Unum Group (UNM) Q4 2012 Earnings Report, Transcript and Summary

Thomas White Thomas R. Watjen - Chief Executive Officer, President and Director Richard P. McKenney - Chief Financial Officer, Executive Vice President and Principal Accounting Officer Kevin P. McCarthy - Chief Operating Officer, Executive Vice President, President of Unum Us and Chief Executive Officer of Unum Us Randall C. Horn - Executive Vice President, President and Chief Executive Officer of Colonial Life and Colonial life & Accident Insurance Company

Suneet L. Kamath - UBS Investment Bank, Research Division Jay Gelb - Barclays Capital, Research Division Yaron Kinar - Deutsche Bank AG, Research Division Randy Binner - FBR Capital Markets & Co., Research Division Christopher Giovanni - Goldman Sachs Group Inc., Research Division Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division Steven D. Schwartz - Raymond James & Associates, Inc., Research Division A. Mark Finkelstein - Evercore Partners Inc., Research Division Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division Seth Weiss - BofA Merrill Lynch, Research Division Sean Dargan - Macquarie Research

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

Great. Thank you, Kim. Good morning, everyone, and welcome to the fourth quarter 2012 analyst and investor conference call for Unum. Our remarks this morning will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the SEC and are also located in the sections titled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2011, as well as our subsequently filed Form 10-Qs. Our SEC filings can be found in the Investors section of our website at unum.com. I also remind you that statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on our website in the Investors section. So participating in this morning's conference call are Tom Watjen, President and CEO; and Rick McKenney, Executive Vice President and CFO; and also Kevin McCarthy speaking for Unum US and Unum UK; and Randy Horn for Colonial Life. And now I'd like to turn the call over to Tom Watjen.

Thank you, Tom, and good morning, everybody. Our fourth quarter was another solid one with operating earnings per share growth of 5.1%, and for the full year, our earnings per share grew 5.7%. This represents the seventh consecutive year of operating earnings per share growth at the company. In the fourth quarter, we saw a continuation of many of the positive trends we discussed with our Investor Day meeting in December. First, our operating performance remains solid. We continue to see premium growth in our target market and continue to generate solid operating results across most of our businesses, which allowed us to maintain our strong profitability and returns. For the fourth quarter, our return on equity was 12.2%, and full year return on equity was 12.3%. Second, our investment performance and asset quality remains strong. We have not deviated from our investment strategy to chase yield but are continuing to take the actions we discussed with you at our December meeting to manage through this low interest rate environment. Third, our overall balance sheet remains in very good shape, and our book value per share, excluding AOCI, grew by 12% this past year to $29.55 per share. Our past 3 years, even with our restructuring actions last year, our book value has grown by an annual rate of 8.4%. And finally, our capital position remains strong, and we have maintained our financial flexibility. We continue to generate strong cash flow from operations, with statutory net income for the total year totaling $625 million from our traditional U.S. insurance companies. For year end 2012, we are estimating our combined risk-based capital ratio to be 396% and holding company cash at just over $800 million. We are continuing to return capital to our shareholders, and in the fourth quarter, we repurchased…

Great. Thank you, Tom. As you can see from our press release yesterday afternoon, we reported net income of $233.9 million for the fourth quarter of 2012 or $0.85 per diluted common share compared to a net loss in the year-ago quarter of $369 million or $1.26 per diluted common share. Included in net income for the fourth quarter of 2012 are after-tax nonoperating retirement-related losses of $7.5 million and after-tax net realized investment gains of $16.4 million. Included in fourth quarter 2011 were after-tax reserve additions and the write-off of deferred acquisition costs in our Closed Block segment totaling $619.6 million, net tax benefits of $22.7 million, after-tax nonoperating retirement-related losses of $5.1 million and after-tax net realized investment gains of $4.8 million. So excluding these items, after-tax operating income was $225 million for this quarter or $0.82 per diluted common share compared to $228 million -- $228.2 million or $0.78 per diluted common share in the year-ago quarter. Moving to a review of our business segments, operating income for the Unum US segment increased 2.3% to $212.2 million in the fourth quarter, with premium income increasing by 3.2%. The expense ratio was stable on the year-over-year basis, and risk experience was also generally stable, with the benefit ratio for the segment at 73% this quarter compared to 72.7% in the year-ago quarter. Within the Unum US segment, operating income in the group disability line was $73.5 million in the fourth quarter of 2012 compared to $77.1 million last quarter. Premium income increased by 0.5% over last year due to sales growth and generally favorable persistency trends in recent quarters. But operating revenue declined 0.3% as net investment income declined by 4.1% due to lower assets allocated to this line and a decline in the investment yield. The benefit…

Great. Thank you, Tom, and good morning, everyone. This morning, I'll cover the profit trends we experienced in our business segments this quarter, a little more detail on our growth trends, and I'll also update you on our investment results and capital position. First, on operating results in the fourth quarter, our Unum US segment again produced good results with growth in operating earnings of 2.3% and generally stable risk experience across each of our product lines. Focusing on the risk results, first, with group disability, the benefit ratio has remained stable at 84.5%, which is consistent with last quarter as well as a year ago. The underlying experience this quarter was again favorable, with stable claim incidents, continued strong claim recoveries and the ongoing benefit of price discipline on new sales as well as renewals. These favorable trends are somewhat offset by the interest rate environment and the impact of the 50-basis-point reduction we made in the reserve discount rate for group long-term disability new claim incurrals in the third quarter. All in all, we're quite pleased with the level of profitability we are experiencing in the group disability line, with a full year ROE of just below 13%. The group life and AD&D line was again a strong earnings contributor this quarter at $55 million. The benefit ratio was 72.5% in the fourth quarter, which is consistent with the third quarter level, with mortality running slightly higher than previous quarters. Margins in this line of business also remain very favorable, with ROE for the year at approximately 16%. And finally, in Unum US, the supplemental and voluntary line continues to be our largest earnings generator at $83.6 million this quarter, an increase of 7.6%. [Audio Gap] year and risk experience also remains generally favorable. The fourth quarter benefit…

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

[Operator Instructions] Our first question today is from Suneet Kamath from UBS.

So I wanted to focus on the U.K. and the long-term care business which surprised relative to what we were expecting. So I was just wondering if you could comment on 2 things. First, in terms of the U.K. and LTC, how much of the better-than-expected claims experience would you say is sort of a quarterly variation that could reverse? Or how much of it is just some of the actions that you've been taking in terms of pricing? And then sort of related to that, specifically on pricing, can you talk about where we are with respect to the repricing of the U.K. business, maybe a percent of the way through that? And then any feedback you've gotten from the regulators as you've tried to reprice the in-force long-term care business?

Let's see if I can sort of organize that a little bit, Suneet. Let's start with just the U.K. if we can and maybe just break it down into 2 -- a couple of pieces. One is your discussion -- your question about group life pricing and where that whole stands; and Rick, maybe we can talk a little bit about the financial outlook. But maybe, Kevin, starting with you back on the U.K. pricing of the group life block and where that stands and perhaps maybe where some of the early indications of its effectiveness are.

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

Maybe just shifting, then, if we could, Rick, to you, just on an outlook for the U.K., just sort of put the quarter in perspective as we go to 2013.

Yes. So as you look at the different elements you asked about claims, I think the life business running similar to what we saw, and we're taking actions to move through that. The disability line actually looked pretty good, but back -- I would say, it's back more in a range of our expectations as opposed to what we've done in the third quarter. When you take that all together, as we look out next year, we came in close to GBP 22 million in the quarter. We're going to see that, I think, stabilize over the course of the year. So we go into a relatively flat plan as we're looking out into 2013. But we're hopeful with what we saw in the fourth quarter that things can look pretty good there.

Great. And then on long-term care?

Yes, maybe we'll break it out into 2 pieces again, Suneet. And maybe, Kevin, just on operational price actions and things we talked about in December. I think we continue to make progress on that.

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

Rick?

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

Got it. And then just one quick follow-up on the long-term care, if I could. If I look at your block, I think it looks like maybe half of it in terms of premium is group LTC and the other half is individual, roughly. Just as you're going for these price increases, do the regulators look at individual versus group differently? Is one more likely to get a rate increase versus the other? Or is it pretty consistent across the 2 product lines?

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

Moving on, we have a question from Jay Gelb from Barclays Capital.

I wanted to get your perspective on how an improvement in the economy and payrolls would essentially act as a tailwind to your overall business, particularly in U.S.?

Kevin, you want to pick up on it? You spend a fair amount of time on that.

Yes. Well, 2 things would benefit us in the U.S. in terms of improvement in the economy -- well, 3, I'll talk to 2. Wage inflation would be one. The large majority of our group life and group disability lines of business are directly related to covered payroll, and the benefits are tied to payroll. So to the extent payrolls go up, benefit levels and premiums go up. Second, I think a positive effect would be growth in employment. As you know, we tend to target markets in our group business toward economically less downward-sensitive industries, and we try to target those that are growing. And so to the extent that we get overall employment growth, that would benefit us on the sales side. It would probably benefit us on the in-force book of business side as well. And so we would start to get some sort of positive uptick in terms of earned premium. And then the third piece of the economy probably is interest rates, and I'll let Rick talk to that.

Yes. No, I think when you look at -- it's certainly tied together in terms of actions that are being taken by the Fed, as well as just the overall improvement in the economy. As we start to see rates come up, certainly, a benefit to our business. All of our product lines that we have out there benefit from a rising interest rate environment. So we certainly will look forward to that, although we have not factored that into our plans today.

Okay. And then just to get your level of comfort in the U.K. business and the runoff operations, are things tracking according to plan there?

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

Right, right. Very, very similar to what we had to do with resetting our U.S. block of business. As you know, we've taken a couple of different actions in the U.K. on the group income protection side. We're bolstering our claim management practices, transferring some capabilities and skill sets from the U.S. to the U.K. I think some of that is starting to flow through when we had very solid group income protection claim management results, risk management results during the fourth quarter and expect that to continue going forward. On the group life side, we already talked about the rate increases that we're placing. We're also managing mix of business sort of downward, toward more core market business. And we also are putting a variety of other internal underwriting measures in place. That would probably have a downward effect on persistency in sales, at least in 2013, until sort of the market normalizes.

And we'll go next to Yaron Kinar from Deutsche Bank.

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

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

Okay. And then the U.K. segment, could you -- I'm sorry if I missed this, but can you provide a little more color on the reinsurance program? Does that -- you put on kind of the size or structure of it?

Absolutely. Rick, you want to pick that one up?

Yes, certainly. There's 2 elements to it. And as I mentioned, it's really to reduce the volatility of this business. Our core line there is certainly our group disability side. And so as we've had the challenges here, we're taking action, using reinsurance to help us mitigate some of that volatility. Roughly, we're going with a 50% quarter share on the block. So you actually reduce capital profits, premiums associated with that block. And then we're also reducing our retention levels in terms of what we retain, cutting those down to 500 million -- or GBP 500,000 pounds per life. So actually, some good restructuring there. It's not going to have a large impact on our earnings to do that. And we think it's a good use and also frees up some capital behind that product line as well. So we're happy with the transaction, and we'll see how that plays out over the course of the year.

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

Rick?

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

And if I could just add one thing too, Rick. I think we closed the third quarter with $762 million of cash, and we were above $800 million this quarter. And so there's some fluidity between RBC and risk-based capital, actually. And it's probably worth everybody keeping those 2 numbers in mind as we think about this whole capital position.

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

And we'll take a question from Randy Binner from FBR. Randy Binner - FBR Capital Markets & Co., Research Division: Just one on the discount rate change. The -- we look at the 10-year and then credit spreads have been tighter too. And so the 10-year, I guess, is moving higher, credit spreads are still tight. But my question is, I mean, what would need to change in those metrics we look at as analysts before we would expect the need for another discount rate change?

Rick?

Well, I think that the discount rate change we made in the third quarter was reflective of those rates that we see today. And so I think that things would have to get quite a bit worse before we would change the discount rate. Something we always look at, but we made a pretty aggressive move in the third quarter. And I take you back to the fact that we do maintain a margin in that line. So when you think about that, it can be more fluid. It's not directly tied to how we put money to work on the quarter, it's taking into account how we're putting money to work, combined with the fact that we have roughly an 87-basis-point margin between our earned rate and our discount rate. So we can manage through that. The move we made, I think, was prudent in the third quarter, and we'll take that out. I'm sure we'll come back and look at that as we get out towards the end of this year. Randy Binner - FBR Capital Markets & Co., Research Division: Okay, understood. And then on Colonial, I just kind of had a couple broad questions. And so it's really starting with the benefit ratio. I mean it came in kind of where we thought it would, maybe 52.5%. And that's been where we've been running, but it's higher than we were I guess in kind of '11 and looking back to '10. And so the first question is should we expect that to be a little bit higher kind of at the current level going forward? And then just if you could kind of talk about how the economy and competition might be affecting the sales outlook for those products in '13.

Maybe we'll flip the 2 around, actually, Randy, and ask Randy Horn to speak to the business and the operations in the economy. And then maybe, Rick, you can just touch briefly on the outlook side of things. But, Randy, just want to sort of set the stage with the environment?

Sure, Tom. Good morning, Randy. Overall, the economic environment does continue to provide some headwinds, as Tom said in his opening comments. But we continue to see significant opportunity in our target markets, which is that small to midsize employer on the commercial side and then the public sector. A lot of the pressure we saw in 2012 and in -- continuing into the fourth quarter of last year was in that large-case commercial account, greater than 1,000 employees. We see a lot of volatility there, and it's not a strong area of emphasis for us. So we feel by staying strongly focused on our target markets, that there's still a lot of underpenetration in those markets, and we see a lot of opportunity there. We have very strong results in the public sector, as Rick mentioned, in the fourth quarter. We're heavily focused on the local government and education side there. And even though, again, the economy is still not our friend, Randy, overall, we still see a lot of opportunity in the highly underpenetrated markets. Randy Binner - FBR Capital Markets & Co., Research Division: And just on competition, I mean, Aflac had kind of 0% to 5% sales growth, which is probably consistent with what most of us are looking at Colonial. But I mean, is there anything -- this is an area of the industry that doesn't change that much, to be honest, from a competition perspective, but didn't know if a better economy or rate pressures and other parts of businesses have changed who you're seeing from a competitive perspective.

Not seeing any significant change there, Randy. There certainly are new entrants to the voluntary benefits marketplace, but it's been fairly gradual over time. And in our target markets, we're still seeing primarily the same competitors: Aflac, Allstate, American Fidelity. So really pretty consistent on that side of it.

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

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

Chris Giovanni from Goldman Sachs has our next question.

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

Chris, as you know, from sort of, over the last 3 or 4 years, we've got a consistent philosophy in large-case, which was basically to just grow at the average rate of the marketplace over time and to be pretty disciplined about how we pursue cases, be opportunistic. So you see some quarters when we have strong large-case sales, you'll see some quarters where we have weak large-case sales. We look for steady sales growth in our voluntary and core market business, but we look for opportunistic sales growth in our large-case national client group business. Our partnership with UnitedHealthcare has gone great. In our national client group large-case sector, we've been aggressively sort of targeting primarily the health care sector in our partnership with UnitedHealthcare. And more than half of our sales, around half of our sales in the fourth quarter came from that health sector and UnitedHealthcare partnership. We didn't write any jumbo cases. So we wrote a good volume, if you will, of large cases as opposed to 1 or 2 big large ones. And so I would say that it was a very, very good quarter for us. I wouldn't necessarily expect it to repeat itself in any following quarter. I think it's going to be, as it has been for the last several years, hit or miss depending on whether we see good disciplined pricing opportunity out there for long sustainable relationships with clients.

Okay. And then, Rick, you gave some pretty good insight in terms of the near- to intermediate-term strategy for the U.K. But I guess when do you expect we see that shift from stabilization to growth? Is that something we could see a year from now? Or could it take longer than that, just given the duration of some of the rate guarantees that you guys have out there?

I think we actually expect it to turn. I mean we would be hopeful we'd see a turn in the course of 2013, although we haven't really built that into our plans. I think we're being pragmatic in terms of how we expect that to come through. There's more to play out. But we certainly would look to see that as we get out into 2014.

Okay, great. And then just one last quick one. I guess regarding your hedging strategy, curious if you can comment at all on any implications from Dodd-Frank around collateral requirements or if it causes you to increase your cash balances at all.

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

And we'll hear next from Mark Hughes from SunTrust.

With the price increases in the Closed Block coming in later in the year, is that going to lead to declining loss ratios?

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

So when you look at the Closed Block, and it's 2 different pieces. Our individual disability block has been very stable, actually pretty good results we've seen over a period of time. We'd expect that to continue. On particular to the LTC side, which I think is what you're getting at. We'd actually expect it to be fairly stable. And so we've kind of put a high 80s number out there. This premium change that we're going to see flowing into these price increases, they're going to take place over quite an extended period of time. And so that's how we look at it, and it's going to take a while for it to be overly noticeable. And stability, I think, is what we're looking for behind this loss ratio.

Got you. And then the -- in voluntary within the U.S. business, that growth has decelerated a little bit. What's the outlook there?

Kevin?

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

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

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

[Operator Instructions] Our next question is from Steven Schwartz from Raymond James & Associates. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: A quickie first. Rick, earnings came in I think a little bit better than everybody was looking for. There were a few items here or there. What do you think -- what would be the base for the growth for 2013, I guess, in your mind, is the question that I want to ask?

Well, the base we're using as we lay out our outlook for next year is reported. So you think of the 315 as we talk about our 0% to 6% growth. If you look at it from a run rate perspective, it's probably a couple of cents lower than we expected, and that's more from a projection perspective. But I don't want to discount the fact that we had a very good quarter and exceeded earnings. But when you look forward, I think you'd probably pull it back a couple cents for a really good tax rate we saw in the fourth quarter and extrapolate off of that. But think about our baseline of 315 and 0% to 6% is what we put out there, how we expect to grow in 2013. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay, great. And then I want to go back to Unum UK, make sure I understand what is happening here. The reinsurance is on which line?

The group life line, purely. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: It's purely the group life line. And it's 50% of the in force, is that correct? Or is it 50% of new business?

Yes, that's correct. It's in force and new business. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. And -- [Audio Gap] 4Q '12 and 3Q '12. In 3Q '12, you stated that you thought there was just some volatility, that the normalized number in pounds was still GBP 20 million to GBP 25 million. I understand from Tom -- so you reported about GBP 22 million. I understand from Tom, there was about a $5 million hit from write-down of software assets, that's in the expense line there. That would kind of get you to 26, 27, somewhere in that range. Are you still thinking that, that GBP 20 million to GBP 25 million is the range for this year? And if so, how does the reinsurance play into that, if it does at all?

Yes, so the reinsurance we've incorporated in terms of our outlook, so when you think about that overall, GBP 20 million, GBP 25 million is still a range. And it takes you back to an earlier question we had on the U.K. I'd like -- I'm hopeful that it could be better over the course of the year. But we built our plans that it will be relatively flat year-over-year as we see some of these pricing increases take hold in combination with what we see from an overall perspective. So U.K. had a good quarter, but I think as we look forward, we're still expecting a flattish-type plan and looking to see if some of these good results we saw in the fourth quarter can sustain.

And one thing to clarify there, Steven, is the software impairment was GBP 3 million, which [indiscernible] $5 million, just to get the currencies straight. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Right. Sorry about that. And then on Colonial, I don't know if you answered this, how much of Colonial's business is individually underwritten versus group underwritten?

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

Yes, the vast majority of our business is still on an individual basis. It's north of 90%, so that 90% to 95% range is individual business and is underwritten. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. The reason why I ask that is that, Randy, you may or may not be aware that the EBSA came out with a FAQ regarding group indemnity insurance, and whether or not it would be exempt under ACA, certain types of products?

I am familiar with that, yes. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: So it sounds to me like that doesn't affect you at all. But would it generally affect the market in a major way?

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

Moving on, we'll hear from Mark Finkelstein from Evercore Partners.

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

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

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

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

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

We'll go next to Jeff Schuman from KBW. Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division: I'm sorry to do this, but I think I'm going to come back to the U.K. for the ninth time. And it's probably been well explained, but I didn't quite follow it. I guess what I think I'm hearing is that you're ceding a significant amount of the volatility and you're ceding some of the capital requirement, but you're keeping the earnings, which sounds like a great outcome, but maybe I didn't quite hear that right.

No...

So maybe I can try and clarify that, so we don't get #10 coming through. The -- it's actually full risk transfer, so we are ceding off the business. So when you look at that, the reason it's not a heavy income impact, it's because there's not a lot of income in the business right now. And so when we take that out, what we're actually able to get from the reinsurers is very similar to the profit levels that we earned at least over the last several quarters. So we'd like for that improve, but that's why the 3 of those things work together. Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. So at this point, they're participating in the modest level of profits, which is not much of a give-up. But then going forward, they would also participate in some of the upside, is that...

That's correct. That's correct. And so as we go through these repricing actions, we have to factor that in. Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then one kind of high-level question. I think I heard Kevin say that -- Kevin was asked a couple questions about kind of U.S. corporate America and the employer situation. And it sounds like you're not necessarily yet seeing a lot of emerging strength. Thinking back a few quarters, I think, at one point last year, your premiums started to lift a bit, and I think Tom was cautiously optimistic that maybe you were on the leading edge of seeing a little bit more strength in some of the employment markets. Is it fair to say now that maybe that's -- it's a little early to identify that strength?

Yes. Jeff, Kevin here. I would say it's bounced around a bit. We -- in the old days, pre-2009 or whatever, we'd get 2% to 3% of sort of top line in-force lift from wage inflation and employment growth. Over the last 4 years, it's been basically plus or minus 0. Yes, I think there was 1 year, it was actually slightly negative. This year, our top line growth came primarily from a combination of a strong sales year and a very strong persistency year, plus that persistency held up in spite of moving prices up. And so that's what's really helped our top line. But in terms of whether the economy has turned or not, I'm no economist, I'm just saying that it isn't showing up right now, nor are we counting on it.

Our next question is from Seth Weiss from Bank of America Merrill Lynch.

A quick question on the LTC. I was just a little bit confused by recent remarks that the improvements in earnings would be gradual over time. I thought you had mentioned earlier in the call that you're 60% of the way through this process and that we would see effects flowing through late 2013, 2014. Maybe if you just help me understand the dynamics of that.

Seth, yes, we're 60% of the way through the seeking approvals process. The actual execution of the rate increases doesn't start until during basically somewhere around the second quarter of this year. Those will roll out gradually across the book. And then the effect on earnings from that top line in coming from the rate increases will emerge also gradually. And so I think as Rick -- I think Rick mentioned that we'd start to see a little bit of that effect the end of 2013, a little more of that effect in 2014 and then going forward. But it will emerge gradually, and we expect, therefore, the loss ratio to stay within that range, stabilized range we think of 85% to 90%.

Okay, great. And if we think about this cycle of how long it takes to reprice the book, is it 2 to 3 years? Is that a fair sort of assessment when we start thinking about late 2013 as a starting point?

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

Okay, great. Very clear. And just one high-level question on capital. You've been pretty consistent about signaling $500 million next year. I don't know if that will still have a pretty nice cash cushion. When we think going forward, what's the main trigger in terms of bringing that down? I believe you said macro events. So if we think about sort of main macro triggers, maybe if you could help take us through that?

Rick, you want to pick up on that?

Are you talking about the excess? When you say the trigger, in terms of bringing that down, I think when you look at...

The excess, yes.

Yes, the excess. I think as we look at that, we've been very consistent over the last several years, and we just don't see the environment yet where we want to take those down to certain levels. You can look at what's going on in the economies around the world, there's just a lot of unknowns out there. And so we feel very good about the $500 million that we've been able to do over the last several years. We think it's a good use of our capital. But I think as we look forward, as we even said as we're going into 2013, we don't expect to take down those levels of excess capital in any meaningful way.

And that last question will come from Sean Dargan from Macquarie.

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

Rick?

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

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

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