To Our Shareholders, Customers and Colleagues

Reflecting our commitment to staying focused and disciplined, 2011 was another strong year for Unum. Focus and discipline have served us well in the past, and I believe that will continue to be the case as we look toward an improving but still challenging environment ahead. While I am very pleased with our overall performance, this is no time to be complacent, and in 2012 our focus will continue to be on the principles that have contributed to our past success.

Our Performance

Despite some persistent challenges, through the efforts of our nearly 10,000 employees we once again delivered on our commitments to our customers, shareholders and all the stakeholders that are so important to our company. Although improving, continued high unemployment in both the U.S. and U.K. is adversely affecting the growth rates in our businesses, while this prolonged period of low interest rates also poses challenges for our company and industry. Despite these pressures, in 2011 we grew the businesses we targeted for growth, generated solid profitability in our core businesses, and maintained a solid financial foundation. Among the highlights for the year:

  • We delivered pre-tax operating income of $1.3 billion and after-tax operating earnings of $897 million;
  • Earnings per share grew by almost 10 percent, well ahead of the industry average, while our return on equity remained above the industry average; and
  • We finished the year with a very strong balance sheet, investment portfolio and capital position.

Again this past year we have been fortunate to have two sources of value creation: our business operations and an active program of returning capital to shareholders through dividend increases and share buy backs. Since the fourth quarter of 2007, we have repurchased nearly $1.7 billion of stock, reducing our outstanding share count by 19 percent — the lowest level since 2002 — and raised our quarterly dividend by 40 percent. We believe that a business capable of both growing and returning capital to shareholders will continue to generate above-average, long-term returns for shareholders. While I was not happy with our stock's performance in 2011, we continued to outperform our industry for the year just as we have over the past three- and five-year periods.

I mentioned earlier our strong balance sheet. A significant contributor to that is our investment portfolio, which continues to perform well. The emphasis we've placed on sound risk management has led to steady investment results, and our credit quality remains among the best in the insurance industry.

Our success, though, goes well beyond just financial results. We strive to be a company that is viewed not just for its financial performance but as a leader in our industry, in our communities, and with our employees — a leader in every sense of the word. I am very proud of the kind of company we have become, and these are just a few examples:

  • Our customer satisfaction ratings have remained at or near record levels;
  • Our company and employees continue to give back to our communities in many ways, including more than $12 million in financial and volunteer support to a broad range of charitable organizations;
  • We continue to create a positive work environment, which is a real competitive advantage, and were named a "Best Place to Work in Insurance" for the third consecutive year; and
  • We were once again named among the "Greenest Companies in America."

Although we have come a long way, this is no time to relax. The environment will continue to change, and we will always be confronted with new issues and challenges. As our track record indicates, though, our people are quick to adapt to the changing environment and don't shy away from tough decisions. A recent example of this was our decision earlier this year to discontinue the sale of new group long-term care policies. This was a difficult decision because we recognize there's a need in the market for this coverage. After a very thorough analysis, however, we concluded that given today's historically low interest rates and the growing number of challenges in pricing and managing this product, it simply no longer met our business and risk management objectives.

At the same time, we elected to move both our group and individual long-term care business (which we discontinued selling in 2009) into a closed block that is reported separately from our ongoing businesses. While there was a cost in taking this action, we can now focus our resources on those product lines that present the best long-range opportunities for us and our stakeholders. We will of course continue to provide our long-term care customers with the high-quality service they have come to expect from Unum. Again, I am very proud of how the organization confronts issues such as this and is willing to make the tough decisions.

So, as I said, 2011 was another strong year and I'm proud of the culture we have established at this company. We have built momentum over the past five years that I believe we can sustain into the future.

Our Business

Speaking of the future, I have always felt that our business is an honorable one that serves a very important purpose: providing individuals and their families with the financial security they need to better cope with the loss of a loved one or the inability to work due to illness or injury.

In many ways, the need for what we do has never been greater. The economic downturn has left consumers, businesses and governments all struggling to adapt. Individual consumers — including the more than 60 percent of Americans who live paycheck to paycheck — have neither the personal savings nor insurance protection to provide for themselves or their families if a life-changing event were to occur. At the same time, governments are struggling with growing deficits and may be unable to be that "safety net" they have been in the past, forcing individuals to take more personal responsibility for their own financial security.

For most workers, and especially those at lower and middle income levels, the workplace has become the ideal place to obtain that peace of mind. Here they get both the information needed to be an informed consumer as well as access to affordable protection that would likely not be available elsewhere. Workplace benefits have many advantages for employers as well, including enabling them to attract and retain top talent and build greater loyalty and engagement with their employees — all of which improves the employer's competitiveness.

Last year, we engaged Charles River Associates to measure the impact that employer-sponsored benefits have on consumers and on public policy. While I would encourage you to read the full study at /, there is one particular aspect I want to highlight here, and that is the connection our business has to our public programs.

According to the study, disability benefits acquired through the workplace in the U.S. protect almost 600,000 families a year from impoverishment and dependence on public assistance programs like food stamps, which translates into direct savings to taxpayers of up to $4.5 billion annually. To help put this in perspective, only 33 percent of those in the workforce have disability coverage, so as we expand ownership for this critical coverage it not only benefits individuals and their families, but also has a positive impact on our public spending.

We also sponsored research in the U.K., where consumers face a very similar challenge. With only 11 percent of Britons covered by private disability insurance, the vast majority rely on the government to provide financial support if they become incapacitated. In spite of the huge cost to the government of providing these benefits, however, the level of protection is inadequate for most families to meet their basic needs, and the current budget pressure certainly doesn't allow for expansion of this program. As in the U.S., private sector coverage can better protect the individual while at the same time relieve some of the burden on the government through reduced public assistance outlays.

Simply put, post financial crisis, the need for financial protection has never been greater, and I continue to believe Unum is uniquely positioned among benefit providers to capitalize on these opportunities.

Since the value of our products and services extends well beyond the individual, and we now see the impact to public policy, we have taken a much more active role in creating awareness among policymakers in both the U.S. and U.K. about the importance of employer-sponsored benefits — especially to those at lower and middle income levels who often lack access to this critical protection outside the workplace. Our hope is that through a more active dialogue between the public and private sectors, we will find ways to work together to make basic insurance protection like this more accessible to all consumers.

Our Outlook

As we look ahead, we have to assume that the headwinds we've faced over the last few years — particularly low interest rates and high unemployment — will continue for the foreseeable future. Although recent signs in both indicators are somewhat encouraging, both the pace and sustainability of further improvements are questionable. We have therefore assumed in our plans only modest improvement in these areas in 2012.

While we have proven that we can successfully operate in this type of environment, I am concerned that there is a significant cost (not benefit) to many consumers from today's low interest rates. Low rates may reduce borrowing costs, which may have a positive impact on economic growth and housing prices, but they are very harmful to savers (including retirees) and financial institutions that provide needed financial services to consumers of all income levels. To compensate for these persistently low interest rates, financial service providers eventually must charge more for their products. This, of course, is counter to our goal of simplifying our products and lowering the cost to make them more affordable to all consumers. I hope that as we move into 2012, interest rates are able to move to more market-driven levels and we gradually reduce the support that is good for some but very harmful for others.

Regardless of the environment, looking ahead we believe we have outstanding opportunities to profitably grow our business in selected markets. Our broad product and service offering, consistent high-quality service and strong financial platform position us well and continue to be tremendous assets. The result is that in 2012 we expect to moderately grow our business, something we have consistently done over the last eight years.

As in the past, if we execute our plans well we will continue to generate excess capital. Our track record shows that we have been very effective in returning that capital to shareholders, and we expect to continue this in 2012. Having the ability to create value through operating performance and capital management is highly valued and sets us apart from our competitors.

We have accomplished over the last several years what we said we would, and I believe we are in a position to continue to do so in the years ahead. We have responded to whatever challenges have emerged by focusing on our customers and maintaining the discipline that has served us so well in the past. I'm confident that we will continue to respond in this way because of our people, who are highly engaged in the business. They care deeply about serving customers and doing what is needed to help us achieve our goals, and they remain our greatest competitive advantage. I am forever grateful for what they do for this company.

Finally, I would like to thank our Board of Directors and my management team for the strong leadership they have provided. As I mentioned, we never shy away from making tough decisions and this group sets the right tone for that at the company.

In closing, this past year was another good one and I believe that we are well-positioned for the future. We will continue to take the actions needed to deliver value for our customers and solid financial results for our shareholders.

On behalf of all of us at Unum, I'd like to thank you for your continued support of our company.


Thomas R. Watjen
President and CEO