Unum 2012 Annual Report Download - page 23

UNUM 2012 ANNUAL REPORT 21
Our Colonial Life segment reported an increase in segment operating income of 1.6 percent in 2012 compared to 2011, with higher
operating revenue partially offset by less favorable risk results and higher amortization of deferred acquisition costs. Premium income grew
5.2 percent in 2012 compared to 2011. The benefit ratio for Colonial Life was 52.5 percent in 2012 compared to 51.9 percent in 2011 due to
less favorable risk results in the life and cancer and critical illness lines of business, partially offset by a more favorable benefit ratio for the
accident, sickness, and disability line of business. Colonial Life sales decreased 1.1 percent in 2012 compared to 2011, with a slight increase
in core commercial market segment sales, which we define as accounts with fewer than 1,000 lives, offset by declines in large case
commercial market segment sales and sales in the public sector market. Persistency continues to be strong and was higher for all product
lines in 2012 compared to 2011.
Our Closed Block segment reported a decrease in segment operating income of 22.9 percent in 2012 relative to 2011, excluding
the charges discussed in “2011 Long-term Care Review and Individual Disability Closed Block Reserves” contained herein. Also excluding
these charges, individual disability risk results were favorable compared to 2011 due to higher claim recovery rates and a decrease in
reserves for existing claims, while long-term care risk results were unfavorable compared to the prior year due to higher claim incidence
rates, partially offset by higher claim resolutions.
Our investment portfolio continues to perform well, although our net investment income declined slightly in 2012 compared to 2011,
primarily due to a decline in yield in invested assets as we continue to invest new cash flows at lower rates. Our asset quality remains
strong, with a net unrealized gain on our fixed maturity securities of $7.2 billion at December 31, 2012, compared to $5.8 billion at
December 31, 2011.
We believe our capital and financial positions are strong. At December 31, 2012, the risk-based capital (RBC) ratio for our traditional
U.S. insurance subsidiaries, calculated on a weighted average basis using the NAIC Company Action Level formula, was approximately
396 percent, compared to 405 percent at December 31, 2011. The decline relative to 2011 results primarily from higher levels of capital
required to support our business growth, but our RBC ratio at year-end 2012 is within our target range of 375 percent to 400 percent. Our
leverage ratio, when calculated using consolidated debt to total consolidated capital, was 30.4 percent at December 31, 2012, compared
to 28.7 percent at December 31, 2011. The increase was due to the August 2012 issuance of $250.0 million of senior notes and the increase
in short-term debt related to securities lending agreements outstanding, partially offset by our 2012 principal payments on the debt of
Northwind Holdings, LLC (Northwind Holdings) and Tailwind Holdings, LLC (Tailwind Holdings). Our leverage ratio, when calculated
excluding the non-recourse debt and associated capital of Northwind Holdings and Tailwind Holdings and the short-term debt arising from
securities lending agreements, was 25.3 percent at December 31, 2012, compared to 23.5 percent at December 31, 2011. Cash equivalents
and marketable securities held at Unum Group and our other intermediate holding companies are a significant source of liquidity for us and
were approximately $805 million and $756 million at December 31, 2012 and 2011, respectively.
Further discussion is included in “Consolidated Operating Results,” “Reconciliation of Non-GAAP Financial Measures,” “Segment Results,”
“Investments,” and “Liquidity and Capital Resources” contained herein.
Outlook for 2013
We anticipate the general environment for 2013 to be similar to 2012, with below-average economic growth and a continuation of
low interest rates. While the environment will remain challenging, the need for our products and services remains strong. We believe we
are taking the needed actions to protect our solid margins and returns and the impact of our pricing and risk actions will likely not have a
favorable impact on our financial results until 2014 and beyond. While we anticipate that our 2013 operating growth will be below our
long-term targets, we currently believe that our per diluted common share after-tax operating income growth will be neutral to positive
relative to the level of 2012.
During 2013, we intend to remain focused on disciplined top-line growth in select markets, continued effectiveness in our operating
performance, and a consistent, sustainable capital generation and deployment strategy. We continue to believe that our strategy of
delivering a broad set of financial protection choices to employees while also enabling employers to define their financial contribution in
support of those choices should enable us to continue in a leadership position in our markets over the long term.