Unum Group
Q2 2008 Earnings Call Transcript

Published: 31 Jul 2008

[Thomas R. Watjen:]

- President and CEO Kevin P. McCarthy - President, Unum US Susan Ring - CEO, Unum UK Robert C. Greving - EVP, CFO and Chief Actuary Randall C. “Randy” Horn - President and CEO, Colonial Life

[Operator:]

Good day and welcome to the Unum Group's Second 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 the Head of Investor Relations, Mr. Tom White. Please go ahead, sir.

[Thomas A. H. White:]

Thank you, Tom [ph], and good morning, everyone, and welcome to the second 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 and the actual results might differ materially from results suggested by these forward-looking statements. The 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 entitled 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 and also in our subsequently filed 10-Q. Our SEC filings including our Forms 10-K and Forms 10-Q 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 that they are made and we undertake no obligation to publicly update or revise any forward-looking statements. Presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can also be found on our website in the Investors section. Yesterday afternoon, Unum Group reported earnings for the second quarter 2008. Net income in the quarter was $240.3 million, or $0.69 per diluted common share, compared to net income of 153.5 million, or $0.43 per diluted common share in the second quarter of 2007. Included in the results for the second quarter of 2008 are net realized after-tax investment gains of 17.1 million or $0.04 per diluted common share and $6.5 million or $0.02 per diluted common share in the second quarter 2007. These gains included the impact of the provisions at DIG B36 accounting, which require changes in fair values of embedded derivatives and certain modified coinsurance contracts to be reported as realized investment gains and losses. This accounting policy resulted in a second quarter 2008 after-tax investment gain of $16.2 million compared to $6.3 million after-tax gains in the second quarter 2007. Excluding the DIG B36 accounting impact, net realized after-tax investment gains related to sales and write-downs of investments were $900,000 in the second quarter of 2008 and $200,000 in the second quarter of 2007. So excluding the realized after-tax investment gains and also the second quarter after-tax cost of $34.5 million related to the increase in the provision for claim reassessment process, our after-tax operating income was $223.2 million for this quarter or $0.65 per diluted common share compared to $181.5 million or $0.51 per diluted common shares in the year-ago quarter. On the call this morning are Tom 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 with that, I'd like to turn the call over to Tom Watjen. Thomas R. Watjen - President and Chief Executive Officer Thank you, Tom, and good morning. The second quarter was another good quarter for our company and I want to take a few moments just to touch on a few areas before I pass things back to Tom White for a more detailed review of the quarter. As Tom mentioned in his opening remarks, excluding net realized after-tax investment gains and last year's reassessment reserve addition, we reported $0.65 per share in operating income for the second quarter, 27% higher than the $0.51 per share reported in the second quarter of 2007. Our pre-tax operating earnings, excluding last year's reserve addition, improved 24% compared to the year-ago second quarter with core operations' pre-tax earnings growth of 13%. This was again driven primarily by strong risk trends across all of our business lines. Similar to the first quarter, each of our primary business lines recorded lower benefit ratios in the second quarter of 2008 compared to the second quarter of 2007, which again to us reflects the strong discipline we've built into our business plans. Also, our investment portfolio credit quality continues to hold up well in this environment and our strong net investment income results reflected a more normal level of bond calls and miscellaneous investment income in the second quarter, falling to some pressure on these items in the first quarter. While our overall miscellaneous net investment income returned to a more normalized level, the impact varied widely by reporting segments and Tom White will touch on these in his comments in just a few moments. Looking ahead, I expect we will continue to see some volatility in the miscellaneous income component of our investment result as long as the credit markets remain challenging and new issuance remains low. To that point, indications are that our third quarter miscellaneous net investment income will be below our historic trend line of $10 million to $15 million per quarter. But again, I don't want to overstate the point, because again we feel very good about the quality of the investment portfolio and the results we’ve been able to generate. Now shifting to sales. Despite slower consolidated sales growth in the second quarter compared to what we reported in the first quarter, we are generally encouraged by the underlying sales trends in our business. Our focus across all of our operating businesses is to grow our core market business and that is sales to our mid… small and mid-size employers and each of our business has accomplished that this quarter. Variations in our reported sales from quarter-to-quarter frankly are largely due to the level of large-case business we write, and again we want to continue to write large-case business, but are going to again be very disciplined and be certain that we don't write business that does not meet our pricing or risk management criteria. But again we continue to expect some level of volatility in large-case sales, because again we are not going to pursue that business at the cost of profitability and a lot more in the sales results in a just few moments. In the second quarter, we continued to introduce new product and service offerings in all of our markets. Unum US rolled out to an additional 35 states our Simply Unum offering, our group and voluntary offering on a single platform, which has been well received and we believe will help us grow our small and mid-sized market business. Unum UK continues to invest in the development of our voluntary benefits offering to make the changing needs of the UK marketplace. It will be a couple of years before any meaningful new sales volume can be expected, but we believe this is a unique opportunity for us in the UK market. And additionally, Colonial Life is preparing to roll out an updated release of Harmony, our new benefits enrollment system that will provide enhanced flexibility and multiple enrollment options. Now let me offer a few comments in each of the businesses before I again pass things back to Tom White. Let's start with the Unum US. Excluding last year's second quarter revision to the claims reassessment reserves, pre-tax operating earnings for Unum US increased by 11%, but generally favorable performance in each of the three reporting lines. Earnings in our group disability line were slightly lower than last year's results when adjusted for last year's claim reassessment reserve addition but we saw strong risk results which were partially offset by higher expenses, some of which I should add were one-time items and lower net investment income. Importantly though, the group disability benefit ratio for the second quarter was 90.5%, a 50 basis point decline from the first quarter of 2008 and 220 basis points lower than the second quarter of 2007. Incidence trends remained generally stable in the second quarter for both our LTD and STD lines of business and we saw no evidence that the weaker economy was adversely affecting our benefit results. With that, we continue to remain confident that we can reduce the benefit ratio to between 88% and 89% by the end of 2008 or early 2009. We saw solid results across the other Unum US business lines. Group life and accidental death and dismemberment pre-tax earnings increased 5% and supplemental and voluntary earnings grew 36% with very strong performance in the individual disability recent issued line of business. Unum US sales declined 4% in aggregate in the second quarter, but core group sales actually increased 3.4% and the greatest change was again in our large-case business where we saw that declining 13%, which again reflects our commitment to continue to grow on a relatively consistent basis our sales to small and mid-size employers. They can be very disciplined about our sales to large-case employers. I should add too that following a strong 34% growth of voluntary benefit sales in the first quarter, sales in this declined to 3%, which is generally below our expectations but I am pleased with the 14% growth in voluntary benefit case count this quarter, which again indicates our growing success in serving the smaller-case marketplace. Kevin McCarthy is available with us this morning to certainly provide some further insight into the business or the marketplace for Unum US. Now shifting to Unum UK. Unum UK had a very strong earnings quarter with pre-tax operating earnings of $96 million in the second quarter, which is a 24% increase over the second quarter of 2007. Risk results remain excellent with the benefit ratio at 58.3% for the second quarter, which reflects strong… which reflects favorable mortality and morbidity experienced in the quarter. Sales increased 11% in dollar terms or 12% in local currency. Last year's results included sales increases, which resulted from a legislative change and excluding that impact, sales actually increased 29%. We continue to feel the pressure on sales and persistency in this market due to the extreme competition we see both in group life and in the large-case segments of the market, but just generally a very competitive environment in the UK market in general. As a result, we will continue to see pressure on our premium growth in Unum UK, which certainly affects our outlook for this particular business. And Susan Ring is with us here today who can… will be able to take any questions you may have about the UK or the UK marketplace. Now shifting to Colonial Life, Colonial Life had pre-tax operating earnings, which increased 5% in the quarter to $68.2 million, again a continued very strong level of profitability in our Colonial Life operation. These results reflect continued favorable benefit experience for the accident, sickness, and disability product lines. While consolidated sales increased... only 3.3% for the second quarter, which again is below our long-term expectations. Our core market sales grew over 7% and our other operating trends such as new rep recruiting and new account growth were very encouraging. Sales in the large-case market were down 14% from last year's levels, which again is indicative of the things we talked about across all of businesses where the primary focus is on the small and mid-sized market and we will be opportunistic in terms of growing the large-case market. Randy Horn is with us here this morning. So for any questions you may have about the Colonial Life business or any of the developments in the Colonial marketplace. As I mentioned earlier, our investment portfolio credit quality continues to be very strong and Tom White will certainly provide further detail in his comments but I don't want to miss the chance to talk about how pleased I'm with the performance in general. We didn't see any material changes in the credit quality and write-downs and gross realized losses for the quarter were quite manageable; in fact excluding the DIG B36 accounting impact, we report a small net realized investment gain for the quarter. The widening of corporate bonds spreads on A and BBB issues enabled us to more than meet our desired yield targets. Therefore, our portfolio yields are remaining stable and the net interest margins have actually been enhanced actually over the past several quarters. And moving just briefly to our capital position. You’ll recall our capital strategy that we announced last year is centered on maintaining sufficient financial flexibility to support our operations across various economic cycles while also positioning us for improvements to our current ratings and, of course, responding to opportunities in the marketplace. We continue to believe that we are presently in a very strong capital position with a great deal of financial flexibility and I feel that Standard and Poor’s recent upgrade is certainly a further validation of our position and the strength of our capital position. And let me touch on a few of the capital highlights for the quarter. Our second quarter estimate of risk-based capital for our traditional US life insurance companies remains well above our long-term target of 300% and at the high end of our year-end 2008 target of 315% to 325%. Leverage excluding the non-recourse debt and capital of Tailwind and Northwind Holdings finished the second quarter at 20.1% reflecting the retirement of $175 million of short-term debt in May. These along with the additional ratings improvements we’ve seen certainly provide us a great deal of flexibilities we think about our capital structure and our capital strategy. We will certainly be evaluating some of those options and choices over the balance of this year. Lastly, just let me talk to liquidity. Our liquidity at the holding company remains very strong at $681 million, comfortably above our target to cover one year fixed charges plus maintain a capital cushion for business in the economic volatility. As you know and we completed the first half of our previously… of our authorized $700 million share repurchase program through a $350 million accelerated share repurchase, ultimately reducing our share count by 15.4 million shares or approximately 4.3% of the year-end 2000 outstanding shares. Given our strong capital position and positive results thus far in 2008, we intend to complete the second half of our previously announced repurchase authorization to a second accelerated share repurchase agreement, which we intend to execute this week. In the second half of 2008, we expect to continue to generate excess capital and will develop a strategy for its deployment consistent with our capital management philosophy. Couple of closing comments in the quarter. Obviously we are very pleased with the overall results. We saw continued strong operating performance in our core operating segments driven by excellent risk results across all of our major businesses. We had generally good sales growth in the markets we targeted for growth. We continue to maintain a very strong quality of our investment portfolio despite again these relatively challenging financial times we are operating in today. We continue to have a significant financial flexibility driven by our strong balance sheet and capital position and our healthy statutory earnings and cash flow, all of which position us well as we look to execute the second half of our share repurchase program and we’ve continued… most importantly, continuing to innovate. There is a lot of opportunities for us in the marketplace to leverage our leadership positions in the benefits business and again we are spending a lot of time with the products, services, and people to be sure that we are in a position to benefit from that. Now I will turn the call over to Tom White who will provide more detail on the second quarter results. Tom?

[Thomas A. H. White:]

Thanks, Tom. I want to take a few minutes to provide some operating highlights on the quarter and provide an update on the investment portfolio. First, we'll start with the Unum US group disability line. As Tom indicated, we continue to see improvement in the group disability benefit ratio, which declined to 90.5% for the second quarter. New claim incidence was generally stable in the second quarter with the levels we experienced over the past several quarters. Our analysis of incidence trends suggests no significant variation either in any occupational categories, case size, or type of impairment. We have cautioned that if recessionary pressures show up in our claims 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 short-term disability line, which can be a leading indicator to LTD claim activity also continues to perform well with stable claim incidence trends throughout the second quarter. Net investment income in the second quarter returned to more normal levels following the lower level of bond call activity that was evident in the first quarter. However, miscellaneous net investment income was approximately $5 million lower in the second quarter 2008 relative to the second quarter 2007. The year-ago second quarter benefited from an elevated level of bond call premiums. Expense ratio was slightly higher in the second quarter of 2008 with the marginal increase primarily resulting from the fine related to a broker compensation settlement. $4.4 million of the total is included in the group disability expense line and the balance of $1.2 million is included in the group life line. In general, we had strong performance in group disability this quarter with solid risk results offset by lower miscellaneous net investment income and also the impact of the settlement expenses. Moving to the Unum US group life and AD&D line, we continue to see strong levels of profitability with BTOE increasing 5.4% to $54.3 million. The benefit ratio was lower than the year-ago second quarter at 69.5% compared to 74.3%. Submitted incidence was relatively stable and we benefited from a lower average claim size. The expense ratio for this line was higher this quarter, primarily reflecting higher sales volume and quote activity as well as the broker compensation settlement Watjen referenced earlier. And finally, the Unum US supplemental and voluntary line produced a record quarterly income in this line with BTOE of $76.2 million, an increase of 36%. All three primary lines, that being the recently issued individual disability, voluntary benefits, and long-term care, produced year-over-year improvement in before-tax operating earnings. Premium income grew 7.3% and risk results remained favorable. The benefit ratios for each major business line improved relative to the year-ago results. In an aggregate, the benefit ratio for the line declined to 74.8% in the second quarter compared to 77.1% in the year-ago quarter. As Tom indicated, while reported sales for Unum US declined by 4% in aggregate, there were a number of bright spots to highlight. Our core market sales for our group lines, that being LTD, STD and group life combined, were positive, increasing 3.4% for the second quarter and 15.7% for the first half of 2008. LTD core market sales by itself grew 5.3% in the second quarter and 16.4% for the first half of the year. We remained disciplined and opportunistic in the large-case market and sales declined 13.2% in the second quarter and have declined 3.8% for the first half of the year. Our mix of sales was in line with our long-term objectives with a 60% core and 40% large-case split. Voluntary benefit sales declined by 3.1% in the second quarter. Case count growth was a respectable 14%; however, the average case size declined as our sales activity was more focused in the small-case market, which in turn pulled down the overall premium volume. Premium persistency in our group lines improved for each of our LTD, STD and group life lines in the first half of 2008 compared to last year with terminations again focused primarily in the large-case settlements. So to summarize the results for the Unum US operations in the segment, we had continued excellent risk management results across the board, a more typical level of net investment income. The miscellaneous net investment income was below the elevated levels from last year and slightly higher expenses, which were largely driven by the $5.6 million fine related to the broker compensation settlement. These trends overall produced growth in BTOE of 11% for the second quarter excluding the second quarter of 2007 claim reassessment reserve revision. Moving to Unum UK, we continue to see very strong results from Unum UK with a 24% increase in BTOE to $96 million for the second quarter. Risk results remained excellent with a benefit ratio of 58.3% for the quarter compared to 62.2% in the year-ago quarter and 57.3% in the first quarter of 2008. This performance was driven by lower pay claims due to strong recovery experienced in the group disability line as well as lower new group life claims. Unum UK's results also benefited in the second quarter by approximately $5.6 million from a non-recurring reinsurance premium on a previously acquired block. Second quarter expense ratio for Unum UK was slightly elevated, reflecting some additional head count costs and other cost associated with investments in process and organizational changes, as well as the decline in premium income. Second quarter sales increased 12% in local currency and 11% in dollars; however, underlying sales trends excluding the impact of the age equality legislation grew by 29% in the second quarter. Group markets in the UK remained very competitive, especially in group life. The pressure we were seeing in our persistency trends are negatively impacting enforced premium levels. Our persistency recruit disability has declined from 88.3% in the first half of 2007 to 86% in the first half of 2008 and for group life, persistency was 78%... excuse me, 78.1% for the first half of 2008 compared to 71.1% in the first half of 2007. Top-line growth will be difficult to achieve in this competitive pricing environment that we do expect the profitability of the Unum UK to remain at strong levels. Moving to Colonial Life, continued favorable financial results with $68.2 million in BTOE for the second quarter, which is 5% higher than the strong year-ago quarter that we produced. The benefit ratio was generally stable with last year, 46.9% for the second quarter of '08 compared to 47.2% in the second quarter of 2007, primarily due to favorable performance in the accident, sickness, and disability 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 historic levels. Expense ratio for Colonial Life was higher at 20.5% compared to 19.2% last year, driven by higher branding and advertising expenses and also investments in our enrollment services underwriting and sales training areas. As Tom indicated, sales at Colonial Life increased 3.3% in total, but the underlying trends remained encouraging. We saw a solid growth in our core market with sales in the under 100 employee commercial market increasing 10.8% and also with the public sector market where sales increased 6.1%. However, sales declined by 13.9% in the large-case commercial market, relatively due to strong sales result in the year-ago quarter. So generally speaking, it’s this uneven nature of the large-case sales activity that is driving quarter-to-quarter volatility in sales. We were also very encouraged by activity in the market. New account growth was up 12.6% for the second quarter; however, average case size declined by approximately 9%. This is an issue more of smaller case size sold and not lower penetration within the case. New sales rep recruiting and productivity showed positive trends with new contracts increasing by 62% in the second quarter and 51% for the first half of the year and our key new rep production milestones continued to improve. Finally, persistency at Colonial Life was slightly higher for its major product lines relative to the year-ago results. In the Closed Block segment, BTOE was $27.9 million in the second quarter compared to $29.4 million in the year-ago quarter. Again this is adjusting for the client reassessment reserve revision last year. Risk results remained stable with the interest-adjusted benefit ratio at 90.1% compared to 92.4% a year ago, again excluding the claim reassessment reserve revision and 90.1% in the first quarter of 2008. Submitted incidence remains relatively stable. You’ll notice that relative to the first quarter, net investment income returned to more typical levels with higher bond call premiums and consent fees relative to the first quarter of the year. However reiterating Tom's comments, I'd caution that the outlook for miscellaneous net investment income for the third quarter is below its historic trend line; it could negatively impact third quarter results. Finally, our weighted average share count assuming dilution for the second quarter of 2008 was 346 million shares, compared to 354.8 million in the second quarter of '07 and share count at the end of the second quarter of 2008 was 345.5 million shares. Our consolidated return on equity for the second quarter was 12.1% and 11.5% for the first half of 2008. Also book value per share increased by 8.6% to $22.19 as of the end of the second quarter compared to $20.43 at the end of the second quarter of 2007. And excluding the net unrealized gains and losses on securities and the net gain on cash flow hedges, our book value per share increased by 9.7% to $21.77 at the end of the second quarter compared to $19.84 at the end of the second quarter of 2007. Earnings on a statutory accounting basis remained very healthy with the second quarter 2008 net gain from operations after-tax of $151.6 million. This is for our traditional US insurance subsidiaries. That compares to $182.4 million in the year-ago quarter, which excludes the second quarter claim reassessment revision. Now I'd like to close with a few comments on the investment environment and the investment portfolio. The current market volatility, particularly the widening of corporate spreads on investment grade issues, continues to present opportunities for us. Despite the market volatility, we achieved a new money yield, this is on a hedge-adjusted basis, for the second quarter of 6.44%. This compares to 6.58% in the first quarter and 6.18% in the fourth quarter of 2007. The portfolio yield continues to hold steady at 6.69% compared to 6.70% in the last quarter and 6.69% in the end of last year's second quarter. Our net interest reserve margins for our core business lines continue to expand over the past year and are comfortably above our 50 basis points to 60 basis points target margin, and we made no changes to our claim discount rates in the second quarter. From a portfolio quality perspective, we are happy again to report that we have no material changes in the quarter. We’ve outlined our exposure to assets and mortgage-backed securities in our Statistical Supplement. I'll take just a minute to highlight a few things that we are frequently asked, those being that we continue to have no subprime mortgage exposure. We have no CDOs related asset-backed or residential mortgage-backed securities. The Alt-A exposure is only 4.8 million and is rated AAA. The book value of 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 $144.9 million and the average underlying rating on those asset guarantee is an A1. Overall, we feel very good about the investment portfolio, it remains in excellent shape and well positioned for what is likely to continue to be a challenging environment. Our high-yield exposure remains at positively 5.3% of invested assets and the level of non-current investments is only $9.2 million. So we’d be pleased to any adjust [ph] any specific questions you may have regarding the investment holdings in the Q&A session. And with that, I will turn it back to Tom. Thomas R. Watjen - President and Chief Executive Officer Thank you, Tom. And before we move to your questions, let me wrap up our prepared comments by reiterating just again how pleased I am with the second quarter results. But perhaps, even more importantly, I am pleased then with the current position of our company from both an operational and financial perspective as we move into the second half of the year. Certainly in the second half of the year, we anticipate continued challenging general environments and again we think we’re in a very good position to be responsive to that. I’ll say we’re not totally immune to the effects of a softening economy or of the aggressive actions that competitors can take. Again, we are very pleased with where our position is today relative to where it was in the past. I think we shared that with you before and we are a very different company today and just to remind you that we sit here today with a much stronger balance sheet and a lot more financial flexibility. Our investment portfolio, as Tom just reiterated, is in a very good position relative to the economy today and we have very manageable levels of high yield and minimal exposure to the asset classes that certainly are affecting the financial system today. We have a more diversified business base, which certainly creates more opportunities for growth and more diversity to the earnings streams. And I’d say lastly, we’ve developed cultures across the company and more disciplined. So in fact, we want to grow our businesses and we want to also be sure that we are growing our businesses in a disciplined fashion. So again a very different company than the one that perhaps was last experiencing a soft economic cycle and again we shared that with you in the past. Now looking out over the longer term, we believe we are well positioned to the benefits and the trends that are impacting our business over the longer term. I personally believe that the benefits business including voluntary benefits is a good business. The products and services we sell play a vital role of serving working citizens and provide a stake [ph] in that that’s even more important today than ever before. While the way the business is done and the expectations of our customers is changing, we are investing heavily in our products, services, and people to ensure that we are responsive to those changes and capitalize on these opportunities in the way that creates actually value for our shareholders. Finally, with respect to guidance, we are increasing our 2008 guidance by $0.09 per share to reflect the strong second quarter results and our outlook for the balance of the year. Our new guidance is for operating earnings per diluted common share within a range of $2.46 per share to $2.51 per share. Within this guidance, third quarter 2008 operating results can be expected to be slightly less than the $0.65 per share reported in the second quarter of 2008. So we expect to at least match the operating earnings per share from the third quarter of 2007. As both Tom and I indicated earlier, we expect lower miscellaneous net investment income, particularly in the Individual Disability Closed Block, very similar to what we saw in the first quarter of this year. It will be a challenge also to replicate the exceptional results reported in the Unum UK segment in the third quarter of last year. With that having said again, as you can sense, we are pretty... we are cautiously optimistic for the rest of this year and feel good about where the company is positioned as we enter into the second half of the year. So, operator, at this time, we are ready to begin the question-and-answer session. Question and Answer

[Operator:]

Thank you, sir. The question-and-answer session will be conducted electronically. [Operator Instructions]. We will go first to Darin Arita with Deutsche Bank.

[Darin Arita:]

Hi, good morning. Looking at the premium income trends and Unum is getting good growth out of Colonial, Unum UK, and the supplementary voluntary line, but was wondering when is it reasonable to expect premium income to grow in the group disability and group life and AD&D segments? Thomas R. Watjen - President and Chief Executive Officer Hi, Darin, it‘s a good question. You are right. We are going through really some change actually as we said many times in terms of the way we're... if the markets we’re focused on and some of the dynamics of… that will have some impact in terms of the different premium composition and maybe I’ll ask Kevin actually to speak of it, it's only most prominent, I’d say in certainly our Unum US business.

[Kevin P. McCarthy:]

Thanks, Tom. Good morning, Darin. The short answer is that I’d expect to see some of that premium trend turn around in about the middle of 2009. The reason that the premium is basically flat in those lines today is, although we have growth in our core disability and group life market that's offset by terminations and disciplined underwriting renewal actions in our large-case market place. So we’ve got steady and improving growth in core and as you mentioned, a strong growth in supplemental and voluntary but the continued decline until it flattens out in 2009 in the large case.

[Darin Arita:]

Great, that's helpful. And in terms of Unum UK, how is the business there prepared for a slowing economy? Thomas R. Watjen - President and Chief Executive Officer Maybe Susan, I'll ask you to respond to Darin's question.

[Susan Ring:]

Yes, Darin, and I think where I am very well prepared and enviably, the mix and make up of the book of business that we have got and where we have primarily the senior executives are covered within UK contracts over here, and so that does tend to make it more resilient in terms of the potential for a lot [ph] of people downsizing with regard to coverage that we have and so I would also say that with regard to the benefit performance and the potential impacts that a downturn could have a recoveries and we do have very strong case management disciplines in place and we achieved strong cap rates. So I think basically the discipline that we have and I don't envisage that we would see an impact there either. So I think we are well placed. If there is anywhere where we are starting to see the potential of an impact, it would be on cross-sell and upsell activity to existing business and so that may be where we will see some continued softening of our results, but other than that, I think we are reasonably resilient and well set.

[Darin Arita:]

Great. Thank you. Thomas R. Watjen - President and Chief Executive Officer Yes. Thanks, Darin.

[Operator:]

And we will take our next question from Colin Devine with Citi.

[Colin Devine:]

Good morning. Thomas R. Watjen - President and Chief Executive Officer Good morning, Colin.

[Colin Devine:]

A couple of questions. First, if you could give us update on where you feel your excess capital position is. You talked about stock buybacks for the second half of the year, but also perhaps looking ahead what might be sustainable. Second, for Randy, it seems to me Colonial is growing somewhat slower than I think you anticipated at the Analysts Meeting last fall and perhaps you can just sort of give us an update as to why that is? And then Susan, if you can talk a little bit about your strategies for next year and taking advantage of some of the regulatory changes. And finally for Kevin, if you can give us some sort of sense as to what kind of rate increases you are looking for as you begin the re-pricing season for next year? Thomas R. Watjen - President and Chief Executive Officer Okay. Let’s start actually to your first question, Colin, in terms of capital plans and the views of capital, maybe ask Bob Greving to speak to that, Bob.

[Robert C. Greving:]

Yeah, hi, Colin. Actually we are in a pretty good shape with regard to our excess capital. As you can see, we are very confident in where we are positioned right now with the execution, imminent execution of our second half of our $700 million share repurchase that we anticipate to be executed on hopefully this week. We've got a very strong risk-based capital, well above our targets in each of our standard US insurance companies and our solvency ratio in the UK is also very strong and well above the target levels in our UK company as well. Our leverage, as you can see, is at 20.1%. So well below our 25% leverage ratio. So a lot of capacity there as well. And our liquidity running at 600… $180 million for the quarter with additional capital being generated virtually every quarter gives us pretty good confidence that even with the execution of the $350 million, we will be in good condition. So we feel very comfortable with where we are right now.

[Colin Devine:]

Can you give us a number and so what you think your excess capital for this is today?

[Robert C. Greving:]

Well, obviously some of the access to excess capital is a little limited. We take ordinary dividends from our insurance companies. So let’s just take that one example. You are trying to bring us down to our target risk-based capital would require additional dividends from the insurance companies. So accessing that for corporate purposes, for share repurchases for example, it would not necessarily be something we would ordinarily do. But I would say our excess capital is overall well in excess of $500 million.

[Colin Devine:]

That’s net of the pending repurchase program?

[Robert C. Greving:]

That's net of the pending repurchase, that's correct. Thomas R. Watjen - President and Chief Executive Officer Yeah, Colin, if you kind of do the math and look at leverage relative to the 25% target, no, we want to hold about $270 million of Holding Company liquidity and that's $681 million right now. RBC, we are at the upper end of our range. You kind of run the math on it and you can get several hundred million dollars of excess capital. But as Bob says, it’s… we’re really not looking to bring all those down in order to generate a whole bunch of excess capital. We’ve got the $350 million in the share repurchases authorization that we’ll execute on. We got a nice cushion above that. We will be generating some additional excess capital and as we get to the end of the year and we sit down and meet with you folks sometime in November, we will start to spell out the capital management thoughts for 2009.

[Thomas A. H. White:]

Maybe just one last point I would add, I think just given where we come from, I think what we're trying to do is look at this as a series of stages and I think even the decision to proceed with the second half of the previously authorized share repurchase, we wanted to see where the results were at mid-year and see what the balance of this year looks like. So I won’t say we’re certainly being cautious, but again I think both Tom and Bob said, Colin, we do see ourselves having excess capital both either from operation or even looking at our capital structure, the fact that we are well below the leverage target that we set for ourself along with the fact that we now have two rating agencies that have given us investment grade ratings certainly [ph] has opened up a number of possibilities to go through the second half of this year and I think Tom, you’re right, let’s use… we’ll use the Investor meeting as sort of a target to begin to share all that in more depth. Now, to your second question with respect to Colonial and growth, maybe Randy, I could ask you to pick up on that one?

[Randall C. “Randy” Horn:]

You bet; good morning, Colin. Yes, at our meeting last fall, we talked about a 10% targeted growth rate. We are certainly below that here in the first half of 2008, but if you peel back that onion, and both Tom White and Tom Watjen spoke to this earlier, you will see that the activity levels of our distribution force are extremely strong, a great recruiting, production from new people, strong double-digit growth in the second quarter in new accounts, it really is that large-case situation that Tom talked about and we are maintaining a very disciplined approach to that. Again, there are good opportunities for us out there in the large-case market and I think some of those are going to come here in the second half of the year. So, assuming that that comes through as anticipated, we are still optimistic about the sales outlook for the balance of 2008. The softening economy presents some challenges but so far, we are not seen any pronounced impacts from that and again we are optimistic about the second half. Thomas R. Watjen - President and Chief Executive Officer Okay, thank you. Susan, if I could ask you to pick up on the question around next year in terms of strategically where we are taking the UK business.

[Susan Ring:]

Yes, sure. I think Colin particularly wants me to make comment on the legislative changes and regulatory changes that are coming through within the UK market and the primary one that I would reference really is sell-side reforms and which is top of the agenda, really for all of the political parties over here. So those tenders actually start to roll out at the tail end of this year in October and will obviously continue into next. But I'll see that as being very much positive and favorable for our business because all of them are very much promoting the benefits that we have and we should upon primary competence… the core competence for asset differentiate it versus our competitors and they were also placing more emphasis on the role of the employer rather than the government and they’re also recommending a move [ph] from the sort of sick-note culture that we’ve had over here to more of a fit-for-work culture. So I think all of those and changes in key things that are being launched by the government speak very much to our agenda and very much to where we have real strengths and so we see that as being advantages. And there are a couple of other things and the retail distribution review which is the review of the distribution and infrastructure within the UK and which we have been keeping a watchful eye on, we don’t feel that that has any impact on us. And then there are some other changes including pension changes, which again we see as being positive and supportive of the shift that we are making with regards to place the emphasize on employee purchase through and the voluntary work force [ph] initiative that we have. So… and at the moment, we don’t see anything that’s going to be particularly posing a threat to our business but we see a number of things within the regulatory changes that we can take advantages of. So I hope that answers your question, Colin.

[Colin Devine:]

Yeah, I think you just told me your growth rates may start to accelerate a bit? Thomas R. Watjen - President and Chief Executive Officer I think to the strategy for next year is I think got some part why there’s such a thrust around the voluntary offering.

[Susan Ring:]

Yes, indeed. I mean we will be focusing on voluntary but not to be exclusion of obviously wanting to grow our risk business and also the individual business that we don't tend to mention, but we do have a thriving individual business that’s growing well, that is last year.

[Colin Devine:]

Okay. Thank you, Susan. I’ll ask [ph] Kevin on the rate environment?

[Kevin P. McCarthy:]

Good morning, Colin. As you know, in 2008, the average rate increase that we were looking for was about 6% although in terminations, it’s interesting to note that the average increase that we were looking for was 23%. So you can see that we still continue to be executing on our real plan to clean up the under-performing part of the business. In 2009, unless we see some recessionary incidence pressure, I'd expect the rate increase to be in about the same ballpark, maybe 5% to 7%.

[Colin Devine:]

Thank you. Thomas R. Watjen - President and Chief Executive Officer Good. Thanks, Colin.

[Operator:]

[Operator Instructions]. We will go next to Mark Finkelstein with FPK.

[Mark Finkelstein:]

Good morning. Thomas R. Watjen - President and Chief Executive Officer Good morning, Mark.

[Mark Finkelstein:]

A question for Kevin. I referred from a couple of companies just about the large-case market and kind of increasing competitiveness in that. Can you just talk about exactly what you're seeing and I guess how competitive it’s going and maybe just thinking about when you're losing some business, I mean what rate is that going on by a competitor against expiring premium?

[Kevin P. McCarthy:]

Good morning, Mark. Large-case markets, I think been largely consistent to last couple of years. I don't think it’s, in my opinion at least, much more competitive maybe now than it was last year. I think one of the things we’ve seen it so that level of competitiveness moved down, Mark, a little bit. I think it was significantly competitive at the sort of plus 10,000 life kind of category, that’s worked its way down into the 2,000 to 3,000 life category, forcing us to sort of maintain a little bit of discipline there as well. In terms of the business that we lose, we don't obviously always know what rate a competitor takes that but typically it’s at a rate at or below our renewal offerings. So as I mentioned to Colin in the disability field on our terminated business, I think we terminated about $100 million with the large-case disability this year. I mean if you look at that, the average rate increase we asked for was 23%, driven of course by the lack of profitability. And so our competitors are taking that it’s something less than that.

[Mark Finkelstein:]

Okay, great. And then just on the $500 million number, was that against a 300% RBC, was that against a 320% RBC? I mean I hate to drill into this. I know you can just talk about this later. Thomas R. Watjen - President and Chief Executive Officer Just against about a 325% RBC.

[Mark Finkelstein:]

So the $500 million is above the $325 million? Thomas R. Watjen - President and Chief Executive Officer Right.

[Mark Finkelstein:]

Okay. Thank you. Thomas R. Watjen - President and Chief Executive Officer Okay. Thanks, Mark.

[Operator:]

And we have no further questions in our queue at this time. Mr. Watjen, I'll turn the call back over to you for any closing comments. Thomas R. Watjen - President and Chief Executive Officer Well, I would just say thank you all on the call for taking the time to join us and again certainly we’re all available answer questions over the course of the day but I think this completes our second quarter 2008 earnings call.

[Operator:]

Ladies and gentlemen, this does conclude today's conference call. We appreciate your participation. You may disconnect at this time.