Unum Group
Q4 2007 Earnings Call Transcript

Published: 29 Jan 2008

[Operator:]

Good day and welcome to the Unum Group fourth quarter 2007 earnings results conference call. This call is being recorded. At this time, I would like to turn the call over to Mr. Tom White, Head of Investor Relations for opening remarks and introductions. Please go ahead, sir.

[Thomas A. H. White:]

Thank you and good morning everyone. Welcome to the fourth quarter 2007 analyst and investor conference call for Unum Group. As we get started, I want to remind you that today's remarks 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 Securities and Exchange Commission and are 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, 2006 and subsequently filed Form 10-Qs. Our SEC filings including our Form 10-K and Form 10-Qs can be found in the "Investor Information" section on our website at www.unum.com. Take note that today... the 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 reconciliation of any non-GAAP financial measures included in today's presentation can be found on our website in the "Investor Information" section. As you know, yesterday afternoon Unum Group reported earnings for the fourth quarter 2007. Net income in the quarter was $160.5 million or $0.44 per diluted common share compared to net income of $276.1 million or $0.80 per diluted common share in the fourth quarter 2006. Included in these results for the fourth quarter of '07 are net realized after-tax investment losses of $16.5 million or $0.05 per diluted common share. These losses were driven by the DIG B36 accounting, which resulted in a fourth quarter after-tax investment loss of $23.3 million. Excluding this DIG B36 accounting impact, net realized after-tax investment gains were $6.8 million in the fourth quarter. Also in the fourth quarter of '07 we recorded after-tax debt extinguishment cost of $36.1 million or $0.10 per diluted common share related to our fourth quarter debt repurchases, which were executed as a part of our capital redeployment initiative. Adjusting for these two items, income on an after-tax basis was $213.1 million for the quarter or $0.59 per diluted common share. On this call this morning are Tom Watjen, President and CEO of Unum Groups, the heads of our three major business segments, Kevin McCarthy, Susan Ring, and Randy Horn, as well as Bob Greving, Executive Vice President, Chief Financial Officer and Chief Actuary. At this time, I'd like to turn the call over to Tom Watjen.

[Thomas R. Watjen:]

Thank you Tom and good morning. You wouldn't be surprised to hear me say that I'm very pleased with the accomplishments of this company over the course of 2007, and certainly our results for the fourth quarter, I think reflects the merits, the good work, and a continuation of themes and actions we're building over the last several years. In the fourth quarter, excluding net revised investment losses and debt extinguishment cost, we reported earnings of $0.59 a share, which is 13% higher than the $0.52 reported in the fourth quarter of 2006 and ahead of the consensus estimate of $0.54. Our before tax operating earnings compared to the fourth quarter of 2006 increased by 16% with strong risk results across the company. We closed the year with record annual earnings in both Unum UK and Colonial and had very, very strong performance in Unum US, where we saw continued improvement in our group disability line of business, as well as strong performance across most of the other lines of business. Core markets sales trends were strong across all of our business segments, including Unum US, Unum UK, and Colonial. Let me give you, for instance, our case count for 2006 saw strong growth across all those businesses. In Unum US, our group disability case count grew 7% in 2007, our group life case count grew 12% in 2007, our Colonial case count grew 11% in 2007 and our UK case count grew 16% in 2007. So, again strong performance in our core markets across all of our businesses. We continued to remain disciplined in the large case markets as we still seek fairly aggressive pricing actions in certain segments of the market. You'll also note in the quarter too we actually saw some expenses increase, but as we go to the details of those expense increases, I think you'll find that much of those were either specific one-off expenses in the quarter or in fact, in many cases, investments that we are making in the business to assure ourselves that we're positioned well to profitably continue to growth the business in the future and Tom will have more to say on that in just a few moments. I have to say, I'm also extremely pleased with our overall investment results. Obviously, this is a very, very challenging investment environment. Our investment income continues to be very strong and through the efforts of our investment professionals, I believe our portfolio was very well positioned in this obviously unsettled times we have today. And again Tom will have more to say on that in just a moment. I mentioned earlier that we are making investments in the business, even though we're very pleased obviously with the results in the quarter and the trends that we saw over the course of 2007, we recognize that we have a tremendous opportunity to continue to grow our business and requires investment in all three of our businesses. Simply Unum, our comprehensive product and service offerings in our Unum US business has been launched on a limited basis and we're pleased… and we're very pleased actually with the initial market acceptance. We are continuing it to roll out in the early months of 2008 and are excited about its potential. Colonial has launched a new branding program to complement the corporate marketing efforts we launched a year ago. We believe this investment will help to accelerate long-term growth in sales and [inaudible]. And in the UK, we’ve also continued to pursue a number of new products and service offerings, which include over the long-term evaluating the voluntary benefit marketplace opportunities in the UK. As you know, with our third quarter announcement of earnings, we also announced our strategy to capital management, which obviously is going to play an increasingly visible role in creating shareholder value for this company. Let me touch briefly on a few items related to our capital management initiatives. Our first priority remains to maintain sufficient managerial flexibility to support our operations in both good and bad times, while also positioning for improvements in our credit ratings and of course responding to opportunities in the marketplace. While the US economy certainly appears to be at a weaker position, we closed the year in a very strong capital position and have a great deal of financial flexibility. Our traditional US life insurance company ended the year with a risk based capital ratio of 344%, substantially higher than our 300% target. Our leverage, excluding the non-recourse debt in capital of Tailwind and Northwind Holdings finished the year at 21.4%, well below our 25% target. Our holdings company liquidity was slightly in excess of $1 billion, well above our target to cover one year's... one year of fixed charges plus a cushion for business and economic volatility. Given the strength of our capital position and the progress we have made in redeploying the capital, following our securitization and frankly despite the challenging business environment, we fully intend to proceed with our previously announced share repurchase as soon as possible. Now, let me also spend a few minutes on each of the businesses because those can tend to get lost in a quarter like this, but again as I mentioned earlier in my comments, we had strong performance across all three of our businesses. And let me start with Unum US. Our pre-tax operating earnings for Unum US increased by 23%, with strong performance across most of our product lines. A lot of the attention is given to our group disability line of business, again we saw some good improvement there with the continuation of solid claim improvements in the quarter. The group disability benefit ratio for the quarter was 91.5%, down another 60 basis points from the third quarter and 250 basis points lower than the fourth quarter of 2006. The benefit ratio was within our guidance range of 90% to 92% for the fourth quarter and we remain confident that reducing the benefit ratio to the 88% to 89% range by the end of 2008 or early 2009 time frame is a realistic objective. We also enjoyed strong results across the other product lines, including our group life and accidental death and dismemberment line, where pre-tax income increased 30% and the supplemental and voluntary lines of business, where earnings grew 20%. While sales declined approximately 8% in total for the fourth quarter of 2007, there is a lot of very, very encouraging trends. Our core market sales, which again, just to remind you, this is sales to employers with less than 2000 lives, our core market sales were actually very strong, increasing 20% and at this point represents 65% of our total group sales, which again is a very important point as you think about the mix of business shift that has happened to this company. Large case sales activity continued to be challenging and we tend to remain disciplined and selective in our pursuit of this business. We had good momentum in our voluntary benefit line of business, with sales actually increasing over 14% for the fourth quarter and in our individual disability recently issued sales, which were lower in the fourth quarter… from for the fourth quarter of '06, but actually increased a very respectable 8% for the full-year of 2007. Premium persistency in our group lines was lower in 2007 than in 2006, but that was primarily driven by the loss of aggressively priced large case business. Case persistency, however, remained generally stable, reflecting the stability of our clock of core market business. Kevin McCarthy is available to give you more detail on our results, as well as any trends that we are seeing in the marketplace. Now, let me shift to Unum UK, where pre-tax earnings of... where we reported pre-tax earnings of $85 million for the fourth quarter or a 4% increase over the fourth quarter of 2006. This completes a record year of earnings for Unum UK. We continued to see very strong risk results with the benefit ratio of 60.8% in the quarter and 59.3% for the full year. Fourth quarter sales were lower in part due to a difficult sales comparison with last year when we benefited from accelerated sales from a legislative change involving employees' retirement age. Excluding the sales from this legislative change, sales for Unum UK increased 12% for the fourth quarter, again a very respectable result. Susan Ring is available to address any questions you may have on what we are seeing in UK market. And last but not least Colonial. Colonial actually reported 16% increase in pre-tax operating earnings of $58.8 million, which again also raps up a record year for that business in 2007. Results continued to reflect positive benefit experienced across all of our major product lines. Expenses were higher than normal this quarter as we invested in Colonial's new branding launch, an action which is designed to help improve our long-term growth prospects. Our sales for the quarter were actually very positive, increasing 12% compared to the fourth quarter of 2006 with strong results across each market sector. We saw good growth in our core markets with... core market activity with sales in less than 500 life market increasing 14.5%. We are also encouraged by the general market activity we see with new account growth up over 11% for the full-year 2007 and new sales rep recruiting increasing over 9% for the full year. So, again, some very good early indicators for 2008. Randy Horn is also available on the call this morning to address any questions you may have about what we are seeing in Colonial, the marketplace, then also specifically any questions you may have about the investments we made in branding and new product development at the Colonial business. I guess in summary 2000... I could summarize 2007 as being a very, very successful year for the company. Let me touch on a couple of reasons why I think so. First off, we have a strong operation... we saw strong operational performance across all of our core business segments. The favorable risk results, especially in our Unum US group disability area, but again the good risk results actually permeated all of our businesses in 2007. We also saw some very strong investment performance and it is not just with the investment income results, but again even the positioning of the portfolio, I believe, is very well positioned, which seems to be some very unsettled times in the market today. We continued to strengthen our capital position. We obviously announced in the third quarter our longer term plans for how we are going to manage capital, but again, the capital position of the company is very strong. We retained all the flexibility that we wanted to retain. As we’ve said before, we intend to continue to proceed with our $700 million share repurchase program that we announced in the third quarter. We also continued to improve the relationships with many of our key constituencies, especially with the regulators, in part that was driven by the successful completion of the claim reassessment process that goes beyond that. We just built a deeper and more trusting relationship with regulators, which will bode well for 2008 and beyond. And lastly, we have continued to invest in the business. As strong as the year ended, we recognized that there is even greater opportunity out there and we are continuing to make investments in that business... in the businesses to actually make sure that we continue to maintain that profitable, yet disciplined growth we’ve talked about to you in the past. Again, the plan here is a very simple one, it's execution. We've have got good plans. We are coming off some strong results in 2007 and again I can assure you that the entire organization in focused on the things necessary to be successful in 2008. And with that now... I'll now turn the call over to Tom White who will provide a little more detail on the quarter. Tom?

[Thomas A. H. White:]

Great. Thank you, Tom. I'll keep my comments this morning on the operating results fairly brief, but I do want to highlight the following. First, just some operating results highlights and I'll start with the Unum US group disability line. As Tom said, we continued to see improvement in the group disability benefit ratio and profitability and profit margin in the quarter. New claim incidence was slightly lower for group LTD compared to the third quarter and our claim recovery performance continues its solid levels. Also within group disability is our STD line of business, which continued to perform very well also with stabled claim incidence trends. The investment income in the fourth quarters are... we saw several million dollars lower than the average of the past few quarters and it reflects a lower level of bond call activity within this line of business. Finally, expenses ran somewhat higher in the fourth quarter, again this is for the group disability line, and this is largely due to higher investment in advertising and branding expenses and also product and service development costs, as well as higher incentive accruals. Moving to the Unum US group life and AD&D line, we saw an exceptionally strong level of profitability in this line this quarter with a benefit ratio of 69.5% compared to 75.9% in the year-ago quarter. Expenses also ran somewhat higher in the fourth quarter in this line, again reflecting the similar expenses as those recorded in the group disability line. Finally, the Unum US supplemental and voluntary line. We also had a strong quarter here in this line with BTOE increasing 19.6%, driven by generally strong risk results and premium growth of 7.6%. Also in supplemental and voluntary, the income from miscellaneous investment income was favorable in this line, with approximately $5 million this quarter from higher than normal bond call activity. This hired a normal bond call activity in net investment income in the fourth quarter was partly offset with higher operating expenses in the period. So, to summarize the results for the Unum US as a segment, we had strong risk management results, which more than offset expenses that were above our normal quarterly run rate. Net investment income, in aggregate, was in line with our expectations, and these trends produced growth in pretax earnings of 23% for the fourth quarter. We move to Unum UK. We continued to see generally favorable claims experience in the UK operations, especially within group life, with a benefit ratio remaining stable compared to the results of the past several quarters at 60.8%. Before tax operating earnings growth was approximately 4% in dollars, but did decline 2% in local currency. As we indicated at our Investor Day, we expect to see a slower rate of earnings growth and a slight downward trend in the margin for Unum UK as we invest in new growth opportunities. However, we fully expect the margins and ROE to remain quite strong, and this quarter was no exception as Unum UK, the un-leveraged ROE was a very robust 29.5% and the pre-tax margin again… pre-tax earnings relative to premiums was 33.8%. Net investment income in Unum UK in the quarter benefited from favorable performance in the index linked bonds. And then you will see expenses in Unum UK were about $4 million higher than normal, primarily due to the accrual of remaining least payments on a non-occupied facility over in the Unum UK operation. Moving to Colonial, again, excellent quarterly results, was a favorable experience in all the primary product lines. We continue to again expect a gradual rise in the benefit ratio to more normal levels in the low 50s, but expect that very gradually over time. You will notice that the expense ratio for the Colonial segment in the fourth quarter is higher than normal. This includes advertising and branding expenses, as well as new product launch expenses that were about $4 million above our normal run rate as we launched our new branding initiatives for Colonial. We expect to incur advertising and branding expenses in 2008 at a similar level as in 2007. However in 2007, those expenses were incurred entirely in the fourth quarter, whereas in 2008, the expenses will be incurred more evenly throughout the year. The closed disability segment, the results were $23.4 million there and generally consistent with our expectations for this segment following the securitization that we announced last quarter. Importantly, the claim trends were stable this quarter with new claim incidence remaining fairly stable and solid recovery experience again in the closed disability segment. A couple of other items to mention, the tax rate, you will see that the rate on operating income, this is excluding the debt extinguishment costs and the realized investment gains and losses, was not lower than normal at 30.5% and this is primarily due to the release of a FIN 48 tax liability of approximately $7 million. And also you will notice debt extinguishment costs with the $400 million debt tender, the $150 million bond call and other de-leveraging activities in the fourth quarter, we incurred after-tax debt extinguishment cost of $36.1 million. With this activity, we’ve completed $752 million of our planned $800 million in debt retirement. Our consolidated return on equity for the fourth quarter was 11.5% and for full-year 2007, it was 11.2%. The leveraged ROE for our core operations of Unum US, Unum UK, and Colonial was 17.1% for the fourth quarter and 16.7% for the full-year 2007, very strong results there. Finally, the trend of strong statutory earnings continued in the fourth quarter, with our fourth quarter net gain from operations, this is after-tax and excluding special items, was $227.3 million for our traditional US insurance subsidiaries and for full-year 2007, the net gain from operations after-tax and excluding special items totaled $850.3 million, which is an exceptionally strong performance. Regarding the claim reassessment process, very pleased to report that since the end of the third quarter, we have completed the reviews of the final 256 claims and the final examination under the multi-state regulatory settlement agreement is well underway and we anticipate its completion in the first half of 2008. I would like to close with a few comments on the investment environment in our investment portfolios. The current market volatility, particularly with the widening of corporate spreads on new investment opportunities continues to mitigate much of the impact that we are seeing in the decline in treasury rates. And obviously the ten-year treasury was down about 56 basis points in the fourth quarter. The new money yield for us in the fourth quarter was 6.18%, this compares to 6.48% in the third quarter, 6.31% in the second, and 6.07% in the first quarter. We had a high level of purchases of inflation index bonds in the UK, which tends to lower the reported new money yield. The overall portfolio yield declined by 4 basis points, however, importantly, the interest reserve margins remained generally stable compared to the third quarter 2000 levels that we outlined in our November Investor Day presentation. We enter 2008 with hedges in place on approximately $600 million of expected cash flows and this represents approximately half of the expected total cash flow to invest for 2008. From a portfolio quality perspective, we are happy to report that there have no material changes in the quarter. You should note that we have added a page to our statistical supplement, which provides some details on the asset to mortgage backed securities portfolio. Now, I'd like to highlight a few important facts that are frequent questions that we get regarding the investment portfolio. First, we have no sub-prime mortgage exposure. Secondly, we have no CDOs related to asset backed or residential mortgage backed securities. Our Alt-A exposure has been reduced to $5.5 million on a book value basis and $5.8 million on a market value basis, and all of this is rated AAA. The book value of our private equity partnership exposure is $61.7 million. And finally, we have no direct investments in any of the financial guarantors, and our exposure to investments was wrapped by financial guarantors is $148.6 million on a book value basis and $152.6 million on a market value basis, and the average underlying rating on these is A1. Overall, we feel that our investment portfolio is in excellent shape and well positioned for... likely continuing to be a challenging environment in 2008. Our high-yield exposure at year-end was 5.3% of invested assets, is generally stable with the 5.8% exposure we had last year. The level of non-current investments is only $2.6 million at year-end and it compares to $16.2 million at the end of the third quarter and $12.5 million at the end of '06. We will be pleased to address any specific questions that you have regarding our investment holdings in the Q&A session. So, with that let me turn the call back to Tom for his closing comments.

[Thomas R. Watjen:]

Thank you Tom, and I will keep my closing comments very brief. Let me just reiterate how pleased I am with our fourth quarter results and those for the full year. Again, this a strong performance. We are very pleased with what's happened, obviously, this didn’t happen without a lot of hard work by all of my associates. So, I want to thank all of them for the great work that was put into what's turned out to be a very good year for us this past year. We said at the Investor Day Meeting in the fall that we are a very different company and let me just kick off four things I think are important to keep in mind as we think about the close of year. First and foremost, especially in this environment this is important, we have retained substantial financial flexibilities in the organization. We have a stronger balance sheet, with risk-based capital at 344%, leverage at 21.4%, as I said before, over $1 billion of liquidity at the holding company. Secondly, we have better positioned our portfolio... investment portfolio, with historically low levels of high-yield bonds and very limited exposure to the asset classes that are troubling many financial institutions today. Thirdly, we have a more diversified business foundation, that comes in part with the growth of our Unum UK and Colonial operations, but also has been supplemented by the repositioning of the Unum US operations. And I can assure we have solid plans for 2008 and the focus throughout the organization is on developing disciplined profitable growth. Again, I very much feel that we are focused on that. So, I get much different foundation for the future. And last but not least, we have made continued progress toward resolving the regulatory and legal matters, which were initiated in 2003 and 2004. Now, while we are not immune to economic volatility, we are significantly better positioned today than anytime in our past. Finally, with respect to guidance, we are reaffirming the 2008 guidance we provided at our November 19 Investor Day, which was for operating earnings per share within a range of $2.35 per share to $2.40 per share. At this time, operator we are ready to begin the question-and-answer session. Question and Answer

[Operator:]

[Operator Instructions] And we’ll go first to Tamara Kravec with Banc Of America Securities.

[Tamara Kravec:]

Thank you. Good morning.

[Thomas R. Watjen:]

Good morning Tamara.

[Tamara Kravec:]

Good quarter.

[Thomas R. Watjen:]

Thank you.

[Tamara Kravec:]

We are happy to have '07 being a strong year. I have a couple of question. First, in light of the probability of recession increasing with industry experts and economist, how are you feeling about this business going into '08 with that probability rising and particular in light of your goal for the continued improvement in the benefit ratio in your [inaudible] business? That's my first question. My second is just touching on reserves and just given the accelerated pace with which the FED is lowering rates and I think that's probably expected to continue near term, are you readdressing reserves in light of your interest margins, if you could talk about that? And then just addressing the competitive environment, particularly in the less than 2000 lives where you saw good growth. Thanks.

[Thomas A. H. White:]

Good. Tam let me start with your first one and then maybe ask Kevin to supplement my comments. But, let me start with the fact, again as you look at the company today, given the balance of our business, we don't feel as though we have anywhere near as much vulnerability to swing from the economy. And again, by that I mean, you look at the contributions that Colonial now makes to our company, Unum UK now makes to our company, and even within Unum US the fact that we have a more diverse product portfolios in terms of contributions from voluntary and group life and things like that. So, again, I start with the point that the company is in a very different position overall relative to where it was in the past. Maybe what Kevin can do is speak specifically for the Unum US group disability line in terms of some of the things that we have done there and why we think again that we are in a better position than the past. I will say though we are keeping a vary eye on the economy throughout as it relates to client activities, also it relates to investment activities as you said. So, we're not taking this for granted. Maybe Kevin just talk a little bit about the Unum US exposure, especially with group disability.

[Kevin P. McCarthy:]

Thanks Tom. Good morning Tamara.

[Tamara Kravec:]

Good morning.

[Kevin P. McCarthy:]

With respect to recession risk in Unum US in group disability, a couple of things, first of all, just overall on Unum US, we are a different portfolio than we were four, five years ago. Our mix of business is now roughly plus or minus 30% group disability, 30% supplemental, 30% life. So, we are nearly as exposed on the disability site for the total Unum US performance as we were in 2000, 2001. Our mix of business by industry is really solid, we don't have exposure of any more than about 14% or 15% in any one industry sector. Our mix of business by size, as you know, has been improving. Our LTD in force is now about 54%, 46% large in our sales in the fourth quarter, actually hit right on our 40-20-40 kind of target in terms of small, medium, and large, so well diversified there. Our claim management results have been extremely consistent over the last seven or eight quarters, our quality indicators are good, satisfaction measures are still solid, incidence has been pretty stable, and our renewal plans continue to operate effectively and have consistently beat plans each of the last three years. So, overall I think we're in pretty good shape.

[Thomas R. Watjen:]

Thanks Kevin. If I can move to the second question, just around interest rates and the impact on reserves, and Tom you want to take that?

[Thomas A. H. White:]

Yes. I think, Tamara, the important thing that we watch is certainly the interest reserve margin there, and if you go back to the Investor Day, we provided where those margins are. There is no material change in those in the fourth quarter. I think the benefit that we have despite the low interest rate environment is the fact that we’ve got about 50% of our cash flows for 2008 already hedged and so… you know, obviously there is a little market sensitivity to the other half, but with the mix of investments that we look at, certainly the widening of corporate spreads on investment grade securities, that's offsetting a fair amount of the draft that we're seeing in treasury rates. Now, having said that, as we look out for 2008, we really don't see any pressure on us to make any adjustments in those discount rate assumptions. If this environment would persist for the full year, then we have to revisit that. But, we're in good shape here for 2008.

[Tamara Kravec:]

Okay.

[Thomas R. Watjen:]

Okay. And then, Tamara, lastly, just for the competitive environment, maybe I'll ask each of the business heads actually speak to that. First with Kevin, then I’d ask Randy and Susan also to speak to what's happening in their respective environment. Kevin?

[Kevin P. McCarthy:]

With respect to the core market, the smaller and medium-sized part of the business, our activity was very strong. In the fourth quarter activity was up 11%. Closing ratios improved throughout the year. Packaged sales grew for us throughout the year. 38% of our fourth quarter sales were three lines of business and 77% of our sales were two lines of business. So, pretty strong across-the-board performance in our core marketplace. Case sales were up 13. I think it needs from the standpoint of our distribution system and its ability to deliver terrific fourth quarter for us with solid momentum going into '08. Supplemental sales were up as well. So, I think the competitive environment in the core market has much to do with the way we execute than worrying about what's happening with other companies, and I think our components throughout the year continued to improve. So, feeling pretty good about our core market performance.

[Thomas R. Watjen:]

Randy, just maybe…you had strong core market performance as well actually and maybe just speak a little bit about what you're seeing in your core market.

[Randall C. Horn:]

Yes. Really, just same as Kevin, Tom, and good morning Tamara. Really not any major change in terms of the overall competitive environment, great activity in our core markets, our new accounts… number of new accounts were up over 16% in the fourth quarter. And again, certainly there could be some economic pressures as we move into 2008. But, again, I think we can overcome that, we are just staying focused on our core markets and maintaining these very high activity levels.

[Thomas R. Watjen:]

Susan, maybe you want to hop around the UK environment?

[Susan Ring:]

Yes. Sure. Where we are seeing most competition being most aggressive I would say within the large case, small case, and in particular group life as well. We are obviously maintaining pricing discipline and in our core markets as well. Within the core market, [inaudible] and closed rates improvement so that all above targets and term levels. [inaudible] activity right across the board is very strong. So, I think we are very focused on the core markets maintaining pricing discipline, where we are seeing less competitor activity. So, we feel very good about 2008 as well.

[Thomas R. Watjen:]

Thank you.

[Tamara Kravec:]

Great. Thank you so much.

[Thomas A. H. White:]

Thank you, Tamara.

[Operator:]

And we'll take our next question from Bob Glasspiegel with Langen McAlenney.

[Robert Glasspiegel:]

Thanks. Actually going to follow-up on Tamara’s question with a question on investments relative to a recessionary environment. How do you think about DDDs, now you're getting paid more to take risk, spreads are one, yet there is more risk and perhaps collinearity with your business. Is this a time to be taking more risk and taking advantage of being rewarded for it, or are you thinking in terms of cutting it back because maybe you might be doubling up some bets on… investment risk with business risk?

[Thomas R. Watjen:]

Bob, this is Tom, it’s a good question, I will offer a few thoughts and maybe I’d ask Tom to supplement those. But, I don’t think this is the time we will positively take additional significant risk. I think it’s the time to continue the path we have taken, which is being very selective, very cautious, that’s played well for so far. You are right, even though there are some buying opportunities out there and I can't say we would do a little of that, we really aren’t going to be aggressively going and building, I don't think the BAA or certainly about the high-yield position, maybe a little selectively here and there, because again the outlook is sufficiently mirky to take an aggressive position right now, even tough there could be some money to be made, frankly, it's not what we are proposing to do. I think, as you know, we have actually... we do have the lowest level of high-yield we have had in quite sometime, it is probably, almost half of what it was at its peak, five, six years ago. We have also underweighted, I think, some of the sectors of the economy, which are cyclical in nature, for example, financial institutions, I think , we are roughly... about half of the market weight. So, I don't think we are going to materially change much of that. I think there may be some things out there that people do opportunistically, but again, from our point of view, this is not the time to be too aggressive in some of those areas.

[Thomas A. H. White:]

Bob, as you think of investment strategy, it has for many, many years focused on investment grade corporate bonds, typically in the BBB to A range, and we think we are getting good value there. We will augment that by looking at a little of high-yield, I'd say right now. We are not particularly excited about putting a lot of new money into high-yield even though spreads have widened. I think we feel like we are getting paid nicely for the risk that we are taking in our core kind of BBB, A corporate bonds. We also do a little bit in mortgage loans. We do a little bit with private placements and these are all investment classes that we'll look at when we think there is relative value to be invested in in those areas. I'd say right now that we think the sweet spot for us kind of remains in that BBB, A, we feel like we are getting paid for the risk. When you first asked the question, my first thought was, I'd much rather be taking risk in BBB bonds than in sub-prime versus CDOs or things like that. We are very pleased the way the investment portfolio is and we have had good performance. We have kind of had in our strategy for the last two or three years that we were going to go into a softer cycle and that's certainly happening and I think we are as well positioned as we can be right now.

[Robert Glasspiegel:]

So, don't look for the BBB ratings to change materially over the next couple of quarter, is that the message?

[Thomas A. H. White:]

That's the message.

[Robert Glasspiegel:]

Thank you very much.

[Thomas R. Watjen:]

Thanks Bob.

[Operator:]

We will go next to Tom Gallagher with Credit Suisse.

[Tom Gallagher:]

Good morning.

[Thomas R. Watjen:]

Good morning.

[Tom Gallagher:]

A couple of questions. First is, can you give an update on trading’s outlook from either A.M. Best or Moody's?

[Thomas R. Watjen:]

Tom, you want to touch on that one?

[Thomas A. H. White:]

I think in terms of rating agencies, Tom, to me the numbers speak for themselves. To have a negative outlook when we have got a 344% RBC, 21.4% leverage, holding company liquidity at $1 billion, and we just had $850 million in statutory earnings, I don't think a negative outlook is the appropriate outlook to have. We have certainly messed with all of the rating agencies. It would be our hope that those negative outlooks go away. Since we meet with them and they let us know when they are having their meetings and what their decisions are, I don't want to front run any comments that they may or may not make. But, again, we present the facts and I think the facts dictate and suggest that a negative outlook is not the appropriate outlook to have right now on the company.

[Tom Gallagher with Credit Suisse:]

Okay. I guess specific to A.M. Best, I think the last few parameters they had in place included continued improvement in the disability cost ratio, which you have delivered on and the closing as multi-stage.

[Thomas A. H. White:]

Yes, that's a good point, Tom, because A.M. Best has been watching the client reassessment very closely. One of the things they wanted to see was a completion of that claims reassessment process. And during January, we actually completed the last of the claim reviews, so that's behind us, and here we can check that off the list, and I would except A.M. Best to whip that issued off the table, so that they will look at the rating… and again I don't want to front run any comment they may or may not be making. But, I think you point out that the numbers are strong and the issues that they have been focused on have pretty much been addressed.

[Tom Gallagher:]

Okay. Next question. On the guidance on the group income protection benefit ratio, the 88 to 89, does this assume stable incidence in terms of just overall claims incidence and severity and also as most of the benefit expected to come from the reprising side, I guess, what I am trying to ask is, do you have some buffer built in case the environment does get worse from a incidence and severity standpoint?

[Thomas R. Watjen:]

That's the good question, Tom. Kevin?

[Kevin P. McCarthy:]

Yes, Tom, good morning. I think the 88 to 89 generally expects stable incidence plus or minus moving, but we are also continuing to execute on our renewal program, we continue to move prices up a little bit where we can and of course we continue to experience positive consistent performance in our claims organization, and I still think we have a little bit of outside [inaudible] performing on all cylinders now. Yes, there is a little bit of… yes, there is volatility, but of course the 88, 89 doesn't presume a sever swing in essence. Frankly, we haven’t seen that either over the last fourth quarter at all, we have been pretty stable.

[Tom Gallagher:]

Kevin, from a leading indicator standpoint, as of right now, you are also not seeing any meaningful change from a claims, incidence, or severity standpoint, is that fair to say?

[Kevin P. McCarthy:]

Yes, it is fair to say. You know, we saw a little bumpiness in the fourth quarter. For example, manufacturing incidence actually was a little better than it has been. On the other hand, financial sector was a little worse than it had been, but pretty much within normal ranges.

[Tom Gallagher:]

Okay. Just two more quick ones. I guess substantial improvement on group life and AD&D benefit ratio. Should we assume that’s a highly favorable result or are we also seeing the benefits of re-pricing because I believe based on the mix shift you seen on the group life side, you have also lost some large cases there.

[Thomas R. Watjen:]

Yes. I think you have got two things going on, we did have generally favorably mortality throughout the year, that was true across most of our operating units in the life business. But, of course, also we have continued to execute on our renewal plan. We have purchased some large case group life business, just why you are seeing the total premium lines are down, but the margins of course have gone up because we had better margins on the small and middle sized market.

[Tom Gallagher:]

Okay. So, we can assume a little bit of improvement, but probably not all the way, is that fair to say from a run rate standpoint?

[Thomas R. Watjen:]

Yes. We are operating pretty well there right now.

[Tom Gallagher:]

Okay. Last question for Bob Grieving. A lot of noise on 4Q statutory results, can you just at least explain some of the seating commission issues as it relates to both the special purpose vehicles as well as the statutory entities? How would you think about those in the context of your overall statutory results?

[Robert C. Greving:]

Tom, good morning. Obviously, there is noise, in the period, we did complete the Northwind Reinsurance transaction and that does follow through our statutory results. Keep in mind that while the reinsurance agreements that went along with Northwind are internal between four of our statutory subsidiaries. So, each of the subsidiaries does get reported separately from a statutory perspective. Under statutory rules, any reinsurance agreement, even if it is internal between affiliates, has to be an arms-length reinsurance agreement. So, each one of those reinsurance agreements have to be in a position as if it were with a third party and of course the state insurance departments make sure that those agreements are fair to the statutory entity that they are regulating in their state of domicile, that resulted in a positive seating commission coming from both Provident Life and Unum America. They got paid positive seating commissions for their blocks of business as that transaction was executed with Northwind Re, and a negative seating commission for Provident Life and Accident. Now, under statutory accounting, you are aware that that’s very conservative accounting and that requires negative seating commissions to be expensed and recorded as a loss immediately and positive seating commissions to be amortized into earnings over time. So, you do see no eyes going... going particularly in the Provident Life and Accident walk of business and that's one of the reasons why we said that's kind of an extraordinary item because that loss as a result of that reinsurance got charged off immediately. Under GAAP, you won't see that because the amortization of both positive and negative seating commissions occur over time. We’d be happy to go over that with you. Tom, I think it might be... it’s kind of beyond the call, but we’d be happy to go with that in more detail with you when the statutory statements are completed and that accounting actually can be tracked through the overall financial statements, if you would like.

[Tom Gallagher:]

That's helpful. So, the high level is simply the $219 million seating commission out of Provident Life and Accident is going... there is going to be a positive adjustment to Provident and Unum Life of America, but it’s going to be amortized with the P&L overtime, is that correct?

[Thomas R. Watjen:]

That's correct.

[Tom Gallagher:]

Okay, thanks a lot.

[Operator:]

We will take our next question from Mark Finkelstein with FPK.

[Mark Finkelstein:]

Good morning.

[Thomas R. Watjen:]

Good morning, Mark.

[Mark Finkelstein:]

Tom just asked a couple of my questions, but let me follow-up on a few things. One is, what are your persistency assumptions for 2008 in US? When would you expect kind of the large case to stabilize and start to increase overall persistency?

[Thomas R. Watjen:]

Kevin?

[Kevin P. McCarthy:]

I think, persistency, in 2008, for the most part, would be pretty consistent with where we finished up 2007, I don’t see any reasons right now to move that assumption either way. We are pretty much “through sort of the large case performance management aspects of our business”, we continue to go through a little program every year where we identify under-performers and try to move those prices up or to the extent that those customers won't accept those price increases, move them up. But, I would say for the most part, our large case business is getting close to sort of being stabilized.

[Mark Finkelstein:]

Okay. I actually missed the comment, Susan, can you just go over sales in the UK for the fourth quarter?

[Susan Ring:]

Yes, sure, absolutely. If you compare our fourth quarter ’07 sales to fourth quarter '06, it is a bit of tough comparison because we had some legislative changes that took place in October, so we actually had an increase in up-sell activity during the fourth quarter '06. If you net that out… that comparison out though and neutralize that impact, then our fourth quarter '07 sales increased by 12%, 13% over 2006. So, it actually was quite a substantial growth. If you remove the impact of the legislative changes… if you look at the core sales during the fourth quarter, we feel very, very healthy closed ratios, which all came through for all of our product lines above plan and we saw up-sell activity very strong in the fourth quarter and in fact for the full year, and growth activity levels were high, up sort of 127% of planned expectations. So, fourth quarter sales, I think, came through very strongly. Does that answer your question?

[Mark Finkelstein:]

Yes, that's perfect. And then just overall expenses in the US, I mean obviously elevated in the fourth quarter, I think both US and Colonial. Did that essentially… is that kind of a one quarter thing or how much of that should persist kind of elevated expense ratios into the early part of 2008?

[Thomas A. H. White:]

The vast majority of that, you can kind of think of as a one-time thing. Clearly, in Colonial, we did about a year’s worth of advertising spend in the fourth quarter and for 2008, that will be spread throughout the year. In Unum US… and you will see it in each of the three business lines there. But in Unum US, as we indicated, there are some higher expenses related to some advertising and branding that we moved up, there is some incentive accruals in there, there is a little bit of an impact that’s moving some of the people involved with the claim reassessment into operating roles. They fill in as kind of normal attrition occurs and some growth begins to occur with the Unum US business and within the claims areas. The vast majority of that, you can kind of think of as a one-time thing. We will have… when you look at 2008 expense ratios really across the board, they will be a touch higher than what we saw in 2007 and that's mostly within Colonial, there is a little bit of advertising that we are going to do, it will be about $1 million a quarter. I’d say in the US, there is a little bit that we’ll be doing. There are some Simply Unum investments that we’ll be making in the UK. Susan is looking at the voluntary market, so there are investments that we are making there. I am not talking about a dramatic move in expenses, a fraction of a percentage. But, these are investments and what we think are some great opportunities for the company.

[Mark Finkelstein:]

Okay. And then just final question. I am going back to a slide that you presented at your Investor Day, and it's the long-term disability incidence index. What are the interesting elements of that slide is it actually shows incidence patterns starting to increase, at least on the slide about four quarters ahead of a potential recession not without forecasting whether we go into one or whether we don’t go into one. But, it sounds like incidence patterns were actually pretty stable in the quarter, and I am just curious if you have any thoughts kind of showing that, you know, in the slide, typically you start to see the increase ahead of the recession and in this particular situation we may not be, do you have any thoughts on that?

[Robert C. Greving:]

This Bob Greving. Mark, the actual submitted incidence for group LTD business in the fourth quarter was actually a little bit below what we were seeing in the third quarter. So, at least at this point in time, we are really not seeing any rising incidence as a systemic type of a pattern. We get a little bit of blip up, a little bit of a blip down, but nothing that seems to be systemic at this point time.

[Mark Finkelstein:]

Okay, thank you.

[Thomas R. Watjen:]

Mark, [inaudible] but in fact part of this can also be attributed to the mix of business actually. I think one of things I thought we gave an exhibit, but there has been noticeable difference in the incidence patterns between core market, for example, in large case over economic cycles. And our business mix has shifted to more of a core market focus as you know. Some of that’s going to be… likely we are going to see that, whereas if the business is not [inaudible] economic swings.

[Mark Finkelstein:]

Great. Thank you.

[Thomas R. Watjen:]

Thank you.

[Operator:]

And we will take your next from Eric Berg with Lehman Brothers.

[Eric Berg:]

I had a question about growth, but I actually want to precede it by... I want to precede it by asking a question about incidence that was prompted just by Tom's comments. In thinking about incidence and how well it's going are not so well or just the state of incidence, just how meaningful is it look at the fourth quarter versus third and by that… I guess what's behind my question is sort of this thought, is it the only incidence that really matters in your business, not the trended incidence, but actual to expected taking into consideration that incidence could be going up and that could be a good thing if it's being driven by, say a change in mix in favor of different industry groups or different... a change in the gender mix of your business? I'm thinking of what matters is not the sequential change, but just how incidence is going relative to your expectations, what are your thoughts on that?

[Thomas R. Watjen:]

Kevin?

[Kevin P. McCarthy:]

Eric, I think you are on the money. I think absolute incidence matters more when you get some severe swings that you are not planning for and pricing for and you have to react to it. When incidence moves sort of in a more gradual fashion, actual to expected is what we pay attention to because that’s what drives our renewal programs, that’s what drives our pricing strategies and it’s also what we measure in terms of mix of business.

[Eric Berg:]

Okay. Thank you. And then my closed questions or closed related questions is this, understanding that the premiums have been shrinking as part of a very clearly articulated and very purposefully carried out plan, it’s clear what you're saying and it’s clear that you are doing exactly what you want to do, that's coming through loudly and clearly, should we presume, Kevin, that now that the large case business, as you said, I think, in response to some earlier question, should we assume that now that the large case business is just about stable that we can expect soon, say in 2008 or… maybe just pose an indirect question, when can we expect premiums in Unum US to start growing, that’s probably the simplest, greatest way to ask the question?

[Kevin P. McCarthy:]

Eric, I would think realistically, probably more as we enter into 2009... maybe... I'd expect core market sales to grown throughout '08, I would expect supplemental sales to grow throughout '08. I think large case sales are still very choppy, it depends on what… how inventory has… maintain our discipline there. You think persistency is largely stabilizing in large case and I think the growth will start to turn, as we get our Simply Unum platform launched throughout 2008, I think you'll start to see some acceleration of core market and supplemental sales growth, which will actually, I think, for the most part, show up and earn premium in 2009.

[Eric Berg:]

Thank you.

[Thomas R. Watjen:]

Thank you, Eric.

[Operator:]

[Operator Instruction]. We will go next to [inaudible].

[Unidentified Analyst:]

Hi, thank you very much. Obviously, there are several metrics by which the balance sheet is strengthened quite a bit. I probably could do the math, I guess, but I am curious if you tell us roughly what the ROE would have been had your balance sheet metrics been at target as supposed to above target, roughly speaking?

[Thomas R. Watjen:]

I think we’d have to come back to you. I am not sure we know that. What we are saying is with the excess capital, the lower level of debt, etcetera, what does that mean...

[Thomas A. H. White:]

Any one factor, we might be able to do it on our head, but unfortunately we are working...

[Thomas R. Watjen:]

Simultaneous equations here.

[Thomas A. H. White:]

If you think through it, from an RBC basis, we are at 344. We are going to target around 320, given the environment that you have, 24 points of RBC. Our leverage at 21.4% is nicely below the 25% level that we will target over the long-term and then again the holding company liquidity at $1 billion, our one-time the annual fixed charges is about 300. So, there is about a $700 million cushion there and that replenishes itself pretty nicely throughout the year. I don't know if I can work through all the math here, but when you look at all those capital management matrix, we got some pretty nice cushion on each one of them.

[Thomas R. Watjen:]

I think if you had all the pieces up, it comes pretty close to about $2 billion of over capitalization or under-leverage. So, you can probably do the math from there on the ROE. Wouldn’t dare to do that in live prime time, but it does amount to about $2 billion of extra capitalization across unit price.

[Eric Berg:]

Okay. Great. I'll take my calculator to it. Thanks very much.

[Thomas A. H. White:]

I think if we could... we'll take one more question and obviously people will be available to take other questions after the call. Let's just go with one more operator if possible.

[Operator:]

Thank you. We'll take our final question from Chris Jermany [ph] with Goldman Sachs.

[Unidentified Analyst:]

Hi, thanks very much for the question. It looks like, I guess, A.M. Best just revised your outlook to stable from negative so that risk appears to be off the table. But, I was wandering as far as proceeding with the $700 million buyback latter, I was just wondering, I know you mentioned you can foresee the recession environment causing you to alter that, but what would cause you to considering or altering the amount or timing of that buyback program?

[Robert C. Greving:]

As you look at our overall capital program, we have indicated, we are going to be cautious about deploying all of that, but obviously our stock price, currently, we feel is it an opportune level for share buyback. We have got obviously a very heavy capitalization, well above our targets, leverage is in great shape, and I think if you look toward the latter part of the year, if operations continue to be on plan and we execute our plan as anticipated, we will be generating additional capital during the 2008 timeframe, over and above what we have got there now. We'll certainly keep an eye on the economic market, what’s going on with our investment portfolio, as well as our overall operational results. So, we want to make sure that we’ve got appropriate cushions. As Tom White indicated earlier, we feel that our reserve base is in good shape. We don’t really feel we need to re-modify and discount rates at this point in time, particularly with the hedging program that we have got out there. But, we will be watching all of those parameters to be somewhat cautious, I believe, as we go through the year, particularly given the drumbeat that we are hearing from the market as far as potential recessionary activities across the board. We will be watching all of those things and executing accordingly. But, I do think that this is a time when, as Tom indicated earlier, we should take a serious look at whether or not we can accelerate a portion of our share program.

[Thomas R. Watjen:]

What you said Bob, I think Chris it would take… Bob, you’d agree, our [inaudible] in the short timeframe. As you said and was said throughout this call, we ended the year on a very positive note. We have got substantial financial flexibility. Again, one of our priorities is always going to be sure that we continue to maintain flexibility in the face of whatever economic environment we face. But, it is hard to see something I think that would get in the way in the short-term our ability to execute the previously announced $700 million share buyback.

[Unidentified Analyst:]

Okay. Thanks very much.

[Thomas A. H. White:]

Good thanks Chris. With that, let me thank you all again for taking the time to join us on the call this morning. And at this point, operator, this will complete our fourth quarter 2007 earnings call.

[Operator:]

And that does conclude today's conference. Thank you for your participation. You may now disconnect.