Unum Group
Q1 2008 Earnings Call Transcript

Published: 2 May 2008

[Operator:]

Good day everyone and welcome to the Unum Group First Quarter 2008 Earnings Results Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions I would like to turn the call over to your host Mr. Tom White. Please go ahead, sir.

[Tom White:]

Thank you Darrel. Good morning everyone and welcome to the first quarter 2008 analyst and investor conference call for Unum Group. 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 Securities and Exchange Commission and are also 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, 2007. Our SEC filings, including our Form 10-K and Form 10-Qs can be found in the Investors 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 reconciliations of any non-GAAP financial measures included in today's presentation can be found on our website also in the Investor section. As you know, yesterday afternoon, Unum Group reported earnings for the first quarter of 2008. Net income in the quarter was $163.1 million or $0.46 per diluted common share, compared to net income of $178.3 million, or $0.51 per diluted common share in the first quarter 2007. Included in these results for the first quarter of 2008 are net realized after-tax investment losses of $44.7 million or $0.13 per diluted common share and $3.2 million or $0.01 per diluted common share in the first quarter of 2007. These losses were driven by the provisions of DIG B36 accounting, which require changes in fair values of embedded derivatives in certain modified coinsurance contracts to be reported as realized investment gains and losses and resulted in a first quarter 2008 after-tax investment loss of $41.6 million compared to a $2.2 million after-tax loss in the first quarter 2007. So if you exclude this DIG B36 accounting impact, net realized after-tax investment losses related to sales and write-downs of investments were $3.1 million in the first quarter 2008 and $1 million in the first quarter 2007. Adjusting for this item and excluding discontinued operations, after-tax operating income was $207.8 million for the quarter or $0.59 per diluted common share compared to $174.6 million or $0.50 per diluted common share in the year-ago first quarter. On the call this morning are Thomas Watjen, President and CEO of Unum Group and Bob Greving, Executive Vice President, Chief Financial Officer and Chief Actuary as well as the heads of our three major operating segments, Kevin McCarthy, Susan Ring and Randy Horn. And at this time I would like to turn the call over to Tom Watjen.

[Thomas R. Watjen:]

Thank you, Tom, and good morning. For us, the first quarter has proven to be a strong start to 2008 as much of the positive momentum has been building in our businesses over the past couple of years carried over to the New Year. Excluding net realized after-tax investment losses, we reported $0.59 per share in operating income for the first quarter, 18% higher than the $0.50 per share reported in the first quarter of 2007. Our pre-tax operating earnings improved 19% when compared to the first quarter of last year with core operations pre-tax earnings growth of 14%, primarily driven by strong risk trends across all of our business lines. In fact each of four primary business lines reported lower benefit ratios in the first quarter of 2008 when compared to the first quarter of 2007, which to me is a strong reflection of the disciplined approach that we've been taking to the business over the last several years. Our investment portfolio credit quality continues to hold up well in this environment with minimal exposure to today's risky asset classes. We did experience some pressure on net investment income due to lower than expected levels of bond calls and miscellaneous investment income, which is really a byproduct to the low levels of refinancing and M&A activity we saw in the first quarter. We historically have received around $14 million to $15 million of this bond call and miscellaneous income, again per quarter and frankly we had zero this past quarter. This was especially evident in the investment income results that you saw in our Unum U.S. group disability and our closed blocks of business lines of business. Our sales trends were mixed, but I am extremely encouraged by the growth that we saw in UNM U.S., which… we actually saw sales growth in the quarter of about 29%. In our recent investment investor meetings we have discussed with you the importance of voluntary products in the marketplace and our company is focused around the core market, which is selling to the small and mid-sized employer. Sales trends in these two important markets were strong in the first quarter with core market group sale increasing 36.5% and voluntary benefits sales increasing 34%. While our reported sales results for Colonial Life and Unum UK were below our expectations, and when you get to the detail you will see that the rest of underlying positive trends in our core market activities reached these two businesses. Also in our recent investor meetings we discussed our commitments in new product and service offerings to capitalize on the changing market dynamics. One such initiative is ‘Simply Unum’ a comprehensive product and service offering in our Unum U.S. business which combines group and voluntary coverages on one fully integrated platform targeted at core market. Our limited roll out which began in late 2007 is producing very encouraging results. Now it's too early for Simply Unum to have an impact on our sales results, however, we are encouraged by the broker and customer receptivity and early results are very much in line with our expectations. On April 1st, we rolled out the offering out to six additional field sales offices and plan to operate in an additional 12 field sales offices by mid-year. We plan to complete our full nationwide roll out as we receive state approval for each of these products and services. I should add that Simply Unum is not the only initiative designed to further leverage our leadership position and I think capitalize on some of the opportunities that are emerging in the marketplace. Colonial Life has begun to raise its profile in the market with a new branding program. We believe this investment along with its new life and health products and enhanced enrollment capabilities will help lead to accelerated long-term growth in agent recruiting and in sales. In the UK we are focused on a number of new products and service offerings including a new dual benefit group income protection product offering, which provides assistance to both the employer and the employee in the event of long-term sicknesses. I think all these initiatives are very much designed to capitalize on our leadership position and show that frankly we are making additional investments in our business to assure that in future quarters we can continue to produce predictable profitable growth that we think is sustainable into the future. Now let me take a few minutes just to talk about each of our three business segments. Let me start with, Unum U.S. Our pretax operating earnings for Unum U.S. increased by 14% with strong performance across each of the three reporting lines. Improvements in the claim management process continue to enhance results in this segment's group disability line with our BTOE [ph] for the quarter increasing 34.5%. The group disability benefit ratio for the first quarter was 91%, down another 50 basis points from the fourth quarter of 2007 and 240 basis points lower than the first quarter of 2007. Incidence trends remain generally stable in the first quarter for both our LTD and our STD lines of business. I am sure there will be some additional questions in the Q&A session about the vulnerability of that businesses economic conditions but we did not see any material change in the incidence in the quarter based on anything that is happening in the economy. We remain confidant that reducing the benefit ratio to the 88% to 89% range by the end of early 2002 or early 2009… I'm sorry, early... the end of 2008 or early 2009 timeframe is still very major realistic objective. We also saw solid results across the other lines including group life and accidental death and dismemberment, where BTOE increased 12% and in the supplemental and voluntary lines of business where earnings grew 7%. Unum U.S. sales were very strong this quarter, increasing 29% from the first quarter of 2007 with encouraging underlying trends both in our core market sales, our voluntary benefit sales as well as our key account growth. And Kevin McCarthy is available to give... provide more detail on those results as well as any developments that are occurring in the marketplace. Now shifting to Unum UK, our BTOE of $87.1 million for the first quarter was a16% increase over the first quarter of 2007. We continue to see excellent risk results with a benefit ratio at 57.3% in the first quarter and all three business lines produced lower benefit ratios year-over-year. Sales declined 10% in the first quarter on a dollar basis reflecting a difficult comparison due to some legislative changes introduced in 2007 and also some very competitive market conditions especially for our group life products and our sales for large employers. And Susan Ring is available to address any questions you may have on both the results on the market conditions over in the UK presently. And last but not least Colonial. Our BTOE in Colonial increased 13% to $67.4 million in the first quarter, a record quarterly result for Colonial Life. Results continue to reflect positive benefit experience for the accident, sickness and disability product lines. Expenses were back to a more normal level following our brand launch in late 2007, which elevated expenses for the fourth quarter. Sales were flat for the first quarter, a disappointing overall start to the year but we did see encouraging signs with positive core market and new account growth. Randy Horn is also available on today's call both to discuss the results as well as to discuss the Colonial's marketplace. Now, I would like to now move to a little... to a brief discussion of our capital management initiatives. As you may recall, when we announced the completion of Closed Block securitization with our third quarter 2007 earnings release, we also outlined our capital management philosophy which is centered on maintaining sufficient financial flexibility to support our operations across different economic cycles while also positioning for improvements in our current ratings and of course responding to opportunities in the marketplace. And we've maintained a very, very strong capital position which I think frankly at this point gives us a great deal of financial flexibility. Our first quarter estimate of risk-based capital remains about 340% for our traditional U.S. life insurance companies, substantially higher than our long-term target of 300% and our year-end target, 2008 target of 315% to 325%. Our leverage excluding the non-recourse debt and capital associated with our securitization tail wind in Northwind Holdings finished the first quarter at 21.9%, well below our target of 25%. We intend to retire the $175 million of short-term debt due this month which will move our leverage ratio even lower in the second quarter and through the balance of the year we are going to continue to certainly look for ways to optimize our capital structure. Holding Company liquidity was $624 million, comfortably above our target to cover one year of fixed charges plus maintain a capital position for business and economic volatility. And so we completed the first half of our $700 million share repurchase authorization, which we authorized in the fourth quarter of 2007. In the first quarter through a $350 million accelerated share repurchase, we purchased approximately 14.5 million shares and at this time we fully expect that we will complete the balance of the repurchase over the remainder of 2008. I guess as I close, we're off to an awfully strong start for 2008, we saw strong operational performance across all of our operating businesses, again driven by very strong risk results. We saw strong sales activity especially in our core and voluntary marketplace. We continue to maintain a very high level of credit quality in our investment portfolio in the face of what is obviously a very challenging financial environment. We maintain financial flexibility and capital flexibility driven by the strong balance sheet and capital position we have plus the continued strong performance of our business and again everything gets very sustainable as we look to the balance of this year. And we continued to improve the relationships with many of our key stakeholders, highlighted by the important conclusion on a favorable terms of the California settlement agreement, which closely followed our successful completion of the multi-state review and claim reassessment process. And as you could sense too, we’ve continued to invest in our business to leverage the position that we have in the marketplace, which again we think are really quite leveragable as we look forward into some very good market dynamics out there ahead of this. Now I would like to turn the call back over to Tom White, who will provide more detail on the quarter. Tom?

[Tom White:]

Great. Thanks, Tom. I'll can keep my comments on the operating results fairly brief this morning but I do want to provide the following highlights. First for Unum U.S. in the group disability line, we continue to see improvement in the group disability benefit ratio, which as Tom said has declined in 91% for the first quarter. New claim incidence was generally stable in the first quarter with the levels we experienced… generally consistent with the levels that we experienced in the first and fourth quarters of 2007. Our analysis of incidence trends shows no significant variations either in any occupational categories or by case size. We have cautioned that if recessionary pressures show up in our claim incidence trends, it would more likely occur with a lag. However, we see no current signs of economic pressure on this part of our business. Additionally, the SCD line, which can be a precursor to LTD claim activity, also continues to perform well with stable claim incidence trends evident in first quarter. Net investment income for group disability in the first quarter was somewhat lower than recent historical quarterly averages and this reflects a lower level of bond call activity and prepayment premiums within the investment portfolio, as again as Tom described this refinancing activity and M&A activities remain at low levels. You'll recall that in the second, third, and fourth quarters of 2007, this activity was somewhat elevated as indicated by the higher levels of net investment income attributable to bond call premiums in those quarters. And finally, the expense ratio was somewhat higher in the first quarter 2008 relative to the last year due to the slight decline in premium income and also higher product and service development costs. Moving to the Group Life and AD&D line, we saw an exceptionally strong level of profitability in this line with a benefit ratio of 68.2% compared to 75.2% in the first quarter of '07. The expense ratio for this line was higher this quarter reflecting the higher sales volume and quote activity as well as higher expenses related to product and service development. And also you should keep in mind that as our mix of business for Group Life shifts somewhat away from large case to more core market business, a slightly higher operating expense ratio will result. Finally, within Unum U.S. the supplemental and voluntary lines, we produced a record quarterly income in this line with BTOE of $68.7 million, an increase of 6.8%, which was driven by generally strong risk results and premium growth of 8.2%. And again the benefit ratios for each major business line improved relative to the year ago results and the expense ratio also declined from the fourth quarter 2007 levels. As Tom indicated, sales at Unum U.S. were strong increasing 29%. Core market sales for our group lines, which I'd defined as LTD and STD and Group Life were very strong, increasing 36.5% for the first quarter following an increase of 20% in the fourth quarter. We continue to be opportunistic in the large case market and sales for the first quarter grew by 12.4%. Our mix of sales was also encouraging with 61% core and 39% large case sales, which is in line with our long-term objectives. Momentum continues to build in the voluntary benefits line with sales increasing 34% for the quarter. And individual disability recently issued sales, which increased 8% for full-year 2007, grew by 13.8% here in the first quarter. Finally, premium persistency in our group lines improved for each of our LTD, STD and Group Life lines in 2008 compared to last year with terminations again focused mainly in the large case segments. So to summarize the results for Unum U.S. as a segment, we had excellent risk management results and the leveling out of higher expenses that were recorded in the fourth quarter of 2007, and these more than offset the lower level of miscellaneous net investment income associated with bond call premiums and prepayment income. So these trends… excuse me… overall produced growth in BTOE of 14% for the first quarter. Now I would like to move to Unum UK, and there we continue to see very strong results from Unum UK with a 16% increase in BTOE to $87.1 million for the first quarter. Risk results were excellent with a benefit ratio of 57.3% for the quarter compared to 61.1% in the year-ago quarter and 60.8% in the fourth quarter of '07. Lower rates of claim incidence for both group long-term disability and group life and an increased rate of claim recoveries for group long-term disability drove these results. First quarter expenses in Unum UK declined from the fourth quarter levels, which were elevated due to the accrual of remaining lease payments on a non-occupied facility. Finally, our first quarter sales, as we mentioned, declined by 10% on a dollar basis due primarily to lower large case activity as well as the benefit we experienced last year from sales driven by age, quality legislative changes. Additionally, the group life market in the UK remains challenging with competitive pricing limiting our opportunities. We did see good core market activity with sales in the under 500-life market for group LTD and for group life increasing by 8%. Moving to Colonial Life, with excellent quarterly results, in fact a record quarter, with favorable risk experience in the accident, sickness and disability product line. The benefit ratio continues to run below our long-term expectations and we continue to expect a gradual rise in the benefit ratio to more historical levels going forward. You’ll notice that the expense ratio for Colonial declined from the elevated level of the fourth quarter of '07. The first quarter 2008 ratio was 19.7% compared to 21.7% in the fourth quarter of '07 and 19.3% in the first quarter of '07. We had high branding and advertising expenses in last year's fourth quarter and as we move through 2008 you can expect to see a more leveled pattern of spending which we will in turn translate into more consistency in the expense ratio throughout 2007. As Tom indicated, sales at Colonial Life were flat this quarter, but we did see some positive underlying trends. We saw good growth in the core market with sales in the under 100 life employee commercial market actually increasing by 8%. However, sales declined by 5.5% in the over 100 employee commercial market. We are also generally encouraged by the activity in the market. New account growth was up by 4.2% from the first quarter. However again, average new case size declined by approximately 5%. New sales rep recruiting and productivity show positive trends with new contracts increasing by 41% in the first quarter and our key new rep production milestones continue to improve. And finally, persistency at Colonial Life was stable to slightly higher for its major product lines relative to year-ago results. Finally moving to the Individual Disability Closed Block segment, these results were $13.7 million, which were below our expectations but it was driven entirely by lower net investment income. Similar to our Unum U.S. group disability results, the lower level of net investment income results from an extremely low level of bond call premiums this quarter as refinancing activities in the market remained low. We also had lower levels of an invested asset as a result of the fourth quarter of '07 release of excess statutory capital, again driven by the securitization that we announced last year. And that was capital that previously supported the Closed Block. Importantly, the risk trends for the closed visibility block remains stable in the first quarter and you will notice that the interest adjusted loss ratio was 19.1% [ph], which was below both the fourth and first quarter 2007 levels. Our weighted average share count, assuming dilution for the first quarter of 2008 was 351.5 million shares compared to 360.7 million in the fourth quarter. During the quarter, we lowered the outstanding share count by 14.5 million shares with the execution of a $350 million accelerated share repurchase and you'll notice that the share count at the end of the first quarter of '08 was 346.3 million shares. Our consolidated return on equity for the first quarter was 11.2%, which was consistent with the full year 2007 ROE. Book value per share increased to $22.6 per share as of the end of the first quarter compared to $21.52 at March 31, 2007. And if you exclude the net unrealized gain on securities and the net gain of cash flow hedges, book value per common share increased to $21.06 at March 31, 2008 compared to $19.56 a year ago. And finally, the positive momentum in statutory earnings continued with our first quarter 2008 net gain from operations, this is after tax, was $148.4 million for our traditional U.S. Insurance subsidiaries compared to $143.4 million a year ago. Now I would like to close with few comments on the investment environment and our investment portfolio. The current market volatility, particularly the widening of corporate spreads on new investment opportunities continues to present opportunities for us. And despite the decline in U.S. Treasury yields in the first quarter, these wider corporate bond spreads enabled us to achieve a new money yield for the first quarter of 6.58%. This compares to 6.18% in the fourth quarter of '07 and 6.07% in the first quarter of '07. The overall portfolio yield, you noticed increased by 4 basis points relative to the year... excuse me, to the year-end 2007 yield. And the interest reserve margins also increased slightly and remained comfortably above our 50 to 60 basis point target. From a portfolio quality perspective, we are happy to again report that there have been no material changes in the quarter. We've outlined our exposure to asset mortgaged backed securities in our statistical supplement and I would like to take a minute just to highlight a few important investment facts that are frequent questions that we get. First of all, we have no subprime mortgage exposure, we have no CDOs related to asset backed or residential mortgage backed securities. Our Alt-A exposure is $5.2 million on a book value basis and $5.5 million on a fair value basis, all of which is rated AAA. The book value of our private equity partnership exposure is $51.6 million. We have no direct investments in any of the financial guarantors and our exposure to investments with wraps by financial guarantors is $135 million on a book value basis and $132.3 million on a fair value basis and the average underlying rating on these securities is an A1. So, overall we feel that our investment portfolio is in excellent shape and well positioned for what will likely continue to be a challenging environment in 2008. Our high yield exposure remains at approximately 5.2% of invested assets. The current level of non-current investments is only $4 million. And as always we will be pleased to address any specific questions you have regarding our investment holdings in the question and answer session. So, with that let me turn the call back to Tom for his closing comments.

[Thomas R. Watjen:]

Yes, thank you Tom. Again before we move to your Q&A, let me just close by reiterating how pleased I am with a strong start we've had to 2008. While we certainly all agree that this is no time to relax, we are certainly very pleased with where things are at this particular point with the strong balance sheet and a more flexible financial platform were relative to our long-term goals. Our risk-based capital was in excess of those goals, our leverage is below those goals and our liquidity to holding company is above those goals, all things which you would like to see. We have a well-positioned investment portfolio with historically low levels of high-yield bonds and very limited, as Tom said, if any exposure to the asset classes that are troubling many financial institutions today and very importantly and more diversified set of businesses with greater sources of growth which enable us to operate better in any environment. Now, we are certainly not fully immune to economic volatility or uncertainty. However, we believe we are significantly better positioned today operationally and financially than at any time in our past. We believe too that we're positioned well to benefit from some of the long-term changes happening in the marketplace whether there... the migration to voluntary products, dealing with issues the employers and employees are dealing with, or the federally funded challenges that Medicare and Social Security have. Again we are well positioned to benefit from those and as you can sense from my earlier comments, we are investing heavily in our products and services and people to assure that we are positioned well, the market leader to benefit from some of the market changes. Finally, with respect to guidance, we are increasing slightly our 2008 guidance by $0.02 per share to reflect the first... strong first-quarter results. Our new guidance is for operating earnings per fully diluted common share within a range of $2.37 to $2.42. Now with that operator, I think at this point we'd like to begin to move to the question-and-answer session. Question and Answer

[Operator:]

Thank you. [Operator Instruction]. And we will take our first question with Colin Devine with Citi. Please go ahead.

[Colin Devine:]

Good morning.

[Thomas R. Watjen:]

Good morning, Colin.

[Colin Devine:]

Couple of questions, just to sort of flush out what's going on... sort of as you continue transform that... the U.S. business and I was wondering if Kevin is around to talk a bit about case counts to give us a sense of really just... from your customer base how is that changing, perhaps just you got Susan on the line, she could also talk about what's going on in the UK in that respect? And also if we could talk a bit about the benefit ratio, just expand is... as you noted the expense ratio is going to start to come up as the mix changes, what's driving the benefit ratio down? Is it the improvements in the back office, the repricing or is it partially a function of the mix? And then lastly, where are the Close Blocks, if you can maybe just give us some sense of what a realistic earnings run rate for it is now that has been securitized and you have taken some of the assets out of that?

[Thomas R. Watjen:]

Good. Colin, good question. Maybe, Kevin, I'll just ask you to start on the case count for Unum U.S., as well let me just tie into that the benefit ratio piece and then we will come to Susan on the question for the UK.

[Kevin P. McCarthy:]

Great. Good morning, Colin. Case count for the quarter was up 31% and Unum U.S., really, really strong results following our fourth quarter results and core premium of course and associated with that case count was up 37%. So the momentum that we established in the second half of '07 continued in terms of customer acquisition. And by the way, case persistency was up also in the quarter. So overall, customer acquisition and retention is going very well. On the group income protection loss ratio improvement, incidence was stable in the quarter, recoveries were slightly improved and I think that drove some of the improvement, certainly mix and continued success in our renewal program also drove some of improved results.

[Thomas R. Watjen:]

Kevin, it’s worth. I think just those were not surprising results on the customer side, when you look at the customer service scores in terms of potential to renew, desire to do more business and so forth, and we just had some very fresh data on that in that regard, which is again very encouraging for the future.

[Kevin P. McCarthy:]

That's right. All of our customer satisfaction ratings continue to go up, like we did to renew, like we did to recommend and a lot of recent information about our brand attributes and financial strength, service quality, all of those ratings were up.

[Colin Devine:]

Kevin just to jump in for a sec, to sort of get at this, the mix changes, the benefit ratio and the expense ratio are going to change. So, we've got a target for where the benefit ratio is going to. Am I correct in understanding and this is what I thought Tom noted, expense ratio is going to start to drift up, so if the benefit ratio target is 88, what are we going to be looking at for an expense ratio?

[Kevin P. McCarthy:]

I think the expense ratio will drift up just little bit at a time probably in the 18 to 19% range for a while. But then I think as Simply Unum comes on board, it will work its way back down, because we have efficiencies with the launch of Simply Unum as a result of having all of our customer management capabilities for all product lines on one single platform and a lot of our customer service capabilities are then web enabled for our customers. So you get some level of, if you will, customer-self service kicking in there as well. So… and I think also as our business mix moves to the small case marketplace and we continue to be affected in our target markets, you are going to also have more of your sales in lower incidence segments, which I think will also help us on the claim management expenses as well.

[Colin Devine:]

Thanks.

[Thomas R. Watjen:]

Susan, if I could just maybe ask you to speak a little to the UK experience in the sales front, especially on the case counts for the quarter?

[Susan Ring:]

Yes, absolutely. Hi, Colin. And with regard to our case count, and that's up overall by 5% over last year and up 11% in our core market. And as far as sort of the underlying trends regarding sales are concerned and they are looking quite healthy [inaudible] product lines and significantly ahead of plan. They are up 24% to 30% and [inaudible] core market are significantly up on 2007 and group income tax in our group long-term disability was 13% versus 8% [ph] in the half last year. So, the key issue really is large case sales [inaudible] our average premiums down and that's really due to extreme pricing pressure that we are seeing in the market where finally the competitors are even prepared to write business below the cost of claims. And the second factor that’s impacting our sales results is Group Life, where concentration of risk issues and where the level of exposure that we hold precludes us writing business in certain hot areas. And we haven’t been able to write the volumes for Group Life that we would have expected. And other competitors either don’t hold the same amount of business and as we have or and they have had a more cavalier approach to the concentration of risk issues than we tend to take. And so really they are the two factors that are impacting our sales, but core sales really remain healthy. That answers the question, Colin.

[Colin Devine:]

Perfect.

[Thomas R. Watjen:]

Good. Thanks Susan. And maybe Tom if you could address Colin’s questions about sort of the more sustainable run rate for earnings in the Closed Block.

[Tom White:]

Yeah, I think Colin the way to look at the Closed Block is probably earnings in the low to mid 20 millions of dollars per quarter. And if you looked at this quarter's results, if we had had a normal quarter for bond calls, retirement [ph] income that would have added about $9 million to $10 million to net investment income and that would get us to kind of $23 million $24 million, we didn't have that this quarter, it is very unusual one for that on that regard. And also keep in mind that with the securitization, we moved out about $400 million of capital and so the net investment income from that capital is no longer reported in that line.

[Colin Devine:]

Okay. Great. Thank you.

[Thomas R. Watjen:]

Thanks, Colin.

[Operator:]

And we'll take our next question with Bob Glasspeigel with Langen-McAlenney. Please go ahead.

[Robert Glasspeigel:]

Hi, Good morning. I am going to stay up with Colin on the group question and actually just tell us what's going on and as we look at page 7 on commissions going up and amortization of DAC less deferrals sort of going up. What sort of pressure is that going to offset as we go over the year with the benefit ratio coming down.

[Thomas R. Watjen:]

I'm sorry. Bob you are looking at the page 7 of the statistical supplement.

[Robert Glasspeigel:]

Right.

[Tom White:]

In U.S.?

[Thomas R. Watjen:]

In U.S.

[Robert Glasspeigel:]

U.S.

[Thomas R. Watjen:]

Tom you want to start?

[Tom White:]

Yeah, I think certainly commissions are going to move up a little bit if sales move up. And that's a direct correlation there. On the amortization issue with the change in the amortization rules going back a year ago with SOP '05-1, if I got all my numbers right. It did cause some changes in that and what we had for Unum U.S. this quarter, particularly in the group disability line was a little bit more of these internal replacements where there was enough of a change in the renewal of the contract that causes us under the new accounting rules to go in and write off the DAC and put a new DAC. So there is a little bit of that expense, it’s maybe $2 million that's impacting that. So there will be... a little noise from that going forward but it's fairly minor relative to the overall earnings of the business.

[Robert Glasspeigel:]

I think the message, I think I am hearing is our earnings growth in U.S. group is going to be less than the benefit ratio improvement held back by discretionary spending on the expense ratio and a higher drag from commissions?

[Thomas R. Watjen:]

I don't think so, we love to have higher sales, I mean we will deal with higher commissions, as the business comes on, the profitability flows through on it. But I wouldn't want you to think that we are going to feel any margin pressure from that.

[Robert Glasspeigel:]

I didn't say margin pressure, I'm just saying the margin improvement won’t be as much as the benefit ratio would suggest by itself. So we got a couple of drags that will offset it?

[Thomas R. Watjen:]

I am not sure, Bob, I think that... I don't think it is quite that extreme. Actually I think because the other thing is we have expenses or I think Kevin now are a little bit higher than expected, but I think we are going to grow our way back into that and actually have comeback in line. So I think there is a couple of other dynamics Bob going on there that, I don't know if Kevin you want to add to that.

[Kevin P. McCarthy:]

I think we have some temporary uptick in expenses by our expansion of core distribution and are refocusing of our distributing channel towards the core marketplace, also increasing voluntary sales drive expenses up a little bit in the short-term. And are Simply Unum launch of courses as we roll that out and all the promotion and training that goes along with that. But then as Simply Unum as I said earlier as Simply Unum sales kick in we will start to get expense ratio efficiencies that start to flow through from that offering. And I think that that will bring the expense ratio back down. And Simply Unum in all of our strategy is of course focused on the small and midsize marketplace and so as I said those tend to be lower incidence marketplaces. So our claims expenses should start to come down as a result of that, and I think also we will get sort of generally a better claim operating performance results in those marketplaces. More package sales. So I think everything that we are doing is geared towards gearing up growth where we think we can improve profit margins and generate earnings growth.

[Robert Glasspeigel:]

Thank you for your answers. I appreciate it.

[Thomas R. Watjen:]

Yes, thanks Bob.

[Operator:]

And we will take our next question with Tom Gallagher with Credit Suisse. Please go ahead.

[Thomas Gallagher:]

Hi good morning.

[Thomas R. Watjen:]

Good morning Tom.

[Thomas Gallagher:]

Few specific questions and then one macro question. I guess starting with Susan, on the UK, I was curious on your comments about the level of competition which sounds like it's getting bit more intense. Can you comment on what you think that means for your sales outlook and also persistency? Are you also seeing aggressiveness if competitors are trying to take business away from you? And then also what do you think that means to sort of the overall growth rate of your business over the next couple of years? Thanks. I will start with that then I have a few follow-ups.

[Thomas R. Watjen:]

Susan?

[Susan Ring:]

Yes, sure. Thanks Tom. You are absolutely right to say the competition is competition is very intense and really with regard to our key competitors and as I said that is being extremely aggressive as far as pricing is concerned. That is certainly putting pressure on us, particularly at the large end of the market. And what we are doing is we are making sure that we are maintaining pricing discipline and it's not just putting pressure our sales, but it's also putting pressure on persistency and that we do have a very rigorous retention programs in place and at all size sectors and that's the business that we hold. And obviously most particularly on the large case, which is where and where tending to be most aggressively attacked and that also really right through including the small and medium case as well. And we do have a very good track record of making surely hold on to the business and that we have got and making sure that customers appreciate the value proposition. If we do these cases then and we keep track of them and we obviously still maintain a relationship because it's still paying existing claims system and we do go back for that business, and we do have a gain of very good record as regaining customers if we aren’t fortunate enough to do some. So, I would say that we've got an aggressive retention program in place to make sure we keep hold to the business that we want. And we do have good results in our core markets from a sales point of view. We are maintaining our pricing discipline. And we are selling very much on the value of the customer proposition that we have to offer and our service proposition. And that is often very well appreciated by clients, by brokers. And to the extent that we do find that we are able to keep business at a price premium and we are also able to close new businesses at a price premium as well. And so, in terms of growth outlook and where obviously I am staying extremely focused to make sure we gain and keep what we are aiming for and having said that we are maintaining pricing discipline and we are not going to write business at a loss. So, [inaudible] having some other key points you want me to make.

[Thomas R. Watjen:]

And Susan just if I could add to that too. I think what you just described is a very similar set of circumstances we faced in Unum U.S. at point some time where you have competitors coming in and doing predatory pricing things and just maintaining that discipline. At the same time continuing to be sure we put pressure on our own product development and sales organizations to be sure that are out aggressively doing the right thing but doing it with cases that we can write profitably. And so, as I said, there is great parallels between the market dynamics that we see from point at times between the U.S. market and the U.K. market. And So I think people have seen in the U.S. market how that is translated ultimately into profitable growth.

[Susan Ring:]

Yeah, absolutely, Tom and the new product that you mentioned that we have launched [inaudible] and that's a real innovation within the UK market, is something that nobody else has to offer. And so obviously we are expecting that that would deliver sales and that other competitors haven't at this point replicated that. So, we definitely have a first-mover advantage from that point of view.

[Thomas R. Watjen:]

Thanks, Susan.

[Thomas Gallagher:]

So Tom, I guess to your point about, the price discipline. Is it fair to say that if competitor pressures continue to be intense, it is a business that you would be willing to shrink to really hold on to your underwriting discipline if it comes there. I don't know if it is going to come to that or not. But is that, didn’t you say that that would be your posture?

[Thomas R. Watjen:]

I think very much, Tom. I think, again, the parallels are very strong between what we were just discussing in the UK right now versus the things that Kevin had to work through in Unum U.S. I mean, again, we have to be sure that we stay disciplined, be innovative, focused on service, focused on training of our people and the relationships we have in the marketplace, but just know when to walk away from business that needs to be walked away from. And again, I think as you point out, it's not clear to me that we're going to see the business shrink in the UK, but on the other hand, the mindset is one to be sure that if we grow, we're going to do – be sure we grow profitably and on a sustainable basis. And certainly our team has done that, you can see with the results. Actually not just this past quarter, but looking back several quarters, the things around large case and group lies have been out there for a while and I think the team in the UK has been very good about staying disciplined on profit.

[Thomas Gallagher:]

Okay. And then one other, I guess, just a more macro question. The comment on claims frequency still being, I think, pretty stable or at least claims incidence being pretty stable. I'm just curious, in past, recessionary cycles, has it really been on the incidence side that you've seen it or is it really on claims duration? Because as I think about it, it would seem that it would be harder to get people to return to work when there is fewer jobs as opposed to seeing a big flood of new claims coming in, just curious what you're seeing on that end?

[Thomas R. Watjen:]

Tom, a big question. Kevin I may ask you to speak to that just operationally in terms of what we are seeing and kind of a look back to the last cycle in terms of why there is actually some key differences, I think, even in terms of the profile of our business right now.

[Kevin P. McCarthy:]

Good morning, Tom. In terms of our current business situation, as we said LTD incidence is flat. STD incidence was actually slightly improved in the quarter. IDI incidence was solid, flat. Waiver of premium incidence was flat, voluntary disability and critical illness incidence levels were favorable. So we just didn't really see any pressure at all from the incidence side. Looking back at prior recessions, I think the impact was more from the incidence side of the equation than from the recovery side of the equation although you do see some pressure on the recovery side, but more from the incidence side. In the 2001 '02 '03 recessionary period incidence went upwards but it was primarily driven by a large case and as you know we've significantly shrunk our large case presence over the last several years. Back then our large case business was I think 33% of our in-force business now... in terms of LTD now down to 26% of our business. So, considerably different mix of business today than we had back then. We also have much more diversified earnings and our claims operating performance is clearly reflected over the last eight quarters that were much tighter on claim management and our renewal machine has been... just terrific over the last four years. So, in a lot of ways I think that the pressures that we experience in '01 '02 are going to be mitigated and softened I think as a result of our diversified business mix and our approach to the business.

[Thomas Gallagher:]

Okay. So, and Kevin, so you are not seeing anything on the incidence side right now…

[Kevin P. McCarthy:]

Nothing.

[Thomas Gallagher:]

Or sorry, on the recovery side right now?

[Kevin P. McCarthy:]

No, in fact recoveries were slightly improved in the quarter.

[Thomas Gallagher:]

I think Kevin you mentioned too, a big difference too is the change in process and leadership in that part of our business and actually investing quite a bit in that part of our business, which I think is somewhat more comforted in good and bad times as more consistency in terms of how that performs and so that’s a big difference also?

[Kevin P. McCarthy:]

Absolutely.

[Thomas Gallagher:]

Okay. Thanks.

[Kevin P. McCarthy:]

Thank you, Tom.

[Operator:]

And we’ll take our next question with Eric Berg with Lehman Brothers. Please go ahead, sir.

[Eric Berg:]

Thanks. Thanks very much and good morning to everyone.

[Thomas R. Watjen:]

Good morning, Eric.

[Eric Berg:]

Yes, good morning. So, I have two questions, one that is let's say a follow up to Tom, and it's really directed to Kevin and it's a general question. So, as everyone knows we have this situation where millions of people are facing housing pressure, price of the house is going down, resets on their mortgages, in some cases unable to refinance. I certainly… your message is coming through loudly and clearly that you've not seen an increase in incidence so far, but how should we think? What's on your mind, Kevin, in terms of this housing crisis and I'm just wondering is there any link, could there be a link between the housing crisis and the disability insurance business?

[Kevin P. McCarthy:]

Well. Good morning, Eric. It would be a stretch. I think one of the things to think about with incidence and recovery patterns is the degree to which people under financial pressure think that living on a fixed disability income, which is a lower percentage of earnings than their current salary levels would be an effective economic solution for themselves. I really sort of couldn’t go there in a sense that housing pressure... housing crisis pressure would generate higher levels of incidence [inaudible] recovery because I think everyone is going to be better off working and earning an income than they are receiving a partial replacement of earnings from disability.

[Eric Berg:]

So, you're saying it would be a stretch, but if they were a link, if I understand you and again I understand that you are saying it’s a tenuous link, but you're saying if there were a link, it might take the form of an individual's feeling overwhelmed by his housing situation, negative equity, for example, just sort of becomes depressed and goes out… seeks to go out on disability, is that how in theory it might work?

[Kevin P. McCarthy:]

I am sure there are some people who are going to be depressed by their economic situation and they might try to file disability claims. But, in general looking at the entire book of business there, I just don't see a link between what you're describing. I think if anything people under income pressures or ability to pay their build pressures, disability is not a good place go to resolve that problem, in fact that’s a worst place than working.

[Thomas R. Watjen:]

Kevin, thank you. I think what you're saying too though is something goes on disability, they are not recovering 100% percent of their income.

[Kevin P. McCarthy:]

Right.

[Thomas R. Watjen:]

So, if they have their own personal financial pressures whether it's because the housing field cost or whatever may be the cause of it. This is not a way to win… to gain the system frankly, not just for our company, but for our industry. They were time pass for people who work and may have been some over insurance in decades past. But, I think frankly that’s not as much the issue with our industry or a company and therefore again if people are filling those financial pressures, frankly they are better off working than they are actually taking the policy out.

[Kevin P. McCarthy:]

Absolutely.

[Thomas R. Watjen:]

The issue might actually be more, Eric, it does affect disposable income and desire to buy voluntary products. So, it’s a little more the… not the claim incidence side, Kevin, but for you and Randy, the issue of you find some persistency or lack of sales because of the challenges people are facing individually and even there we don't see that because of the small nature of the size of this premium relative to other things that they do.

[Kevin P. McCarthy:]

Right.

[Eric Berg:]

Very clear, that set me straight on that issue. My second and final question relates to the very, very favorable claims experience in Group Life and my question is a simple one, there was a dramatic reduction year-over-year in the Group Life benefit ratio. It’s now much lower than it was on a full-year basis than each of the last three years, should we view this benefit ratio, 68.2% in the quarter, as a new standard or was it anomaly? Thank you.

[Tom White:]

Yes, it’s Tom While. I wouldn't think of it as an ongoing run rate. I think generally a bit more favorable than normal and could move up a little bit. However, the overall profitability and margin on the business, we would expect to stay relatively flat with where it is, but if you look at the underlying issues there, the incidence was a touch better. The average claim was pretty flat with what it was before. The waiver of premium, which is another kind of risk driver in there, was favorable. I think the mix of business is probably helping us, certainly getting out of some of these larger cases over the last couple of years has improved the profitability. I think bottom line is, profitability should stay very strong, but you may see the benefit ratio tick up a little bit.

[Eric Berg:]

That's helpful, Tom. Thank you.

[Robert C. Greving:]

Eric, this is Bob Greving. We also see a seasonal pattern in our Group Life claims and the first quarter of the year is always the most favorable quarter. I think you'd probably see something go back into the… to the low-70% range like we experienced for the total year last year overall.

[Eric Berg:]

Thanks to everyone.

[Thomas R. Watjen:]

Thanks you, Eric.

[Operator:]

And we'll take our next question with Tamara Kravec with Banc of America Securities. Please go ahead.

[Tamara Kravec:]

Thank you. Good morning.

[Thomas R. Watjen:]

Good morning, Tamara.

[Tamara Kravec:]

I wanted to delve a little more into the voluntary and supplemental business. You had pretty solid earnings and sales were up 34%, and you've obviously had your roll out of Simply Unum. So, if you could just talk about your expectations there for sales and profitability as we go forward?

[Thomas R. Watjen:]

Good. Kevin, you want to pick up on that?

[Kevin P. McCarthy:]

Yes. Good morning, Tamara. We did have an excellent quarter and we had terrific momentum entering the year in our voluntary benefits business. In addition to that, not so much as a result of the Simply Unum content as much as sort of the overall attitude that we have in the marketplace in our distribution systems around commitment to voluntary products in our longer-term strategy around Simply Unum. I think we have increased core market focus in voluntary benefits. We are expanding our rep distribution channel in the core market, and that of course I think will drive additional voluntary benefits down the road. So, we are very optimistic about sales growth in VB. We are also introducing new products. We have good diversity in our voluntary benefits lines of business, and we'll continue to introduce additional voluntary lines in 2009. And so overall, I see that as being an increasing percentage over the course of time of our Unum U.S. book of business. And of course, we have terrific investments in our enrollment capabilities there as well, which I think will drive increased participation in our voluntary lines and we have solid persistency there too. So, overall it's a really good story.

[Tamara Kravec:]

In your mind, do you have a target business mix? I mean given that your profitability in your Group Income Protection business is improving and that the earnings there are more robust? How would you envision the mix in the U.S. changing there over the next couple of years?

[Kevin P. McCarthy:]

I don't have a target. I would think that our business would tend to be sort of, a third of our business voluntary, about a third of it group disability, about a third of it life and AD&D kind of business. But I think as we get our Simply Unum strategy launched over the next several years, the lines are going to blur between what I'll call traditional group lines and voluntary lines. In fact, I think our overall target is to be a benefits company to provide as many benefits as we can through that one Simply Unum platform to employers and to provide as much funding flexibilities we can to employers and employees. And so I think the lines between how much of it's voluntary, how much of it's employer paid will begin to blur at the time. The real question is how many lines, how many clients can we acquire and how many lines of business can we place to satisfy the needs of those clients.

[Tamara Kravec:]

Okay. And I am sorry if I missed this earlier, but I think the amortization in your UK segment was sequentially down a lot? Was there a reason for that?

[Thomas R. Watjen:]

I think it goes back to the change in the DAC accounting last year, the SOP 05-1 and how those internal replacements are handled.

[Tamara Kravec:]

Okay.

[Thomas R. Watjen:]

Actually the pattern of renewals is a little different in our UK business relative to our U.S. business. In the U.S., it's more of a kind of a heavy January 1, and in the UK it’s a little more… little more heavily focused on April 1. There is a little noise, as we kind of get a year past that and you'll see a more normal pattern emerge.

[Tamara Kravec:]

Okay. Thank you.

[Thomas R. Watjen:]

Thank you, Tamara.

[Operator:]

[Operator Instructions]. We will take our next question from Mark Finkelstein with FPK. Please go ahead.

[Mark Finkelstein:]

Good morning.

[Thomas R. Watjen:]

Good morning, Mark.

[Mark Finkelstein:]

I wanted to go back to a point that you touched on kind of in a brief comment, but just at Colonial, do you believe you're seeing any impact from the economy on either sales or kind of I guess account penetration on those cases you currently have. And if so, how does that factor into your sales expectations for the year. One of your competitors said that they may be seeing some impacts. So, I'm curious in kind of why you're seeing in your experience.

[Thomas R. Watjen:]

That’s a good question, Mark. Randy, you want to take that one?

[Randall C. Horn:]

You bet, Tom. Good morning, Mark.

[Mark Finkelstein:]

Good morning.

[Randall C. Horn:]

Yes, we're watching that very, very closely as you can imagine. In the first quarter, we're not really seeing much impact quite honestly from the economy, our account penetration is very stable. The number of payers overall in terms of those purchasing new policies from us is actually up about 3.5% or so, and our persistency is very stable, actually increasing somewhat. So, at this point in time we just not see much of an impact. And so as we look out to the future, we're still cautiously optimistic that we'll be able to hit our sales targets for the year.

[Mark Finkelstein:]

Okay. Great. And then just real quick on the higher yield in the quarter on new money. I guess are you incorporating that into pricing and does that have any kind of impact in your view on the solid sales in the U.S.?

[Thomas R. Watjen:]

It is not being incorporated into pricing right now. No.

[Mark Finkelstein:]

Okay. So, in the first quarter there were no material pricing adjustments outside of the… I think you disclosed the IDI change?

[Thomas R. Watjen:]

Certainly not related to any change in investments deals.

[Mark Finkelstein:]

Okay, great. Thank you.

[Tom White:]

Thanks, Mark. I think at this point, Tom, maybe just one more question.

[Thomas R. Watjen:]

Yes.

[Tom White:]

Okay, great.

[Operator:]

Okay. We'll take our last question with Jeff Schuman with KBW. Please go ahead.

[Jeffrey Schuman:]

Good morning.

[Tom White:]

Good morning, Jeff.

[Jeffrey Schuman:]

How are you?

[Tom White:]

Fine. How are you doing?

[Jeffrey Schuman:]

Okay. The questions for, maybe for Bob Greving. I was just wondering when you wrapped up the claims reassessment process, what was the level of the remaining claim or benefit reserve at that point and was that released this quarter or redirected somewhere or how did that sort of work its way through the financials?

[Robert C. Greving:]

All right. Jeff, basically the reserve had pretty much been exhausted during the quarter. And we had a little bit over that that actually flowed through earnings. But for the most part it was pretty much breakeven. So, it pretty well dovetailed in to finish everything else.

[Jeffrey Schuman:]

You know about what the amount was?

[Robert C. Greving:]

It was just a couple of million dollars, I think.

[Kevin P. McCarthy:]

Jeff, if you go back, I think it was the third quarter last year there were some adjustments that we've made, there were some IDI reserves that were released. And this quarter, we put up a little bit of extra for LTD reserves and we also kind of shrewd up the expense reserves. I think it was... we brought down a little bit on the IDI side and bumped it up a little bit on the LTD. So, the big adjustments were made in that quarter and so the fourth quarter and first quarter impacts were very, very small.

[Thomas R. Watjen:]

Right. If anything, Jeff, we've had a little bit of expense pressure in the quarter as some of those resources we had devoted to the RSA actually got moved back into the general operations. But that's really the only pressure that we had.

[Jeffrey Schuman:]

Okay. Thanks a lot.

[Tom White:]

Well, thanks Jeff and actually thank you all again for taking the time to join us on the call and this completes the first quarter 2008 earnings call.

[Operator:]

Once again ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.