

Edward A. Spehar - BofA Merrill Lynch, Research Division

Was it a...

Breege A. Farrell

4-0, yes. Roughly it was $10 million Paribas, $20 million in Crédit Agricole, that kind of thing. So it would be lower now. I can't tell you it was totally 0, but it would be much lower now. And then the kind of -- just to give you an idea, I know we don't usually give individual credits, but to give you an idea, the consistency with our theme of that $500 million, about $100 million -- over $100 million will be France Telecom. We have some large exposures to the utilities to Lafarge, names that you would know would be very internationally based. It doesn't mean that if France should default, if we get to that point, we wouldn't see some problems, but it's the banks we're most worried about.

Edward A. Spehar - BofA Merrill Lynch, Research Division

Rick, just following up on the buybacks. Last year you said the initial guidance was $500 million, wasn't it?

Richard McKenney

I'm sorry?

Edward A. Spehar - BofA Merrill Lynch, Research Division

The buyback last year.

Richard McKenney

Yes.

Edward A. Spehar - BofA Merrill Lynch, Research Division

When you gave guidance, wasn't the assumption $500 million?

Richard McKenney

It was, correct.

Edward A. Spehar - BofA Merrill Lynch, Research Division

Okay. So for the first 9 months, I think you've done $620 million.

Richard McKenney

Correct.

Edward A. Spehar - BofA Merrill Lynch, Research Division

Assuming you do less, but something in the fourth quarter, possibly, you're already -- you're doing more than what you had said he would do last year, and the environment has gotten worse as we've progressed through this year. So I guess when you talk about $500 million and conservatism because the world looks a little scary, it's gotten scarier throughout this year, you've done more than the initial guidance. Are we sort of splitting hairs here a little bit too much focused on is it $500 million? Is it $750 million? I mean, is there a tendency to be more on the low end when you first come up with buyback guidance?

Richard McKenney

Potentially. So when you look at -- I can only look backwards in terms of answering that. I think when you look through the course of the year, we actually bought it at pretty good clip when we saw prices come down. And in the August timeframe, we bought more, and then bought less when we saw some of the challenges around the world. So I think that when we put $500 million, that's certainly a marker. If the world gets dramatically better on January 1, we have the opportunity to buy more, but I think what we're seeing, as we sit here today, we don't necessarily see that being the case. So $500 million is -- gets back to that fundamental capital generation. As we generated, we're going to buy back stock with it, and we'll sit here with a good financial flexibility.

Edward A. Spehar - BofA Merrill Lynch, Research Division

And I guess one follow-up. This isn't a Unum-only issue, but I think a lot of us struggle with segment ROEs when we hear them from all the companies. And one of the things that jumps out, and I think this came out maybe last year, is if the Group Long-term Care business is a 15% plus ROE business, why would you be going for 30% to 50% rate increases? It's just hard from this side looking at a business if it is actually generating those types of returns, why would need to raise rates so much?

Richard McKenney

Yes. I think when you look at it, it gets back to -- it's not just a rates. As Roger took you through, it's also mitigating some of the risks going forward, particularly, on our interest rates. And so I think if we can do it in a structure, we can mitigate those rates then prices a flex point around that.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Chris Giovanni, Goldman Sachs. An extension on Ed's question in terms of potential for upside in the $500 million. I mean, what would you need to see to upsize it? Is it your share price moving lower? Is it something on the macro side? Improving loss trends? What would take the $500 million up?

Richard McKenney

Well, I think it would be all those different things. I think we've been done very opportunistic in buying back our shares at very good prices. So if there's weakness in the markets at large, not relevant to us, we would take advantage of that. I think, as I say, the world turns back in a different direction radically, we'll take that into account. This is something we really look at on a day-by-day basis. And as we sit here today, we're looking at $500 million is a very reasonable thing as we look forward to next year. That could change a month from now it could change. Three months from now, it may not change. But we think as we generate those said earnings, giving it back to shareholders through share repurchase is the action steps we want to take.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. And then on your side and Page 94 where you show earnings growth on sort of a normalized versus a flat interest rate environment, you're showing the flat rate environment of 4%. I assume that's operating earnings growth on dollar, not per share. So what's the difference between that and the 0% to 3% that we're seeing this year in sort of the low rate environment?

Richard McKenney

The normalized piece you're talking about specifically?

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

So the 4% -- if we stay in this rate environment 2%, 10-year, you're showing 4% earnings growth. Yet this year we're seeing 0% to 3%, which is lower than that sort of flat 4% growth.

Richard McKenney

Yes, I think when you look out over a period of time, so I think when you look at this is -- earning chart, so what we would have said last is our normalized is 5% to 8%. Think of a premium growth in the 3% range. Benefit ratio is pretty stable from that in a normalized environment. Natural growth, interest rates going out there. So there's a lot of factors in there. What this is more meant to show is the delta given the interest rate environment. So given if the interest rate environment stays in that forward curve or the flat environment, this is relative to our longer-term expectations. This will be subtractions we weren't expecting in that normalized environment. Does that help?

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Yes.

Thomas Watjen

Okay, if there are no more questions, Tom?

Thomas A. H. White

Great. Well, thank you, everybody. We will reconvene downstairs on the third floor. I can't remember the room, but we'll have lunch in the -- down on the third floor, and there'll be someone down to guide us. Appreciate everyone's attendance and for those who joined us through the webcast, we'll be signing off now. So thank you, everybody.

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