Unum Group
Q1 2009 Earnings Call Transcript

Published: 4 May 2009

[Operator:]

Good day and welcome to the Unum Group first quarter 2009 earnings results conference call. This call may be recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Head of Investor Relations, Mr. Tom White. Please go ahead, sir.

[Tom White:]

Thank you, Leo. Good morning, everyone. Welcome to the first quarter 2009 analyst and investor call for Unum. As we get started, I want to remind you that 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 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, 2008. Our SEC filings can be found in the investor section of our website at www.unum.com. Please take note that 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, also in the investor section. Yesterday afternoon, Unum Group reported earnings for the first quarter of 2009. Net income in the quarter was $164.9 million or $0.50 per diluted common share, compared to net income of $163.1 million or $0.46 per diluted common share last year. Included in the results for the first quarter of 2009 are net realized after-tax investment losses of $41.8 million, or $0.12 per diluted common share, and $44.7 million, or $0.13 per diluted common share, in the first quarter 2008. These losses include the impact of the provisions of DIG B36 accounting, which requires changes in the fair value of an embedded derivative in a modified coinsurance contract to be reported as realized investment gains and losses. This accounting requirement resulted in a first quarter '09 realized after-tax investment gain of $15.4 million compared to a $41.6 million after-tax loss in the year ago quarter.Net realized after-tax investment losses related to sales and write-downs of investments were $57.2 million in the first quarter of '09, compared to $3.1 million in the year ago quarter. So excluding these items, our after-tax operating income was $206.7 million for this quarter, or $0.62 per diluted common share, compared to $207.8 million, or $0.59 per diluted common share, in the year ago first quarter. On the call this morning are President and CEO, Tom Watjen, and Bob Greving, Executive Vice President, CFO and Chief Actuary, as well as the heads of our three major operating segments, Kevin McCarthy, Susan Ring, and Randy Horn. At this time, I would like to turn the call over to Tom Watjen.

[Tom Watjen:]

Thank you, Tom, and good morning. With our first quarter results, we're obviously off to a fast start for 2009. I want to touch on certainly a few of the highlights I take away from the quarter, and I'll spend a few moments later going into more detail. First, excluding net realized after-tax investment losses, we reported $0.62 per share in operating income for the first quarter, 5% higher than the $0.59 we reported in the first quarter of 2008. In addition, each of our businesses continued to perform well with lower benefit ratios on a year-over-year basis for each of our specific businesses. Our overall level of profitability, however, was impacted somewhat by the challenging environment for net investment income, particularly miscellaneous net investment income, and the weakness of the British pound impacted the translation of our U.K. earnings. I would point out that if you look at the pre-tax operating earnings growth, as reported, that was up six-tenth of a percent. If you actually have a constant currency, in other words, apply the same currency evaluation that we had in the first quarter of 2008, operating income actually grew 8.5%. On an earnings per share basis, we reported a 5.1% growth in earnings per share year-over-year, but again on a constant currency basis, that would have been 13.6%. So can you see the magnitude of what the impact of translation changes have meant in terms of our reported results? Third, we continue to see solid momentum in our sales results. As we've discussed, our strategy is to focus on maintaining underwriting and pricing discipline and have a particular emphasis on core market and voluntary market growth. We again saw a positive momentum in these areas. Companywide case count grew 21%, which tells me our value proposition is a strong one. Fourth, while realized investment losses remain somewhat higher than our long-term trends, excluding DIG B36, our losses were in line with the experience of the two previous quarters. We expect to continue to experience somewhat higher realized investment losses until the economy in financial markets improve. However, we remain confident that our portfolio was well-positioned to weather this difficult credit cycle. The net unrealized loss position in our fixed maturity portfolio widened slightly in the first quarter from year end 2008 levels. Tom White will provide further detail on the performance of the investment portfolio in his remarks. I will say that the environment for new investments remained positive in the first quarter, which is reflected in the attractive yields on new money we experienced in the quarter. Finally, we continue to maintain the financial flexibility to support the business and to absorb any further investment losses which might occur. You will see that we comfortably exceeded our targets for capital and liquidity, leverage and risk-based capital, and are on track to meet our year end 2009 capital metrics guidance. Now, let me come back again and spend a few moments just talking about a few of these elements in a little more detail, starting with our Unum U.S. business. Pre-tax operating earnings per Unum U.S. increased 16% to $183.6 million in the first quarter, with strong earnings growth in the group disability and supplemental and voluntary lines of business offsetting lower earnings in the group life business. Group disability earnings were 44% higher driven by strong risk results. The group disability benefit ratio for the first quarter improved to 88%, a decline of 70 basis points from the fourth quarter and 300 basis points from the year ago first quarter. Seasonally adjusted submitted incidence trends and claim recovery results actually showed a slight improvement relative to the fourth quarter and were generally in line with our first quarter of 2008. Again, this quarter, we saw no risk pressure from the weak economy. We also had very strong results from the supplemental and voluntary line with earnings growth of 24%. Results in the group life and AD&D line were down 13%, driven primarily by lower premium income and slightly higher claims experience. Total Unum U.S. sales increased 3.5% in the quarter. We saw good growth, though, in several areas, including a 16% increase in core market sales and an 11.5% increase in voluntary benefit sales. As you know, these are two areas we've targeted for growth this year and believe there's good long-term potential there as well. These positive results were offset somewhat by reduced sales in the large case market, an area where we are maintaining our underwriting and pricing discipline. Our pipeline for large case sales is building, however, and we expect to show a strong second quarter large case sales growth. As we've said in the past, this is an opportunistic market and we want to continue to be very selective. We actually are seeing some very good opportunities in this environment. Kevin McCarthy is here, obviously, to answer any questions you may have on this segment or the outlook for this particular business. Now turning to Unum U.K., our pre-tax operating earnings were $62.3 million for the first quarter. While on dollar terms, these results were below year ago results, due to the decline of the value of the British pound. In local currency, the first quarter operating earnings actually increased by 1.6%. Our strong U.K. results were also driven by favorable risk results, specifically favorable claim incidents in the LTD line of business. We also saw some benefits from the expense initiatives we discussed on the fourth quarter call, and Susan Ring is available here this morning with us to address any questions you may have about the U.K. business or marketplace. Colonial Life actually saw pre-tax earnings increase 5% to $70.9 million for the first quarter, again also driven by favorable risk results. While total sales were generally flat with year ago results, we continue to see growth in our core market sales which increased 1.8% in the quarter with new account activity increasing actually 10.8%. We also saw solid growth in recruiting and in our new rep contracts. Both of these indicators should lead to further core market growth in the future. So, again, those are very good leading indicators. Randy Horn is on the call here this morning to address any questions you have around Colonial's results or the Colonial marketplace. Now shifting to investments. Our investment portfolio continues to perform well, with a manageable level of default and impairment experience. We are seeing good opportunities to invest money at attractive yields while intending our investment quality objectives. Although, we monitor changes in our portfolio of values closely, today's unrealized investment losses are not a significant concern to us, since our liabilities generally would not cause us to need to sell investments prior to maturity. Certainly, last but not least in this environment is our capital position, which again we continue to feel very good about and very comfortable with the position as well as the financial flexibility that's implied by the current capital ratios. Our first quarter 2009 estimate for risk-based capital ratio for our traditional U.S. life insurance companies exceeds 330%, above our long-term target of 300% and in line with our year end 2009 target of 330% to 335%. Leverage, excluding the non-recourse debt and capital of Tailwind and Northwind Holdings, is 21.2% as of the end of the first quarter, below our long-term target of 25%. Holding company liquidity was $473 million, also comfortably above our $270 million target, which allows for coverage of one-year fixed charges plus the maintenance of the capital cushion for business and economic volatility. Again, we are on track to meet our year end 2009 target of holding company liquidity in excess of $0.75 billion. In summary, I feel good about our first quarter results and our position as we move ahead. Our core operating segments continue to meet our expectations with strong risk results across our major businesses, which reflect the disciplined strategies we put in place, a commitment to maintain pricing, and the strong underwriting and risk management disciplines that we built in our business. We are seeing strong sales momentum in our targeted markets. We have a strong value proposition for our customers and we can offer them a wide selection of benefit choices supported by a focused and engaged group of professionals. Our commitment to this business and stability as a provider is also working in our favor in this environment. We are growing our customer relationships indicated by the case count growth I mentioned earlier. We believe we're going to be in an excellent position when the economy eventually recovers. Our investment portfolio continues to perform well in a tough environment. We continue to maintain strong financial flexibility to protect us in these uncertain times, and importantly, to position us to continue to invest in the business and seize on opportunities created in this challenging environment. Now, I'll turn the call over to Tom White, who will provide more detail on the first quarter results. Tom?

[Tom White:]

Great. Thanks, Tom. First, I want to take a few minutes to supplement Tom's comments and provide some operating highlights on the quarter. Within Unum U.S., we'll start with group disability. As Tom indicated, the group disability line reported a strong quarter as we continued to see improvement in the benefit ratio, which declined to 88% in the first quarter compared to 88.7% for the fourth quarter, and 91% in the year ago first quarter. There are a number of factors that are driving this continued improvement and I will point to four. First is the ongoing shift in our block of business to more core market business and less large case business, as well as the shift to more stable industries such as healthcare and education and away from traditionally economic-sensitive industries, such as retail, construction and manufacturing. Second, we saw favorable claim recovery trends. Third, ongoing adherence to pricing discipline, particularly in the large case business. Fourth is a continued stable level of new claim incidence. New submitted claim incidence on a seasonally adjusted basis was slightly lower in the first quarter than the fourth quarter of 2008, and essentially in line with the first quarter of 2008. This marks the fifth consecutive quarter since the peak in U.S. employment levels that our new claim incidence has remained stable, which we think is a strong signal to us that the strategic changes we have made within this business are paying off in lower volatility and greater consistency. Additionally, the short-term disability line, which can often be a leading indicator of LTD claim incidents, continues to perform well with a low stable level of claim incidents in the first quarter. Lastly, the discount rate on new claim incurrals which was raised in the fourth quarter last year was maintained at that level here in the first quarter. Our interest reserve margin for this line of business continued to widen. Moving to the group life and AD&D line, operating income here decline to $48.3 million, compared to $55.4 million a year ago, primarily driven by lower premium income, which declined by 2% and a higher benefit ratio of 69.8% this year compared to 68.2% in the year ago first quarter, resulting from higher average paid claim size. The supplemental and voluntary line had a strong quarter with operating income of $77.6 million, which is 24% higher than last year. All three primary lines here, recently issued individual disability, voluntary benefits and long-term care, each produced year-over-year improvement in before-tax earnings. Reported sales for Unum U.S. increased by 3.5% in aggregate and there were several bright spots to highlight. Our core market sales for our group lines, which would be LTD, STD and group life and AD&D combined, but our core market sales showed continued strong momentum increasing 16.1% for the first quarter. This is the sixth consecutive quarter of sales growth for these lines in the core end of the market. Sales in the large case market for these lines declined by 16% in the first quarter. However, as Tom suggested in his comments, we expect large case activity to accelerate in the second quarter. Finally, voluntary benefit sales increased by 11.5% in the first quarter as our activity in the core market segment remained strong with high levels of quotes and new coverage sales. So to summarize the results for Unum U.S. as a segment are continued favorable risk management results, some ongoing pressure on net investment income with considerably lower than normal levels of miscellaneous net investment income, but continued positive sales results, particularly in our targeted core and voluntary markets. Moving to Unum U.K., Tom mentioned a decline in the value of the British pound relative to the dollar, which moved from $1.98 in the first quarter of '08 to $1.44 here in the first quarter of '09, continues to negatively impact translated results for the Unum U.K. segment, but the underlying operating performance remains generally strong. While operating income in dollars declined 26% in local currency, operating income increased by just under 2% as a result of by favorable claim experience, particularly in the LTD line. The overall benefit ratio declined to 53.3% for the quarter compared to 57.3% a year ago. First quarter sales were quite strong, increasing 45% in local currency, largely driven by higher large case activity, but we did see case count growth of 12% within Unum U.K. Colonial Life

[Tom Watjen:]

Thanks, Tom. Before I make a closing comment and we entertain your questions, I thought we'd anticipate one of the questions and I will make a few statements about that. That has to do with the impact the recession is having on our business. First and most importantly, the economy is not impacting our risk results as evidenced by our improved benefit results this quarter. I think for much of the attention, certainly, around the recession and the focus of what that may mean for our business, as you know, has been around our Unum U.S. group disability business. While this line is certainly important to our overall operations, it represents only approximately 18% of our current pre-tax operating earnings, and compared to a contribution of over 30% in prior years, and so, again, is a less significant part of the overall picture of the company. I'd also add that when you look at the Unum U.S. group disability business, there's a number of things that have actually changed there. The mix of business we've talked to you about in the past is very important, where the mix has shifted in terms of case size. The mix has shifted in terms of industry focus. So for even that part of the business that we have, which again is very, very important to us, you'll see the risk characteristics of that part of the business again are very, very different. The other thing I'd leave you with is the place where you'd expect to see some higher level of claims in a weaker economic environment is probably in the more subjective claims, such as muscular-skeletal and mental disorders. These types of claims only represent around 25% of our overall claims. So, again, it's not the entire disability business, in effect, that potentially is vulnerable to soft economic conditions. It's a much smaller part of the claim activity that would be vulnerable to that. I guess because of this I think we feel pretty good that we're well-positioned, because these risks are much smaller at the company today and much more manageable. Again, I want to come back to what I started with, which is, the economy is not impacting our risk results. In fact, again, you saw that through the improved benefit results that we actually had for the quarter. We are, though, in this environment, seeing some pressure on our topline. In all of our businesses, we are seeing slight pressure on new sales to existing customers, an indication that current customers are slower to add new lines of coverage reflecting the pressures they are feeling on their budgets. This is true both with employers in the U.S. and the U.K. As I mentioned earlier, though, case count growth has been strong, indicating to us a continued strong connection with our markets, and again, validation for our value proposition in the marketplace. We're also seeing some slight pressure on what I would call natural growth of our in-force block. That is, the lower levels of employment and reduced rate of salary growth have a dampening impact on the growth of existing business. Certainly, that's something we've got to keep an eye on. While these factors have a slight impact on topline growth, we do not expect them to impact our profit margin. We have embedded this into our guidance for the year. In short, we're certainly not immune to the effects of the recession, but believe that we are very well-positioned to effectively manage through that. Now, again, as you can see, the quarter certainly continued some themes that we started several years ago and we want to continue to focus on disciplined risk management; continue to focus on profitability and margin expansion over topline growth. As you can imagine, as an organization, the focus is very much on continued, consistent execution. So that's certainly priority number one. At the same time, we want to continue to invest in our businesses, despite the weakness in the overall economy. We are making investments across the entire enterprise. These investments range from expansion of our Simply Unum platform and build out of our voluntary benefits enrollment capabilities in Unum U.S., to Colonial Life's development of our new enrollment system and expansion of their sales force to include work in the Unum U.K. operation, to revamp our group life product offering and develop new products to expand the market for group risk in that particular market. We have the resources to support our business during these challenging times and to make these kinds of investments in new products and services, which we know will enhance further our competitive position in the marketplace. While we are not immune to external forces, we are much better positioned today than at any time in our past, and certainly believe that we are positioned to take advantage of the opportunities which may emerge in today's very difficult and challenging environment. Finally, I will conclude with my prepared comments by reaffirming our previous 2009 operating earnings per share guidance of $2.45 to $2.55 per share, as well as our capital management targets as well. At this time, Leo, we are ready to begin the question-and-answer session.

[Operator:]

(Operating Instructions) We'll take our first question from the site of Darin Arita, Deutsche Bank.

[Darin Arita:]

Can you talk about, with the U.S. disability, the difference in claims incidence and recovery rates that you are seeing between the core market and the large case market?

[Kevin McCarthy:]

In general, we typically see lower levels of incidence rates in disability in the core market versus the larger case market. We do see some better recovery rates in the small case marketplace primarily, I think, driven by industry mix. Whereas in the large case market, you've got industries like manufacturing, wholesale, retail, transportation, utilities, those kind of companies. Whereas in the small, medium-sized marketplace, it's more professional services, financial services, education and healthcare. So, in general, as we move our mix shift from large case to core market, that's a positive effect of that in the loss ratio.

[Darin Arita:]

Has the difference, though, in experience changed at all in the past few quarters?

[Kevin McCarthy:]

I think we continue to get improvement in our claim recovery performance across all size segments. This particular quarter, we had an improvement in particular in shorter duration recoveries as well. Also, we had lower average-size new claims in terms of indemnity levels. We had lower paid incidence and we had higher average-sized recoveries. So, all of those contributed to the improvement in our loss ratio in the quarter.

[Darin Arita:]

Just turning to capital. Looking at it building up, you've got a lot more holding company liquidity, the RBC ratios there, in excess of 330%. In your discussion with the rating agencies, what do you think it takes to get your ratings to move higher from here?

[Tom Watjen:]

Let me start, but ask maybe Tom White to supplement that. I would start by the fact, this is certainly the environment for us to continue to build capital. I think I will always feel very good, obviously, about the capital business we have right now, and the economic, and financial environment we have right now. Sort of warehousing capital is very important. So I think you're going to continue to see us continue to do so and, hopefully, continue to generate the solid operating performance we have right now. Tom, I think, hopefully, over the long-term, that continues to enhance the rating picture for the company, but maybe you want to add to that.

[Tom White:]

Yes, Darin. I guess from our perspective, we feel like we've delivered, certainly, our plans and everything. We laid out with the rating agencies, both from a capital perspective in terms of risk-based capital and holding company liquidity leverage, our use of excess capital, but also on an operating earnings side of things. I think one of the challenges that we've kind of had with ratings agencies has not so much been on showing capital numbers, but showing consistency in results. As we've said in our prepared comments, we are five or size quarters into a recession. We have had about a 300 basis point improvement in our group disability benefit ratio in what has been a very difficult environment. So, we think that speaks to the changes that we've made, the better operating performance. Ultimately, we feel like that will turn into better ratings for us. As Tom said, it's a very difficult market and a tough ask in this kind of market, but we think the results speak for themselves and will ultimately result in better ratings for the company.

[Tom Watjen:]

I would add to it. In the meantime, we continue to perform well in the business. The ratings we have today are certainly allowing us to write new business, continue to be very effective in growing our franchise and so, whereas we'd like to see a ratings improvement. It's not exactly something that is holding us back from doing some of the things that we like to do, Darin.

[Operator:]

We'll move next to the site of Randy Binner of FBR Capital.

[Randy Binner:]

For Tom White, I guess I'm not clear on the comment about how the unrealized loss position benefited from the NAIC classification of hybrids to bonds instead of preferreds. Maybe I heard that wrong, but did you imply that that $164 million helped how unrealized or something?

[Tom White:]

No, it actually went against us. It's all geography. On that page 13.1 in our statistical supplement, that I know a lot of you focus on, in the past, anything that was considered to be a fixed maturity redeemable preferred stock was not included. The NAIC during the quarter basically reclassified those, and those particular specific securities, as fixed maturity bonds. So all it does in our reporting is that we include those bonds on that page. So what I am just pointing out that as you do your fourth quarter to first quarter comparisons, keep in mind, that we have included an additional $279 million of these hybrids. They are trading at a loss right now. So of the change from fourth quarter to first quarter, $164 million of that change is the addition of these bonds on that particular page in our disclosure.

[Randy Binner:]

I believe the overall mark on the hybrids is in the neighborhood of $0.44. Do you have a breakout of where the Tier 1s and the Tier 2s are marked?

[Tom White:]

I don't have that right now. Our mix really didn't change. The portfolio didn't change. I think we had one small maturity. I think we said, what, $486 million here in the first quarter. So the mix between the Tier 1 and Tier 2 didn't change.

[Randy Binner:]

So we will just back into the 44.

[Tom White:]

Yes.

[Operator:]

Our next question comes from the site of Colin Devine of Citigroup.

[Colin Devine:]

I've got something for everybody, I think. Why don't we start with Randy? If you could talk a little bit about why your lapses remain quite strong when Aflac's basically imploded this quarter and yet you are in the same sector? What are you seeing? Also, Aflac had very strong agent recruiting, and I'm wondering if you could comment on that? For Kevin, it's nice to see this benefit ratio keep coming down. I assume at some point that starts to stop, but also the operating expense ratio continues to trend up. Does that reflect more the mix shift towards the small case or do you have an expense problem? For Susan, you promised to get the expense ratio down. You did it. Is this level sustainable? I guess, also, is this benefit ratio sustainable? Then Tom, so you don't feel left out here. Is there any update on the CFO search or have you been fortunate in talking Bob into not retiring?

[Tom Watjen:]

You're right, Colin, you did hit us all. We appreciate that actually. None of us feel slighted here. Let's go back, let's do it in your order. Randy, do you want to pick up on Colin's points on persistency in recruiting?

[Randy Horn:]

Yes, we're just not seeing any kind of significant decrease in our persistency ratios. That's very broad-based all over the country and within most of our industry classifications. So I think it really speaks to the fact that even though the recession is having an impact, and certainly there is very strong concern on everyone's minds about job outlook and that type of thing, that people value the benefits that they do have. As I think you know, we emphasize benefit counseling very heavily. Our folks are out there talking to people about their in force benefits. I guess my read on it, is that, people are going to drop a lot of other things before they drop their insurance coverage. I, of course, cannot speak to Aflac's situation and what they experience, but again, we're seeing very steady results all over the country. In terms of our agent recruiting, that is really a silver lining of this economic environment. We're seeing continuation of very strong new agent recruiting. It was up about 24% in the first quarter. We're seeing very strong levels of production coming from our new agents. So we're very encouraged about that in terms of future outlook.

[Kevin McCarthy:]

I think you're right on the money in terms of what you are anticipating here. Case size mix is definitely a driver here, both in terms of an improved loss ratio performance, but also, it does have a different effect in terms of acquisition costs. As you know, our core sales this quarter were up 16%, so there's higher acquisition costs, both as a percentage of premium and in volume. Our case sales were up 28% in the quarter. So you've got policy issuance costs as well going up. So we don't have an expense ratio problem as much as we are, I think, spending money in the right place in terms of our business acquisition and our claims management. That's showing up in our benefit ratios.

[Colin Devine:]

So we should see this, perhaps, continue a little bit? The expense ratio is just going to continue to rise slowly?

[Kevin McCarthy:]

I think a little bit. I think it will eventually level off as we sort of reach a stable mix. For a while, I think you will continue to see some anticipated improvement, perhaps in the loss ration and a slight uptick in the expense ratio.

[Colin Devine:]

All your major redesign is done now?

[Kevin McCarthy:]

You're correct.

[Colin Devine:]

It came out of, again, the claims reassessment and all that?

[Kevin McCarthy:]

Yes, all of our claims management redesign is completed. As you know, our renewal program is also stabilized as well.

[Susan Ring:]

First of all, the expense ratio. We have been maintaining strong disciplined expense control of management, particularly with regard to operational expenses, which are well-controlled and managed to within budget. Obviously, the expense initiative that we undertook at the end of last year has really helped. The performance incentive has been sustained from that. The part which won't be sustained, which will mean that there is a slight increase in our expense ratio going forward, is that some of the expenditure, particularly in relation to development, has been delayed or deferred. So what we will see is a slightly different shape in terms of those costs coming through during the year. So that piece I don't think will be sustained, but we do expect the strong management on operating expenses to be. So there will be a slight shift in that. Perhaps…

[Colin Devine:]

So on the benefit ratio, was there anything extra this quarter?

[Susan Ring:]

Yes. On the benefit ratio, again, we have seen very good risk management results. We haven't seen any negative impact from the recession. We've delivered good strong recoveries during the quarter, and what we have also seen is that incidents has been down and as potential claimants have really stayed at work. That, we do think, has been partially a recessionary impact from a positive point of view. What we don't think is that that will be sustained on an ongoing basis. So I would expect to see, again, an increase in the benefit ratio, but obviously we're still expecting to maintain very strong recovery in return to work.

[Colin Devine:]

OK.

[Susan Ring:]

Hopefully, that answers the both better, Colin? Great.

[Colin Devine:]

Yes.

[Tom Watjen:]

Just on the CFO search, I think as you know, this is a very important hire for us. We want to be very methodical and careful in this process. We've got big shoes to fill with Bob's announced decision to retire. The good news is, Bob is certainly, as you know, is been willing to work with us in whatever length or period of time is necessary. It is hard to get a search going in the first quarter, I have to say, when you look at people going through year end closings and things like that. So it's well underway. Maybe a little slower than I would have hoped, but as I look back to what you'd expect to accomplish in a first quarter when, again, many people you would be talking to are going through year end closings themselves. It's probably where it should be in terms of our process. Again, the good news is, Bob has been very willing and gracious in working with us over a period of time that's necessary to be sure we got the right person and the right transition plan in place.

[Colin Devine:]

Maybe just one final one just to reconfirm. You feel very comfortable with Unum's capital position, very comfortable with your dividends. That sort of sets you apart from your peers, but it's always nice to have that just reaffirmed.

[Tom Watjen:]

Yes, we do. It's because of two things. One is that we obviously think we have a good set of business plans in place that we're executing very consistently and it's producing very consistent results, which is important, including very strong statutory results. The second thing is, we have a very strong financial position and capital position that we think is good at all levels. It's good at the insurance company label. It's good at the leverage level. It's good at the liquidity level. So again, we feel good. I mean we don't want to spend, as we said before, we want to be careful that we continue to warehouse capital for this environment, but again, we feel very good about where things stand right now.

[Operator:]

We'll move next to site of Mark Hughes of SunTrust Robinson Humphrey.

[Mark Hughes:]

You had mentioned a couple of times you might expect an uptick in large case new sales. Was that a couple of big wins or is there something broader going on there?

[Kevin McCarthy:]

I think for the most part, the sales cycle for large case is somewhat longer than it is for small case. So we get a line of sight to the future a little bit easier in large case. We've got some fairly good-sized wins that we can see that are going to merge in the second quarter. That's primarily what we are talking about here. As far as the broader picture, a little bit too early to tell how that's going to play out.

[Mark Hughes:]

Is there some change in either the market or in you that has allowed you to be more (inaudible)? You have been willing to be more aggressive in these large cases?

[Kevin McCarthy:]

No. We really haven't changed our [posture] regarding aggression in large case. I do think that we are always disciplined about it. So that's why you get volatility in the sales. We always write a moderate amount of it every year and we're consistently doing that, but how it times itself during the course of the year varies. I think all of our positive performance over the last several years in both renewal management and the pricing stability that has occurred from that as well as our positive claims performance and the profitability that we've had in our improved service value proposition, all of that I think is probably contributing to some increased competitiveness there.

[Mark Hughes:]

Then in the core market, you've obviously done very well. When do you come up against some tough comps in trying to sustain that growth?

[Kevin McCarthy:]

Some tough comparisons?

[Mark Hughes:]

Yes.

[Kevin McCarthy:]

Probably, the fourth quarter. We had a very strong fourth quarter in 2008. So the comparison, I think, there will be some pressure on us during the fourth quarter of 2009, given how strong we were in fourth quarter 2008.

[Operator:]

We'll move next to the site of Mark Finkelstein with Fox-Pitt Kelton.

[Mark Finkelstein:]

I guess I have a couple of questions. I guess one of your competitors talked about some pressures in small case in terms of kind of just one kind of bankruptcies occurring, and kind of reduced plants, et cetera? Secondly, some looking for kind of lower-cost alternatives. I'm just curious in your core market if you are seeing any of those same kind of trends in terms of looking to kind of reduce some coverages and/or pricing or what have you and how you are reacting to that?

[Kevin McCarthy:]

Yes, we've seen a little bit of it. Our case persistency was down a little bit in the first quarter after we had, I think, three consecutive years of steady improvement in case persistency. When we looked into that a little bit more deeply, it's primarily at the very, very small end of our business. There was a fairly dramatic increase in reported very small cases that were dropping the coverage because they were under financial or budgetary pressures. It didn't affect premium very much. It just affect case persistency. In fact premium persistency was solid.

[Mark Finkelstein:]

Then I guess just following on the prior question, you've got a couple of competitors/blocks that are apparently out there. How is just some of the disarray with some of your competitors on the group side impacting your quote activity? I mean, I understand that you've got a couple of large cases? I mean, are you seeing additional opportunities for quotes, not just at the large case, but also throughout the business? How should we be thinking about just any kind of structural changes in the competitive landscape in light of that?

[Kevin McCarthy:]

Well, our activity levels were up 17% and our close ratios in the quarter were up 10%. I don't know if that's totally driven by the behaviors of competitors as much as our continuing improved performance. Also, we continue to ramp-up our core sales rep staffing levels, but there is probably some combination of those.

[Mark Finkelstein:]

I guess just finally on claim incidence, I think, Tom, you broke down the higher sensitivity claims, I think 25%, some of the mental claims. Just to clarify the comment, broadly, in those specific claim areas, are you not seeing any trend movement, increases in those claim activities, due to kind of economic weakness? That statement can be made across industry sectors and case sizes?

[Tom Watjen:]

It can, Mark, but I'll ask maybe Kevin to add anything to that. As I said, those are the areas you tend to think about, but frankly we haven't seen it.

[Kevin McCarthy:]

Right. I think the comment, Mark, it's more about, if you are going to see something, that's probably how it would occur, but we haven't seen it. We haven't seen any discernible change in reported incidence levels by cause of disability.

[Operator:]

We'll take our next question from the site of John Nadel of Sterne Agee.

[John Nadel:]

So most of mine have been asked and answered, but just maybe a high level question for you guys. If we strip out the potential positive or negative impact of foreign currency, you look at your results so far this quarter and some of the expectations around some of the larger case sales that you have sort of highlighted is coming on, persistency of the business is generally stable. Can we expect topline growth on a consolidated basis or, I guess, premium growth on a consolidated basis in 2010?

[Tom White:]

You need to break it down, because we've got four different stories going on.

[John Nadel:]

Yes.

[Tom White:]

Clearly, the Closed Block is going to decline 5% a year. That is not going to change and not going to necessarily accelerate anytime soon. Unum U.S., you got a couple of factors going on in there. We still think that we can get to a positive year-over-year comparison as we get towards the year end. We've got a little headwind developing with the recessionary pressure that Kevin talked about. So we'll just have to see how that plays out. With the sales that we are seeing, with the persistency we are seeing, we're still looking good there.

[John Nadel:]

Yes, that was sort of my point.

[Tom White:]

Yes, I think Colonial is kind of the same thing. That's pretty consistent 5% or 6% topline growth. We'll have some challenges in the U.K. We have seen the last handful of quarters' year-over-year premiums are down a little bit. That's a function of sales activity being lower; persistency being lower for the last couple of years, but persistency is firming up for the most part. Sales are starting to come back, and that will be a gradual process. I hate to kind of give a single answer for the total company, because you really have different things. Again, when you think of our strategy, it is not to necessarily grow the topline. We want to be selective

[John Nadel:]

Yes, I guess where I'm going is, I mean the capital, the balance sheet story, the liquidity at the holding company, the lack of debt maturities, et cetera, is all very strong and very defensive on a relative basis to the vast majority of your peers right now. I'm thinking just about the earnings outlook. In this environment, right, to Colin's point on how much lower can the benefit ratio go with the pressures of the economy, notwithstanding the changes that you guys have made that is positively impacting that. At some point, the premiums have to flatten to go up, to drive earnings growth, and that was sort of my point.

[Tom Watjen:]

I would just add to what Tom shared with you. I think, Tom, also what you were getting to is because there's three or four different themes going on here, some of what we're seeing in some of the markets, we're targeting in terms of the core markets in voluntary, the margins are actually better in some of those products. So that can also be one of the things as you think forward. Because the mix of business shift, I think, has different margin characteristics to it, which maybe in the topline, I think, as you were saying, Tom maybe telling you one thing, but the margin actually maybe telling you something very different.

[John Nadel:]

Just to the increase in quoting activity, not necessarily closing ratios, but the increase in quoting, any sense, Kevin, as you think about the U.S. market? How you would attribute or what portion of that increase in quoting activity you would attribute to employee benefits, to folks actually really looking to shop because they are concerned about their current carrier?

[Kevin McCarthy:]

No, I don't really have much of a sense of that. I think it's probably more that we have been very disciplined about building out our distribution capacity and capability. We've added, I think, 34 core market reps between last year and this year. Then, of course, we've rolled out our Simply Unum initiative, which gives us greater ability to get multiple quotes across multiple product lines with the same customers and brokers.

[Operator:]

We'll take our next question from the site of Mr. Tom Gallagher of Credit Suisse.

[Tom Gallagher:]

First question is just on the improvement in the benefit ratio and group disability. I know you cited favorable claims recovery trends. Can you talk a little bit about what's underlying that? Is it return to work? Is it more settlements? I guess the reason I ask is just intuitively you would think returning to work is likely to be more difficult when there's fewer jobs. Anyway, that's my first question.

[Kevin McCarthy:]

Yes. There's a number of factors. As I mentioned, the disability ratio is driven by a lot of factors. Paid incidence was slightly lower quarter-over-quarter versus the first quarter of last year. Our in-force pricing is up slightly, and that contributes to the loss ratio. It's up about 1% on a premium for life basis. We had higher average-sized recoveries in terms of their indemnity value and we had lower average-sized new claim submissions coming in. So, all of those sort of affect our loss ratio. We do continue to get steady claim management performance. We had slight increases in recovery rates, slight increases in death resolution rates and slight increases in settlements. All of those sort of add in.

[Tom Gallagher:]

So a little bit of a lot of things, it sounds like.

[Kevin McCarthy:]

Yes.

[Tom Gallagher:]

The next question is just on stat earnings. I noticed they were particularly strong at least on an operating basis. Can you talk a little bit about what was driving that?

[Tom White:]

Yes. Statutory earnings were very good. When we get those statements out on the website here in a few days, you'll be able to look through those. We do get a little bit of benefit with the relationship between the special-purpose reinsurance vehicles when they have investment losses, and it gets reimbursed. So that helps the statutory earnings the way it gets presented. So what I would probably ask you to do this quarter is to focus on the net income line, where all that impact washes itself out. The fact that we are $140-something million of statutory net income in a first quarter is an excellent result for us. There is some seasonality in our business. We tend to see a little higher group life claim incidence in the first quarter and there is a little bit higher disability incidence just on a seasonality basis. That comes through in statutory earnings. So the fact that we have a strong statutory net income in the first quarter is pretty powerful for us.

[Tom Gallagher:]

So, Tom, from a sustainability standpoint, you would direct us to net income as opposed to the stronger operating income?

[Tom White:]

Yes, I think for this quarter. We can get together off-line and kind of talk through some of that. When those filings are out there, we can walk through it. Yes, I guess probably the better way to focus is to look at the net income for this quarter, which, again, was excellent.

[Tom Gallagher:]

One other thing I noticed, just on page 14.2 of the supplement was, looks like incurred on prior-year claims was a large negative number and...

[Tom White:]

That's positive reserve development. The way it's presented on that page. So when you look at the last four or five quarters or so, we have had very positive reserve development. That's what drives a lot of the improved results you see in statutory earnings.

[Tom Gallagher:]

How should we think about that? Is that just underlying relative to prior estimates of reserves, you're just seeing better underlying?

[Tom White:]

We are seeing better experience. We are seeing better incidence. We are seeing better recovery. Pricing, as Kevin mentioned, is coming through nicely. Mix of business is coming through. It all feeds together. You got a lower benefit ratio. You got a better profit margin. You see better reserves development, stronger statutory earnings, stronger cash flow. It's just all driven by the changes that we've put in place over the last handful of years in that business.

[Tom Gallagher:]

Last question just on the U.K. Susan, can you just talk a little bit about the environment? I guess the way I sort of look at that business is, it's been by far the most volatile just looking at sales and premium revenue and profitability, has the competitive environment stabilized? Is it lessening? Is it just as intense as it was? I recall back on investor day, there was discussion about what sounded like massive price disparities in the market. Maybe you could just give us an update of what's happening there?

[Susan Ring:]

I would say that it's just as intense. I wouldn't say that it's [varied]. So it's something that we continue to sort of monitor and keep an eye on. We ensure that we don't get distracted by it. We are maintaining our pricing discipline. We are still very strongly positioned from a market point of view, both in group income protection, group disability, where we have the market lead, and also in group risk, overall, which includes all the group protection products. So we are very focused on making sure we continue to deliver to our customers, and what they want, and develop the offerings and the services that we deliver to them. So just as intense, but we're just as equally focused on what we need to do.

[Tom Gallagher:]

Susan, would you say you're still seeing some price activity that's 30%, 50% away from what you think is reasonable or is the price war letting up at all?

[Susan Ring:]

No, I would say, again, we're still seeing some very aggressive pricing. Having said that, as a result of that, we have seen some losses with regard to our group life business. So you all have seen from the results that our persistency for group life wasn't where we'd have liked it to be for the first quarter. Having said that, though, our group income protection, our group disability persistency was very strong, in fact, 91%. Our group critical persistency was just under 90%. So we are very much focused and our field force is focused on making sure that we maintain the business that we've got. So there is some very aggressive pricing out there, but our service offering is very strong. A lot of what we offer from a product point of view means that we are very well-positioned. In some cases uniquely positioned with the features and services that we offer. So, we continue to focus on making sure that we develop and deliver that.

[Tom Watjen:]

We have time for one more question.

[Operator:]

Our final question will come from the site of Eric Berg of Barclays Capital.

[Eric Berg:]

I know. After all these years and after this market, my skin is about three inches thick, so no offense taken at all. It's absolutely fine. I was hoping to follow-up on a comment by Kevin and Susan regarding the recession. My question is very narrow and very precise. I've listened to everything you have said about, very attentively, about the changes you've made in your business. My first question is, why do you think it is that in the corners of the economy, here and in the U.K., that would be hit right by a recession and in which you would expect to see an elevated level of claims, including mental and nervous claims, we have not? What's your best sense of what's going on different this time around?

[Kevin McCarthy:]

Let me say two things about it. One is sort of factual and one is highly speculative. The factual one is that although with everything that's going on in the economy, the unemployment rate change in our mix of business, for example, the education and health sector where you have still got employment growth going on, has a dampening effect on expected results. In addition to that, particularly in group disability income, we tend to insure a lot of people who are college educated or higher. As you know, looking at unemployment, our employment level statistics, the change in our unemployment rate is much smaller than the headline rate. So that's sort of factual side of it. I think the speculative side of that is, it's awful hard to try to get inside of people's heads as to what makes them or doesn't make them file for claim. As I have said in prior quarters, I think right now, if you have a job, taking the chance on filing for disability at the risk of your job is probably not a great plan.

[Susan Ring:]

Yes, sure Tom. I mean, in the fourth quarter last year, I don't know whether you remember, we did actually see some increase in claims incidence, but that hasn't been replicated in our experience for the first quarter. What we saw last year was, in particular, claims, the mental and nervous disorders, and they tended to be short duration claims. This quarter we have seen lower inceptions. I think the primary reason for that is because potential claimants are staying at work because they don't want to see the sort of job closed out or restructuring that could happen behind them when they go on to disability claims. So I think people are sort of staying put for fear of further changes. The other thing that we're seeing in the U.K. as well is certain employers are actually withdrawing claims. So they are submitting them and then withdrawing them fairly quickly. The reason for that is because they are undergoing organizational changes. They're restructuring. In some circumstances, they are making categories of employees, which includes that potential claimant, redundant. So there are two factors going on, really.

[Eric Berg:]

My final question relates to profitability in your core business. What you call your core business is, of course, a corner of disability that lots of people have been pursuing very aggressively for years. Lots of people have told us about their desire, whether it's StanCorp or Reliance Standard, I think Met and Hartford have both created units to focus on this core market. Why do you think profitability continues to be better in your core business than in the large case market, given what would appear to be increasing attention by your competitors to your target market too? Thanks.

[Kevin McCarthy:]

Yes, I think you're right that there is increasing attention, but still, if you look at the size and scope of our field sales and service operation and its focus and attention on the core market, I think we have broader and deeper coverage there and a long history there with a lot of brokerage relationships. In addition to that, we continue to redesign our offerings to fit that core market. 71% of our sales this quarter had two or more lines of coverage. So I think that we are able to maybe serve that brokerage market and that small case market place with a breadth of offerings supported by service, and even supported by the ability to add on voluntary benefits with enrollment. I just think we have maybe a value proposition that's more focused on that market.

[Tom Watjen:]

Thank you, Eric, and then thank you all for taking the time to join us on this call. This will complete our first quarter 2009 earnings call. As always, we are all available for questions if there are some to follow-up. Thank you.

[Operator:]

Thank you. This does conclude our conference call for today. You may now disconnect your lines, and everyone have a great day.