普登 (UNM) 2006 Q4 法說會逐字稿

Good day and welcome to the Good day and welcome to the UnumProvident Corporation fourth quarter 2006 earnings results conference call. Corporation fourth quarter 2006 earnings results conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to head of Investor Relations, Mr. Tom White. Please go ahead, sir.

Thank you, Cindy and good morning, everyone. And welcome to our fourth quarter analyst and investor conference call. Before we get started, allow me to read the Safe Harbor statement.

The Safe Harbor is provided for forward-looking statements under the Private Securities Litigation Reform Act of 1995. Statements in this conference call regarding the business of UnumProvident Corporation which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. These forward-looking statements are made based upon management's current expectations and beliefs as of the date of this conference call, but there can be no assurance that future developments affecting the Company will be those anticipated by management. For a discussion of the risks and uncertainties that could affect actual results, see the sections entitled Cautionary Statement Regarding Forward-looking Statements and Risk Factors in the Company's Form 10-K for the fiscal year ended December 31, 2005 and subsequently filed 10-Qs. The Company expressly disclaims any duty to update any forward-looking statements. Our discussion this morning will include non-GAAP financial measures, therefore, reconciliations to the corresponding GAAP measures are available on our website, which is www.UNUM.com, under the Investors and Shareholders section.

As you know, yesterday afternoon, UnumProvident Corporation reported net income for the fourth quarter of 2006 of $276.1 million, or $0.80 per diluted common share, and this compares to net income of $137.5 million, or $0.43 per diluted common share, in the fourth quarter of 2005. Included in net income for the fourth quarter of 2006, and also described in our earnings release, our income tax benefits related to several tax liability adjustments, as well as debt extinguishment costs, which when netted together, increased net income by $93.9 million, or $0.27 per diluted common share.

Additionally with the announcement of our proposed sale of the GENEX subsidiary, we are now reporting GENEX as a discontinued operation. Adjusting for these items, and also excluding net realized after-tax investment gain of $500 ,000 in the current quarter and $1.5 million in the year ago quarter, income from continuing operations in the fourth quarter of 2006 totalled $179.8 million or $0.52 per diluted common share compared to $133.3 million in the year-ago quarter, which was $0.42 per diluted common share.

We have several members of management assembled on the call this morning, including Joe Zubretsky, Senior Executive Vice President for Finance, Investment, and Corporate development, and Kevin McCarthy who is the President of our Unum US business unit.

And now, I would like to turn the conference call over to Tom Watjen, President and CEO.

Thank you, Tom, and good morning.

I think as I mentioned in my statement yesterday with the release, I'm obviously very pleased with the way we closed out the year and the results for the fourth quarter and for what that actually means for momentum as we look at 2007. And as Tom mentioned, we reported net income of about $0.80 per share, results from continuing operations of about $0.52 per share. But I think when you adjust for some of the positive developments in the investment operation in our UK business, I think probably the results are a little closer to $0.47 a share, which, again, is nicely above the consensus estimate of $0.44 a share. So again, I think you can see why I'm pleased with the fourth quarter results and pleased with the momentum that we built in the fourth quarter, which I think is going to carry over into 2007.

And Joe Zubretsky is going to be making a few comments in more depth about the results. But let me capture a few highlights, because, again, I think there was some strong indications across all of our businesses that we're really closing the year on a very positive result.

Let me start with Unum US. Obviously, the improvement and results in Unum US was primarily driven by the improved profitability we saw in the group income protection line of business. As you know, the loss ratio net business improved another 50 basis points over the third quarter to close that year out at about a 94% loss ratio for that line of business. And I believe we're solidly on track for our projection of hitting a 90 to 92% expected loss ratio by year end. So again, our confidence in that continues to be very strong, and I'll have some more comments about guidance in just a few moments.

The other thing I would add about our Unum US business is all our other lines performed very well. Again, as you know, the other lines of group life, voluntary benefits, and things, those lines have had very strong results and, again, show the continuation of the ability to not only improve our group income protection line of business, but also to continue to perform well across the other lines of business in that part of our Company. Things like persistency, pricing, expenses, customer satisfaction, employee engagement, again, those all ended the year on a very, very positive note, which, again, leads to my belief that we have good momentum carrying over into 2007.

Now with Unum UK, again, another very strong quarter, driven primarily by a favorable benefit ratio, strong investment income results, a favorable exchange rate, as well. I think if you look at the fourth quarter excluding some of those unusual items, it was still a very strong quarter. And again, we believe those strong trends we see in the UK are sustainable, although, again, not quite at the same levels we saw in the fourth quarter. So again, we are bringing down, as we talked about at Investor Day, some of the expectations for that business as we looked at 2007. But, again, it should be a very solid year in 2007 for that business, as well.

I'd add in the UK business, we are very encouraged in the fourth quarter by some of the sales activity involving our group income protection line. I think as we've talked to you in the past, the market has been relatively slow over there. And we saw some pick up in the market. And, obviously, we were a big beneficiary of that pick up. So, again, that certainly affected our group income protection sales in the fourth quarter, so, again, I do think we have some nice sales momentum carrying over into 2007.

The group life market over in the UK remains fairly challenging. It's a very price-competitive marketplace, and, hopefully, I think what you see in our results is we're retaining our discipline in terms of not going after underpriced business. So, again, the group life market is a little more competitive right now but, again, a very favorable market condition, we believe, for group income protection.

Colonial had another strong quarter. Profitability, again, continues to be very strong, primarily driven, again, by a relatively consistent benefit ratio. So, again, we're seeing the benefit ratio stabilizing at levels that we think are very good for the business long-term. And, again, that played its way out in the fourth quarter as well.

Obviously, an important part, though, of the Colonial story, as you know, is the sales side. And we're very pleased that we closed the year out with a 10% sales growth over the previous year. The fourth quarter sales were up about 4 or 5%, which is only a little lower than we had seen in previous quarters this year. But if you get a little deeper underneath that, that was primarily because of some slower growth in the large case business -- actually our core market sales, which is sales to employers of less than 500 lives, were actually up about 10%. So, again, underneath the themes in the fourth quarter, I think were some very positive developments which speak well for the future. I'd also add that things like agent recruiting, agent productivity, and those measures are also ones that, again, are -- we made some nice progress in the fourth quarter, which again sets us up well for 2007.

Just quickly on capital. Again, Joe will talk about this in more depth in a few moments, but we continue to strengthen the capital position of this Company. And when you look back to 2006, this was the third year in a row the Company generated statutory earnings of over $600 million for the year. It's the third year in a row the Company has had a risk-based capital ratio of over 300%. We closed the year with over $450 million of holding company liquidity, which is down slightly from what we'd expected. But, as you recall, we used a part of that liquidity earlier in the year to fund some of the additional costs of the reassessment process. So, again, a very strong close to the year from the capital point of view. And I guess, just lastly, from a marketplace point of view.

We continue to feel good about the positions we have in all of our markets. Our customer retention, as I said earlier, has been very strong. Our service levels have been very strong. Our employee engagement across all of our businesses has been very strong. So, again, a nice result for the quarter. Again, it was not just in one part of the business, but it was consistently across all parts of the business we saw some of those favorable results.

Now, one other item I just want to touch on that we mentioned in the release yesterday is that we made some organizational changes affecting our Unum US business. In the past, you may know, I actually, along with three of my direct reports, have worked closely to manage that part of our business. Our company's obviously in a much different position right now. And our business is a much different position right now.

One of my goals throughout the last three years that I've been CEO is to continue to streamline the organization so that we're set up in the way that supports the business needs in the future. And it was a good time, frankly, to make some changes in terms of how we organize some of our senior executives in that part of our business.

And I'm very pleased to announce that effective yesterday, Kevin McCarthy has stepped up to the role of President of Unum US and that Bob Best has assumed the role of Chief Operating Officer of Unum US. And I think many of our investors know those two executives well, you know their track records of success. Obviously I'm very pleased with this announcement. I think it sets up that part of our business more effectively for the future. I'd also say, to a degree, some of this has been how we've been operating for the last six months anyway, so this is not a big change organizationally. It affects a relatively small number of people, but it's absolutely the right change at the right time for this part of the business.

Now secondly, Roger Edgren, who maybe some of you know, who has run our field sales organization, and having joined us in 2004 from a very successful career in the brokerage community, has actually been contemplating a change. And with the change that we're making in our structure for Unum US, Roger will be leaving the company. We're very fortunate, though, that he'll be working with both Kevin and Bob over the next couple of months on some transition things to be sure that we have effective transition of some of the things that are going on in that part of the business. So, certainly sorry to see Roger leave, but, again, feel very good about the roles that Kevin and Bob are playing. And they have very strong teams. And so I think it was the right time to make this change business wise, it was also the right time to be sure we made the change when, in fact, both Kevin and Bob have strong teams in place to continue to maintain the momentum in 2007 that we built in 2006.

Lastly, just looking ahead very briefly. As you know from the discussions we had on Investor Day, we are not changing the game plan. We're staying very focused on a very narrowly defined sort of plan. We think we've got good momentum carrying over from 2006 into 2007. And the focus is really going to be in the three areas we talked about during Investor Day.

First is we want consistent execution across all parts of our business. And, obviously, the most important part of that is the US group disability claims operation where, again, we've seen some nice success of improvement the last 3 or 4 quarters. But, again, consistent execution is a very, very important priority across all three of our businesses.

Second, we had capital management. As you know, we've shifted pretty quickly from a Company that's actually needed capital to one that generates capital. And, again, Joe will talk more about that in a few moments in terms of just some of the focal points, in terms of how we're going to look at this excess capital situation.

And last, but not least, is to continually chisel away at those outstanding legal and regulatory issues that are outstanding. I think, as you know, we've made a lot of progress in that regard, and that will obviously continue to be a focus for at least a couple of us in 2007. So, again, I feel real good about where things stand. If we execute those plans well, I'm very confident we'll continue to create value for our shareholders.

And now let me turn things over to Joe Zubretsky.

Thanks, Tom, and good morning, everyone.

This morning I'll add some more color, some more detail around the operating results of the three primary operating units, Unum US, Unum UK and Colonial. Second, I'll provide you with an update on the trends in the claims reassessment process. Thirdly, I'll talk a little bit more about the capital management initiatives and some of the fourth quarter activity. And then some summary comments about an accounting change, an accounting pronouncement change that the company will comply with in early '07.

First the operating performance. Unum US segment was up 31% year-over-year. A very, very strong performance in Unum US, anchored, as Tom said, by the group income protection line which continued to show improvement in the benefit ratio. We've posted a 50-basis point decrease in that ratio, from 94.5% in the third quarter to 94%. We continue to see all the underlying metrics, claim recoveries, settlements, liability acceptance rate, all moving in the same direction and getting more consistent, which, as you know, was one of our early challenges. With the fourth quarter results, a 50-basis point improvement, we continue to be confident in projecting a 90 to 92% benefit ratio in group income protection by the end of 2007, consistent with the guidance we gave you last fall.

Second point I'd like to make in group income protection is that the net investment income for the quarter was unusually high. We had bond calls of about $12 million ahead of plan, and in any projection you do in that line, you should discount that activity as just being a bit unusual and aberrant.

Next, the group life and AD & D line continued steady, stable performance for the quarter, 6.4% increase in operating income, benefit ratio remains stable. There was a slight increase in claim size offset by a decline in claim incidents. So very, very good results in group life. And supplemental and voluntary produced a very strong quarter, with operating income growth of 16.5%. Within that line, the voluntary work site benefits results were very, very encouraging.

As you know, this is a lynch pin of our future strategy, and premium growth was 9.5%, and it's profitable growth, as the benefit ratio declined to 64.1% in the fourth quarter off of 66.9% result in the fourth quarter of last year. So again, very good profitable growth in voluntary work site benefits. And the recently issued individual income protection line and long-term care produced slight improvements in earnings. So all in all, very, very good quarter in Unum US.

Looking at sales for Unum US, sales were up 10% for the fourth quarter year-over-year and 5% for the full-year, as Tom referred to previously. A few statistics that are important: First, case coverages in the core market, that is the number of cases written, grew by 3.4% year-over-year. However, because, on average, the cases were a smaller size, the premium equivalent of our sales declined by 6%. Again, case coverage is up by 3.4%, offset by a decline in average case size.

We had higher than normal sales in the large case market. And it increased by 29%. Now I will qualify that statement by referring to an acronym we use here, NBOC, or new business on old case. And that's important because these are not new cases that we're competing for in the marketplace where you'd experience unusual pricing pressure. These are existing clients and expansion of lines of business. We already write in those clients where Kevin and his team have very good visibility on the underwriting characteristics and the demographics of that group. And so, there's less pricing risk, and, obviously, the outlook would be for profitable growth in the large case, given that it was heavily skewed toward NBOC.

Our sales mix, therefore, was a little bit skewed, more toward the 50/50 range, more than our target of 60/40, core and large. But, again, driven by the phenomenon I mentioned a minute ago, our strategy has not changed. Our strategy is clearly to grow the core at a mid single digit rate and take the large case business when, in fact, it can be profitable. Persistency for the group long-term income protection line was outstanding for the year at 87.8%, off of 84.8% in 2005. So, testimony to the outstanding service, quality of the business, our customers are sticking with us.

But I will caution you as we look forward to 2007, we're going to guide down that persistency rate driven off of case. As we said at our investor day in November and we continue to say, we will walk away from unprofitable large case business. We need to attrit some of that business, at times, when the pricing isn't right. And so we'll talk more about core and large case persistency rates as we move forward in '07 so you can be assure that we're retaining the business that is profitable. So, all in all, a good quarter in sales for Unum US.

Moving to Unum UK, the segment had an outstanding quarter. Very low benefit ratio, 60.2%, compared to the 67 to 69% levels you were seeing earlier in the year. I would say that just everything happened right. Incidents was right, good pricing, claim management, recoveries worked well, producing an $81.8 million quarter. And as Tom referred to, that level's not sustainable. We think the core earnings of that business are more in the $70 million range.

Sales did bounce back in the fourth quarter, 77% in dollar terms, 58% in local currency. But keep in mind, this is off of the very low comparison point of the prior year. To remind you, we talked about how that marketplace was sort of stymied and distracted with a lot of pension reform. Brokers and benefit administrators, we're dealing with those types of issues, and now we see more activity in the marketplace, quotes are higher, and certainly the activity has returned to what we call a more normal level of sales activity across the board. So again, our long-term focus in the UK is to grow where we can grow profitably. It had been a stagnant marketplace at 11% penetration. We continue to believe that we can create demand for this product and grow at mid to high single digit rates here over the foreseeable future.

Next segment I'll talk about is Colonial. Very solid fourth quarter, with continued strong steady performance. Operating income was up 30.5% year-over-year. If you adjust for some litigation costs that dampened the results a quarter ago, it was 11% increase, still very respectful, double-digit gain. The benefit ratio continues to come in in the low 50s at 52.3%. So the growth we're experiencing continues to be profitable growth.

Premium income grew by 8.3% in the fourth quarter, the highest rate of quarterly growth in 3 years. And we did complete the year with a 10% year-over-year sales increase, following 2.8% growth in 2005 and a decline of 2.3% in 2004. So the sales team in Colonial did a great job. Tom talked about some of the segment activity in Colonial, vis a vis sales. Sales in the core markets were strong, a little bit down in large case, but that's consistent with the strategy.

And portending well for the future growth is the building of what I call the distribution infrastructure. We continue to add new management and new reps. We were up 20.3% in new rep recruiting for 2006. Our number of reps remained constant at about 6,500, but we think we can grow average weekly producers at a fairly substantial rate for 2007.

That concludes my comments on the segment results, now let's turn to the claim reassessment process, the second area I want to talk about. Really, business as usual. We completed the reassessment of slightly over 3,000 claims for the quarter, bringing the total number of claims reassessed to just under 14,000, approximately 55% of the 25,000 we expect to reevaluate. The fourth quarter results were completely in line with our reserve assumptions.

The overturn rate, the rate at which we're overturning claims and making a decision that results in a payment, was 41%, which is 9 points lower than the 50% overturn rate we're experiencing in the prior two quarters. Again, in line with our assumptions, that brings the overall overturn rate down to 37%. Our reserve assumption is 40% on an inception to completion basis. We still think it's prudent to reiterate it's reasonably possible range that sits above the actual accrual we made in our financial statements of $90 million. We're certainly pleased that one quarter post taking that reserve charge, the activity occurred within the range of assumptions that we laid out. But too early to tell, so we're going to hold the consistent, that $90 million reasonably possible range, and we'll update you on whether we can take that down and guide that down as we post future quarters. And operationally, we may not track to complete this reassessment process by the end of the year 2007.

Tom talked about the capital management initiatives. Again, everything in line with expectations. We continue to post the 300% risk-based capital ratio. Our leverage ratio as planned at 25.1%, holding company liquidity at nearly $450 million. And as Tom said, another strong year in statutory earnings. We're going to be obsessed with holding company cash flow and liquidity and financial flexibility. As you know, statutory earnings is the basis for operating subsidiary dividends and three straight years averaging $600 million certainly bodes well for that metric continuing to be strong.

In the fourth quarter, we continued the process of our deleverage program. Minor activity, but still important, we repurchased $32 million of our 2015 notes, which, again you know we're issued out of the UK business and resulted in some debt extinguishment costs of $1.9 million. And our 2007 plan is to get to a 24% leverage ratio. In early '07, our ASIS securities, our second traunch of ASIS, the $300 million traunch. In February, the debt in the Ford contract will be coupled. The $300 million of short-term securities will, therefore, remarket. And in mid May, we will issue 17.7 million shares of common stock and receive fresh proceeds of $300 million of cash, all baked into our forecast of over $900 million of holding company liquidity by the end of 2007.

Next point, on capital management, is just to mention that we continue down the path of exploring a securitization of the closed disability block. On the -- in the wake of the success of the inaugural securitization transaction we executed in the fourth quarter of 2006 on our LTD business, we remain confident that the capital levels of the closed block are not economical. Investors will agree with that assertion, and, therefore, we are moving forward with the expensive modeling and analysis that is required for this exercise, and we'll update you on our progress on a quarterly basis.

Last point to make, you saw the press release, we were successful in reaching a definitive agreement for the sale of the GENEX business. GENEX was a great investment for us, cash on cash, pretax yielding 11% over the years we owned it. It's noncore to our operation, and we felt it was time to allow GENEX to grow under new ownership, so we reached a definitive agreement with Stone Point Capital, a private equity firm, and that should close sometime in the second quarter of 2007.

Last comment I will make with respect to an accounting pronouncement we'll have to deal with in the first quarter. As you know, the accounting profession issued new guidance on how to account for deferred acquisition costs. We will -- unless it's deferred, and it's still possible that it will be, we will record that in the first quarter, nd we'll refine our estimates and report them when we file our 10-K.

Right now, our estimate of the impact will be to record a cumulative effect adjustment to reduce our deferred acquisition cost balance in a range of $625 to $695 million, that's a pretax number, with a decrease to beginning of the year retained earnings after tax of $400 to $450 million. That reduces the book value per share from its current range of about $20.40 to somewhere between $19.09 to $19.23, but also increases the reported return on equity by 60 basis points. So, we clearly believe that this has absolutely no impact on the intrinsic value of our Company, but for those of you who are fundamentalists in your analysis and you want to do the math, if you take the lower book value per share, take the higher price to book value multiple implied by the higher ROE, the valuation, our current valuation, is clearly supported after this accounting change.

We have talked to the rating agencies. Because, as you know, this will impact, at least, the GAAP-based reported leverage ratio, and the rating agencies, in our discussions with them, are considering this accounting change completely non-economical, and will have no influence on their decision making as they review the financial strength of our Company. So, again, we'll refine our estimates when we publish our 10-K, and, obviously, we'll book our final estimates when we go to post our first quarter results.

So, that's the report on the fourth quarter, highly productive, a good financial quarter for us, with strong operational performance. As Tom said, positive momentum going into 2007. With that, I'll turn back the call over to Tom Watjen.

Thank you, Joe.

And just in closing, I'm, obviously, again, very pleased with the results we had for the quarter and, frankly, the contributions that were made across, many, many parts of the country. And, obviously, I'm especially pleased with the ongoing improvement we're seeing in our US group income protection claim management organization, where since making some of the organizational changes just over a year ago, we've seen some steady improvement as we went through 2006, which, frankly, is what gives me great confidence in our ability that we're going to achieve our stated goal of 90 to 92% loss ratio for that line of business for 2007. So, again, it's the steady improvement that we've seen, actually, over the last year, which I think gives us all great confidence in our ability to achieve that this year.

As you know, we're not changing our guidance. The guidance that we provided on our conference call for the third quarter as well as at the Investor Day meeting in November continues to stand, which was, as you recall, operating earnings per share for 2007 of $1.83 to $1.87 per share.

Cindy, I think at this time, that concludes our prepared comments, and let's begin the question and answer session.

[OPERATOR INSTRUCTIONS]

And we'll take our first comment from Tamara Kravec at Banc of America.

Thank you, good morning.

Morning, Tamara.

Just on the UK group income protection sales, you talked a little bit about the pick up there, but what exactly are you seeing in terms of what's changed in the marketplace? It seems like a pretty big change just for one quarter, so if you can elaborate on that. And then I have a follow-up.

Sure, that'll be fine, Tamara, I'll take that. Frankly, the market, I'd say, was distracted over much of 2006, as employers were actually dealing with some other issues unrelated to our products, including some pension reform. And so, I think one of the things we saw was actually a much lower level of activity in the market during much of 2006, again, as our client base, frankly, was focused on other issues.

And I think as those issues began to disappear and people, again, began to focus back on the things that we do, that obviously led to increased activity, and, therefore, you saw some of the sales in the quarter. I would, therefore, say, in part, some of the sales for not just us in the industry, could also be pent up demand. Because, again, people we focused on other issues during other parts of the year.

Okay. So, would your -- based on what you're seeing, and this may be harder to say, do you think that that pent up demand is going to flow into '07? Or do you think it's unreasonable to carry forward this kind of an increase?

I think, Tamara, a little bit will, but I think this was probably not -- I think as Joe said in his comments, with some of the elements of our UK results for the fourth quarter, they're probably not fully sustainable as we go into 2007. So, I wouldn't want to extrapolate that level of sales growth into 2007.

Okay. And then on -- I have a capital related question. You have the ASIS that are converting. So the -- so I understand it, that $300 million of prices you'll be getting in May, that's included in the $450 million of holding company liquidity by the end of '07?

No, sorry. Right now, we have -- we ended the year with $450 million in holding company liquidity. What I'm saying was the $300 million in fresh ASIS proceeds in May was baked into our estimate of the $950 million of holding company liquidity we'd have at the end of '07.

Okay. That's what I thought. Just checking that. And so the -- obviously you have the ASIS converting and your capital position's improving, so can you update us on your posture on share buy back in light of the conversion and the capital you'll have?

As you know, Tamara, we've been pretty clear in our intentions there. We believe that a ratings upgrade to investment grade levels is entirely consistent with creating shareholder value. So anything we do has to be in cooperation with the rating agencies. And we continue to pursue the idea of the closed disability block securitization. So there will be ongoing dialogue with the agencies over the next 6 months, with lots of moving parts.

And part of that will be, if you do create excess capital, $950 million that we plan to have for the end of '07, or perhaps even greater as a result of securitization, how to deploy that capital toward deleveraging the company and shareholder-friendly actions is part of that dialogue. So we're not ready to discuss our plans in that area, but that is part of the dialogue we're having with the agencies today.

Okay. I'm sorry, just one more question. On the SOP 05-1, can you just explain what -- it seems like a very large amount that you're recording in additional DAC, but other companies have yet to really give estimates out. What is actually that comprised of? What's really behind that and driving that?

Well, I think, not to get into the fine technical details, basically what the pronouncement required you to do was amortize DAC over a shorter period of time, in effect, the length of the contract rather than the length of the customer relationship. And so the cumulative effect adjustment, as you are aware, assumes that that policy was in effect since the beginning of time. The cumulative effect adjustment is a catch up adjustment, assuming that we have amortized those costs over shorter periods of time, length of contract rather than length of customer. Quite frankly, I think it's in line with what other companies have recorded, at least as a percentage of the group DAC balance. It only affects our group contracts, the remaining deferred acquisition costs we have on our balance sheet relates mostly to individual contracts where this pronouncement didn't affect it.

That's helpful, thank you.

Thank you, Tamara.

We'll take our next question from David Lewis at SunTrust Robinson Humphrey.

Thanks. Joe, back on the SOP 05-1, other than the one-time impact in the first quarter, do you have a sense of the annual impact as you adjust your assumptions on DAC going forward?

Yeah, David, when we gave you our outlook for '07 back in November of $1.83 to $1.87. Obviously, the rules were a little unclear at the time, so we had various estimates of what this pronouncement would cost us on an earnings basis going forward. But we included some element of that in giving you that estimate. Now as time has marched forward here over the last couple of months, we've refined that estimate, other things have gone up and down. So I would say on a net basis, we're not inclined to change our guidance, we're still comfortable at the $1.83 to $1.87. But the impact was not material in any of our lines of business on a going forward earnings basis.

Do you get a sense it's a couple pennies, a nickel? I guess, kind of where I'm going, in effect, since you didn't assume it before, you've actually raised your guidance somewhat.

No, I want to be clear on this. We had various estimates of what it might cost us on an earnings basis, and we considered those when we gave you the guidance back in November. It's at least $0.02, could be as high as $0.03, could be somewhere between $0.02 and $0.03.

Okay. That's helpful. And maybe for Kevin, can we get a little update on how the claims incidents developed in the fourth quarter versus recovery trend improvements? How much of the benefits coming from recovery versus claims incidents?

Good morning, David. Incidents was mildly improved, I would say, during the fourth quarter for both STD and LTD, but not significantly so. Recoveries had pretty strong momentum throughout the quarter. In fact, in the whole second half of the year, we had continuing steady improvement in recoveries and also in the offset side of our business. So, a good, steady, consistent performance throughout the third and fourth quarter. No one measure really made a difference.

And Kevin, traditionally you have a little higher claim trends in the first quarter relative to the fourth quarter. So, would we be better off assuming a flat sequential 94% versus continued improvement, or what's your thoughts?

A little early to know what the first quarter is going to look like in terms of incidents, but we don't see any trends that would be driving, at least, the feeling that incidents would be going up significantly. I would expect you'll see marginal improvement in the loss ratio, just as we explained on investor day that we ought to be going up in tracking toward that 90 to 92 range at about a half a point to a point per quarter kind of thing.

Despite the seasonality of potentially higher claims in the first quarter?

That's right.

Great. Thanks very much.

We'll take our next question from Eric Berg at Lehman Brothers.

I think, Joe, you said that you're now expecting persistency to be different next year, I think you said from what you expected based on a little bit different mix? Do I have that right, and if so, could you give us more specifics?

Sure, what I said was, the fact that we are very disciplined about this -- writing large case business and how we're not going to renew it at pricing levels that are not profitable. I think what we need to start doing is talking about persistency in core and in large case so that you can understand that we're executing against our strategy. And I think what we're saying now is that the overall persistency rate in group long-term, in LTD, can be closer to 84% than the 87.8% we did this year, all driven by the expectation that we'll walk away from some large case business that's not priced right.

Okay. My second and final question relates just to your overall outlook for the earnings per share. If it was the case that the earnings, excluding the earnings per share, excluding the special items came in ahead of, not only of the consensus, but of your own forecast, why aren't you raising your projected earnings per share, your guidance?

Well, I think we're -- we want to be pretty clear about this. The $0.52 that we're talking about on an operating basis did include some legitimate positive activity that we don't think is sustainable. Clearly, the net investment income line, these bond calls happen randomly. We're happy when they happen, we collect the money, but you can't project that into net investment income results over time.

And the benefit ratio, everything just worked, it was the perfect storm in the UK in the benefit ratio. Everything worked well, all at the same time, and we don't think a 60% benefit ratio is sustainable. It's probably somewhere between 65 and 68%. Again, I think discounting for that, I think our $1.83 to $1.87 stands. As you know, you can't just look at EPS growth next year, you have to look at operating earnings growth, dampened by the continued dilution of our share base due to the issuance of the ASIS. So our earnings growth actually is greater than 10% next year pre-dilution.

From the ASIS?

Yes.

Thanks very much.

Thanks, Eric.

We'll take our next question from Jeff Schuman at KBW.

Good morning. In spite of your comments on persistency, where does that leave us in terms of group income protection premium growth for '07? Are we likely to see some year-over-year premium growth or still trending pretty flat?

Good morning, Jeff, Kevin. I would think it would be trending pretty flat given the persistency pressure that we're facing. As Joe said, we continue to be disciplined on our new large case pricing, we're being very disciplined on our large case renewals. Far and away, the majority of persistency pressure comes from those large case renewals, and, as you know, our efforts are to reprice that business to profitability or accept the fact that it's going to walk away. I would expect core business to be growing, large case business to be fairly flat overall, flat due to the persistency pressure.

Great. And then my second question. Any change at the margin in terms of competitive conditions, either small case or large case? At least one of your most direct competitors continues to talk about a pretty competitive small case market. So you see anything different there?

No, I think the small case market for us has been pretty consistent during the course of the year. Prices have been fairly stable, I think. And in the small case marketplace, we gained momentum over the courses of '06 with our small case focus and pushing our value proposition more aggressively in the small case market as opposed to the large case market, which is why we're seeing some growth. But the price pressure that we see, in particular, is in the large case marketplace and, in particular, in group life where we just don't see any lessening of the aggressive pricing of the large case group life marketplace, which is why we don't have any growth there at all.

Great. Thanks, a lot, guys.

Thanks, Jeff.

We'll take our next question from Joan Zief at Goldman Sachs.

Thank you. I just have -- just a few questions. I was wondering if you could just talk a little bit more about your success at Colonial? What are the products that you're selling? Are you seeing just some more significant acceptance in the marketplace for this type of work site marketing? What do you think, ultimately this -- your market share could move to?

And the second question I had was about the litigation, Tom, that you had mentioned -- you're going to finish up, try to finish up this year. Could you just remind us of what that is and if you think that there is any sort of news that we should be looking for in the short run on that.

And lastly, you talk a lot about the possibility of buy backs or no buy backs. What's your position on the dividends?

Okay. Good, Joan. I'll get started and maybe, Joe, I can ask you to do the buy backs. But let me take the Colonial one and the litigation. And first off, Joan, let me step back on Colonial. I think, as the group knows, we brought a new CEO into Colonial in the first quarter of 2004. So there's -- what we're seeing today is the result, I think, of some good strong work done by Randy Horn and his team to really get that business repositioned and refocused to a degree.

And much of the refocusing, frankly, was going back to basics. It was the basics of re-orienting the sales organization to recruiting and bringing new agents into the system. We had not -- we had lost track and lost focus on that, frankly. It was dealing with some sales management issues that existed in that part of the business. At the same time, obviously, honing up the operations side of the business. So, when you look at the results today, it's not just with fourth quarter, but I think you're seeing that progression, actually, throughout 2006. You see signs that the sales recovery is very much underway, and you see, obviously, that we have continue to have good benefit ratio performance and good expense manage. And, again, it didn't come without a fair amount of work by Randy and his team.

But, again, back to just the sales part of it. Again, they've refocused their energies back on what, I think, is the strength they have in the marketplace, which is that small and mid-size employer. They too, just like the Unum US years back, have gotten a little refocused -- their energies were a little more heavily directed to large case business. And, again, they've got a much stronger value proposition, that small and mid-sized marketplace.

When we talk about growth rates for Colonial, we give you the aggregate growth rate. And, again, in aggregate, the growth in sales was up 10% for 2006, but actually the growth in core markets was almost double that, actually. Because, that's, again, where there's a much greater value proposition, that's where they can make a significant inroad into some, the more -- the less traveled market. And so, again, we're pretty optimistic about that business. And, again, it's very much because of a back-to-basics sort of approach to the business.

And they've already done a lot of that heavy work in terms of requalifying the sales management organization. As Joe mentioned in his comments, the recruiting efforts are up substantially, the productivity measures are up substantially, which, again, speaks well for the ability to carry this momentum into 2007. I don't have a view on a market share. I don't necessarily think of it that way. Because, again, they're trying to be sure they balance their business. They want to grow, but also grow profitably. We don't want to chase, for example, big large jumbo cases unless we can, in fact, do that business profitably, just as is the case with Unum US. That's a little long answer, but it's all driven by, I think, some real good foundation work that's been established over the last couple of years by that management team, and you can see the results of some of those efforts. They're very, very positive.

Now, with respect to litigation, you're right, I very much, I think, put a marker in the sand that I personally am going to spend a fair amount of time being sure that we clean up the infamous note 9 activity. And really, when the 10-K is released, there's really no material progress that we're going to be noting, I'd say, in the 10-K. But on the other hand, there will continue to be active discussions with all of the remaining things that are outstanding. As I said, I don't want to put too many lines in the sand in terms of when those things are completed, concluded. It's very important from my point of view that we eliminate that overhang. Myself, along with our general counselor, will be spending a lot of time on that. I don't see anything particularly noteworthy out on the horizon. We're going to continue to chisel away at that day by day, piece by piece.

And Joe, just on the buy backs and the whole capital question.

Sure, Joan. And I think we've discussed this before. We continue to believe. We look at the life insurance universe and we look at some of the companies whose valuation parameters we actually aspire to and admire. And a lot of these companies are creating two-thirds of their value through, or their EPS growth, through actual earnings growth, and a third through just a continuum disciplined program of share buy backs. So we continue to believe that we can create shareholder value in a share buy back program versus increasing the dividend. In fact, we have information, we have done a lot of analysis that suggests that you don't get it paid -- you don't create value by increasing the dividend beyond the 1.5% yield that we have right now.

Second point we made on the dividend is, because the rating agency test that's the tightest is our coverage ratio, not our leverage ratio, until I get better coverage statistics over the next couple of years, I think holding the dividend at a constant level makes the most sense from a rating agency point of view. The program will be to, as we create this excess capital, to put a plan in front of the rating agencies that mix further taking down our debt and our deleverage program and a disciplined program of share buy backs and while maintaining the progress toward moving toward an investment grade rating. That's the way we're thinking about share buy back versus dividend.

Okay. Thank you very much.

Thank you, Joan.

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

Good morning. I want to take a second pass at Eric Berg's question. I just want to make sure I understand your characterization of the true core earnings at $0.47. Tom, I believe that takes out the bond calls in the above normal earnings for the UK, is that correct?

Yeah, Bob, this is Tom White. Let me walk through the adjustments that we look at internally to get the reported operating earnings of $0.52 to $0.47. First thing you'd look at is, in the Unum US group income protection, the net investment income line, we had $12 million of bond calls, kind of above and beyond what we normally see. And again, we always have couple $3 or $4 million of bond calls in there, but this quarter it was heavier than normal, and we would quantify that at $12 million more. That's pretax.

Secondly, in Unum UK, as Tom and Joe described, it was an exceptionally good quarter when you look at the benefit ratio of 60% versus a more normal 67 to 68%. We think there needs to be some adjustment there. Net investment income was a little stronger than normal. Foreign exchange rates certainly helped us. You need to offset that a little bit with the small DAC adjustment that flows through the UK business. But we think there's about $11 or $12 million in earnings pretax or about $7.5 million after tax that you probably need to adjust out. So still a very, very strong core earnings of around $70 million in the quarter. But at 81.8, that's not going to continue at that level.

Third thing to think about is, there are some expenses, some special items. There's a little bit in Colonial. There's some expense items in the corporate segment that we would characterize as one-time type things. We think those are about $6 million or between $3.5 or $4 million after tax.

And then the fourth thing to think about is, when you look at the tax rate on this kind of adjustment that we're making here, you see about a 32, 32.25% tax rate. That's lower than we've seen. Typically, we're going to be around a 35% tax rate. The reason it's lower this quarter is the fact that the Unum UK results were so strong, and that helps because it's a lower tax rate. So if you adjust the tax rate, say from 32.25 to 35%, that's about a $7.6 million, $7.5 million after tax adjustment. So those are the adjustments that we're looking at. Again, those would take us from $0.52 to $0.47, which, again, is kind of our view of what we think the core earnings power of the quarter was.

Thank you. The question I was going to drive to was, if you take that $0.47 as a core running rate, multiply it by 4, and dilute by -- I think you said 17.7 million shares in May, so we're going to have 7 months of dilution and shares, which is about 3%, assuming no benefit and reinvested proceeds. It seems like if you multiply that, if you do the math, you're not having any surge from Colonial and UK growth from the base of the fourth quarter. It seems like without any growth, you get to your $1.85 middle of the range for --

Yeah, I understand what you're doing there, Bob. I think a couple things to think about: One is, our earnings have a little bit of a quarterly seasonality pattern. And so, we end up the year here this year at $0.47. Typically, first quarters are $0.02 or $0.03 or $0.04 below that. We're not going to give specific guidance for the first quarter, but odds are, it's going to be less than the $0.47, which would be in line with the normal morbidity and mortality patterns that we see in our business. And we think earnings per share on a quarterly basis will grow from there.

Now, again, adjusting for these items that I talked about for the fourth quarter, and then you look at 2006 on that basis, we still think there's about 10% pretax earnings growth in there, and that's what we're basing that on. Again, we'll have some dilution to deal with with the ASIS securities. You know, there's a little bit of the SOP 05-1 impact that kind of works its way in there. It's all embedded in the guidance. But, I think, underlying all that, Bob, is about a 10% growth in pretax earnings.

Bob, Joe Zubretsky. In summary, I think the way we look at it is, while the strong fourth quarter didn't cause us to raise our estimate, it does make us more confident in hitting that estimate. And Tom Watjen would said that I would say that, and that is really what's happening here.

Thank you very much.

Thanks, Bob.

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We'll take our next question from John Nadel at Fox-Pitt.

Yes. Good morning. I have a question in following up on SOP 05-1. Maybe two real parts here. One is that last week, I think on Hartford's conference call, they sort of gave us an indication that the charge was akin to thinking about their prior amortization period being about 4.5 years, moving down to about 1.5 years. I was wondering if you had commentary that would be the equivalent of that for Unum?

I can't quote the specific years, but as I did say that, underlying that statement, by the Hartford, I'm assuming, is that if you were amortizing it over the life of a customer, you now need to amortize it over the life of a contract. Given that our price guarantees extend from 1-3 years, 1.5 makes perfect sense.

Okay.

So I would say that, yes, I would agree with that assumption.

And then the second thing is --

John, this is Tom White. Just one other thing to think about is the mix of business. If you've got more large case, you're going to have more rate guarantees in there. If you've got a little more small case business, it doesn't necessarily have the rate guarantee, and you don't do the re-underwriting like you do on a large case piece business. It will have some impact, as well.

Understood. The second question is just on the prospective impact of SOP 05-1. Is it a drag -- pardon me, is it a drag against your future DAC amortization? Because, I'm thinking about it, you're writing off 75 to 80% of an $850 million today --

John, it washes out after roughly a year. There's a little noise in the first year. And it's really based on the pattern of when business renews during the year. And a lot of our business renews January 1, so it gets scooped into the cumulative adjustment. When you're trying to compare company to company, you've got to look at a lot of things, and another thing to think about is what is the pattern of when business renews that goes through this.

Yeah, understood. I was just actually wondering if your DAC amortization in '07 will be lower than your DAC amortization in '06?

We're not going to make guidance on specific lines like that.

Just a question as to whether this is benefiting you on a year-over-year basis or not?

No. I think the -- no, the amortization in '07 will, as I said before, $0.02 to $0.03, but due to other items in recasting our guidance, we don't need to change our guidance. And then, in the out years, neutral to GAAP earnings.

Sure, once you get through the year of implementation. Okay, thank you.

Well, I think at this point, I think we'll close off the question-and-answer session. I just wanted to certainly thank everybody for their involvement in discussion this morning. We all, again, stand ready if need be after the call to follow up on any further questions you may have. But again, thank you very much for the time of all those who participated and, again, look forward to future discussion. Thank you.

Thank you. That does conclude today's conference, you may disconnect at this time.