Northwind Individual Income Protection Closed Block Securitization Transaction. (Posted on 10/31/2007)

Transcription

1 Northwind Individual Income Protection Closed Block Securitization Transaction (Posted on 10/31/2007)

2 Safe Harbor Statement This presentation includes forward-looking statements, which are statements that are not of current or historical fact. Actual results might differ materially from results suggested by these forward-looking statements. Additional information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission, including information 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 December31, 2006, and subsequently filed Form 10-Qs which can be found in the Investors and Shareholders section of our website at In addition, these statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. This presentation includes certain non-gaap measures for which a reconciliation to the most directly comparable GAAP is provided. 2

3 Northwind Securitization An important element of our business strategy has been to more efficiently manage the capital supporting the IIP-Closed Block business. The Northwind securitization transaction accomplishes this objective by creating a more efficient capital structure which has also been validated by both rating agencies and financial markets. Unum has clearly transitioned from a company that raised capital to one that generates capital over the past three years, and the Northwind securitization significantly accelerates the availability of excess capital. We have formalized our capital management philosophy to guide our capital redeployment plans. This strategy contemplates supporting our business growth plans and increasing our financial flexibility at both the insurance subsidiary and holding company levels. 3

4 Capital Management Philosophy Our priority is to maintain sufficient financial flexibility to support our operations over various economic cycles and to respond to opportunities in the marketplace while positioning our Company for improvements in its credit ratings. We have set in place several financial targets which will guide our capital management decisions including: Maintain a risk based capital ratio of 300 percent or greater for our traditional U.S. insurance subsidiaries. This is to be measured on a weighted average basis using the NAIC Company Action Level formula. Maintain leverage at approximately 25 percent. Leverage will be measured as debt to total capital (defined as debt plus stockholders equity, excluding the net unrealized gain or loss on securities and the net gain or loss on cash flow hedges) excluding the non-recourse debt and associated equity of Tailwind Holdings and Northwind Holdings. Maintain excess capital at our holding companies sufficient to cover one year of fixed charges (measured as interest expense plus common stock dividends) plus a capital fund which will vary with business and economic conditions. Maintain a common stock dividend yield that is near the median of our peers. We consider any capital above that needed to achieve and maintain these metrics to be excess capital available to fund share repurchases, business growth, or acquisitions. Our goal in allocating excess capital is to maximize risk-adjusted shareholder returns over a three to five year time period, with share repurchase used as the benchmark for evaluating uses for excess capital. 4

5 Allocated Stockholders Equity by Segment IIP - Closed Block Actual Allocated Stockholders Equity as of September 30, Q07 Leveraged ROE Core Operations - Unum US - Colonial - Unum UK $2, % IIP Closed Block We have limited ability to improve ROE for the IIP- Closed Block through operational improvements, but we can put in place a more efficient capital structure and boost overall consolidated ROE from its 3Q07 level of 11.2% to approximately 11.9% pro forma $6, % ($ millions) 5

6 The Transaction and Related Actions The Northwind transaction is a securitization which creates a more efficient capital structure for our business, validated by the financial markets and rating agencies. Two activities are occurring: Insurance Securitization Forming new holding company (Northwind Holdings, LLC) which issues $800 million in private offering Capitalize a newly created captive reinsurance company (Northwind Re) Reinsure Closed Block business to new reinsurance company Extraordinary dividends paid from insurance subsidiaries to holding company Capital Redeployment Plan Boost RBC to 320% Debt reduction of $800 million $150 million retired in Feb 2007 $150 million PINES call $400 million debt tender $100 million other debt retirement Target holding company liquidity of $300 million Common stock repurchase of up to $700 million 6

7 Part I: Insurance Securitization Allocated Stockholders Equity, IIP Closed Block as of September 30, 2007 Actual Pro Forma $2,594 $2,190 $800 $1,390 Amount Represented by Non-Recourse Debt Amount Represented by Unum s Allocated Stockholders Equity Benefits Financial markets validate appropriate reserves and capital level; less total allocated stockholders equity Replaces Unum capital with financing tied to block s performance; no refinancing risk No recourse to Unum Group creditors Increases financial flexibility at subsidiary and holding company levels ($ millions) 7

8 Part I: Insurance Securitization (continued) Financial Steps in the Securitization +$800 Results Ceding companies capitalized at 300% RBC +$1,600 Northwind Re capitalized at 200% RBC -$1,270 $1,130 Pricing of Northwind Holdings debt validates appropriate capitalization for reinsured policies $1.1 billion available for use by Unum Group Statutory Capital Potentially Available from Closed Block Non-recourse Northwind Debt Capitalization of Northwind Re Net Proceeds from Securitization ($ millions) 8

9 Part II: Capital Redeployment Plan Financial Steps in the Capital Redeployment Plan Results +$1,130 RBC increases to 320% Leverage maintained at 25% -$350 Holding company liquidity above target of one-times fixed charges $925 -$800 -$700 >$300 Share repurchase of up to $700 million ROE enhanced by 70 basis points; EPS increases with share repurchase Holding Company Liquidity Estimate Prior to Northwind Net Proceeds from Securitization Increase Capital & Surplus of Insurance Companies Debt Repurchase Maximum Stock Repurchase Estimated Net Cash Flow for 2008 Holding Company Liquidity Estimate ($ millions) 9

10 Core Operations Actual as of 3Q07 Unum UK Colonial Allocated Stockholders Equity $1,009 Leveraged ROE 32.4% Unum US $0.8 $ % Unum US Group Income Protection operating performance accounts for low ROE. Our focus remains on improving the profitability of the Unum US GIP line in order to drive further improvement in ROE. $4, % ($ millions) $6, % 10

11 Appendix 11

12 Mechanics of the Transaction Step 1: Forming new holding company (Northwind Holdings, LLC) which issues $800 million of debt Step 2: Capitalize a newly created captive reinsurance company (Northwind Re) Step 3: Reinsure Closed Block business to new reinsurance company Step 4: Extraordinary dividends paid from insurance subsidiaries to holding company Unum Holding Company 4 Excess Capital Released with Risk Transfer Equity Dividends Over Time Northwind Holdings, LLC Premium Bond Insurer Credit wrap Ceding Commission Capital 2 Dividends Over Time Proceeds 1 Interest and principal Investors (non-recourse to Unum) Insurance subs PLA, PRL, UA 3 Reinsurance contract Northwind Re 12

13 Non-GAAP Reconciliation (in millions) As of As of September 30 June Average As Reported Total Stockholders' Equity (Book Value) $ 7,830.8 $ 7,371.6 Less: Net Unrealized Gain on Securities Net Gain on Cash Flow Hedges Total Stockholders' Equity, As Adjusted 7,347.2 $ 7,158.2 $ 7,252.7 Total Debt 2,460.2 Total Capital $ 9,807.4 Three Months Ended September 30, 2007 Leveraged After-tax After-tax Allocated Operating Unum UK Operating Equity Income (Loss) Reserve Allocated Income (Loss) Annualized As of Average Average Average Before Net Release and After-tax Before Net Leveraged September 30 Allocated Allocated Leveraged Realized U.K. Tax Law Interest Realized Return 2007 Equity Debt Equity Investment Loss Change Expense Investment Loss On Equity Unum US $ 4,539.8 $ 4,527.6 $ (1,194.1) $ 3,333.5 $ 99.4 $ - $ (14.1) $ % Unum UK 1, (235.1) (13.3) (2.9) % Colonial (204.1) (2.4) % Core Operations 6, ,324.8 (1,633.3) 4, (13.3) (19.4) % Individual Income Protection - Closed Block 2, ,627.2 (641.9) 1, (7.7) % Corporate and Other (1,638.4) (1,699.3) 2, (17.1) % Total $ 7,347.2 $ 7,252.7 $ - $ 7,252.7 $ $ (13.3) $ - $ % Proforma Three Months Ended September After-tax Operating Income, Before Net Realized Investment Loss Excluding Unum UK Reserve Release and U.K. Tax Law Change $ Share Repurchase / Debt Activity (9.5) After-tax Operating Income, Before Net Realized Investment Loss, Proforma $ Average Total Stockholders' Equity, As Adjusted $ 7,252.7 Share Repurchase / Debt Activity (709.5) Average Total Stockholders' Equity, Proforma $ 6,543.2 Assumptions for Proforma Calculations: $800m Northwind debt issued at the beginning of the quarter and one quarter's worth of associated interest expense. $650m of existing debt assumed repurchased at the beginning of the quarter and one quarter's worth of associated interest savings. $700m of common stock is repurchased at the beginning of the quarter and one quarter's worth of associated lost net investment income from the cash outflow. Note: Our revised leveraged ROE calculation involves: 1) The allocation of Tailwind and Northwind debt and the related after-tax interest expense specifically to the Unum US GLTIP line of business and IIP - Closed Block segment respectively; and 2) allocation of the remaining debt and after-tax interest expense to all product lines based on each line's prorata share of allocated stockholders equity to consolidated stockholders equity. Previously we allocated total equity and the total after-tax operating loss from our corporate segment, not just the portions of equity and expense associated with debt. Annualized Return on Equity, Proforma 11.9% 13