普登 (UNM) 2007 Q1 法說會逐字稿

Good day and welcome to the Unum Group first quarter 2007 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 Mr. Tom White, Head of Investor Relations. Please go ahead, sir.

Thank you, Cindy. And good morning, everyone. And welcome to the Unum group first quarter 2007 analyst and investor conference call.

As we get started, I want to remind you that today's remarks will include forward-looking statements which are statements that are not of current or historical fact and that actual results might differ materially from results suggested by these forward-looking statements. Additional information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission, including information in the sections titled Cautionary Statement Regarding Forward-looking Statements, and Risk Factors in our annual report on form 10-K, for the fiscal year ended December 31, 2006, which can be found in the investors and shareholders section of our Web site at www.Unum.com. In addition, these statements speak only as of the days they are made, and we take no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on our Web site in the investor's and shareholders section.

As you know, yesterday afternoon, Unum Group reported earnings for the first quarter of 2007. Net income in the quarter was $178.3 million, or $0.51 per diluted common share, compared to net income of $73.4 million, or $0.23 per diluted common share in the first quarter 2006. Included in net income for the first quarter of '07 and described in our earnings release is income from discontinued operations of $6.9 million, and net realized after-tax investment losses of $3.2 million. Adjusting for these items, for both current and prior years first quarter, and also adjusting last year's first quarter for the claim reassessment charge and debt extinguishment costs, income from continuing operations for the quarter totaled $174.6 million, or $0.50 per diluted common share, compared to $129.2 million, or $0.40 per diluted common share, in the first quarter of 2006, which is an increase of 35.1%.

Joining us on the call this morning are the heads of our three major business segments, Kevin McCarthy, Susan Ring, and Randy Horn, and as well as Bob Greving, Executive Vice President and Chief Financial Officer and Chief Actuary. At this time I would like to turn the call over to Tom Watjen, President and CEO, for his remarks related to the first quarter operation and 2007 expectations. Tom?

Thank you, Tom. And good morning. Let me start my comments by simply saying that I am actually very pleased with our results for the first quarter and I think we're off to a very good start for 2007. As Tom mentioned our operating earnings per share of $0.50 were certainly above consensus estimates and our own internal plan. Our pre-tax operating earnings increased 34.2%, and actually, our core operating earnings actually increased 37.2%, so again, some very good solid performance from a bottom line point of view. I will say more about, it but frankly it came from continued improvement in our U.S. group income protection product line where we saw the benefit ratio move down to 93.4%, from 94.0% in the fourth quarter and about 2 points below the level it was in the first quarter of 2006. So again, we are seeing some very nice steady improvement but we've also seen some very strong performance across all of our operating segments and we will make a few comments on that.

We had strong investment results. We had strong expense management. So across many aspects of the business, I am certainly very, very pleased with the performance. Again not everything met our expectations, and we'll talk about a few areas that did not, but on balance we really feel good go the start of our new year. All three of our operating segments actually had very favorable results, and I will touch a few highlights here and Tom will talk about them more, but let me start with Unum U.S.

In Unum U.S., pre-tax operating earnings increased 40.6%, with improved earnings in virtually every line of business. Most importantly, we saw continued improvement in our group income protection line with continued improvements in the claim management aspects of the business as well as slightly favorable new claim incidents. As I mentioned, the loss ratio was down to 93.4%, which is 60 basis points lower than it was last quarter. And again, with that, we feel very comfortable with the projection that we laid out earlier of the loss ratio reaching a level of 90 to 92% by the end of this year, and as we continue to produce the kind of results we had the last several quarters, our confidence level in that guidance certainly continues to improve.

Our other operating lines within Unum U.S. continued to perform well as well. We saw very strong results in our recently issued individual income protection line of business, which enjoyed record profits for the quarter, as well as an 18% increase in sales. We saw favorable mortality in our group life and voluntary benefit lines, again, which we think is very indicative of the disciplined approach we've taken to those lines of business here, the last several years, so again, that line of business continued to perform very well.

Now, as I mentioned, we continued to have very strong expense management with our Unum U.S. business. At the same time we have been investing in some fairly exciting activities we think are going to help enhance some of our growth prospects in the second half of the year and into 2008, which we'll talk about in some of our comments later, and we have been talking about expense management, we have been continuing to invest in this aspect in parts of this part of the business to continue to assure our position for future growth. Again, I will have more to say to that.

Probably the one area that did not meet our expectations for Unum U.S. was the sales where sales were and softer than we expected. When we think about sales, we think about two segments of the marketplace. Our core market business, which is the business sold to small and mid sized employers as well as the large case business and actually both of those segments were below expectations. In the core market sales, we certainly saw a reasonable amount of activity but a lower average case size. We also recognized the activity in the marketplace is probably down somewhat, but frankly, we also think there was an execution issue there for us in terms of focus and we have some very specific plans in place right now to raise that level of activity and focus. I will say the April results look a little better than we would expect so again, we seem to have shown some improved already there but as you know, core market sales were an area of great emphasis and focus for, a little disappointed by the results here in the first quarter but think we are really attacking it the right way to turn this around for the second half of the year.

As you know, large case can be somewhat volatile. We've adopted a very disciplined approach to that part of the marketplace. Very focused on making sure we can get adequate pricing for that business. You may recall we saw some pretty good results in the fourth quarter of last year, because we saw some business there that was business that we thought we could do in a disciplined manner. Activity has been a little lower in the first quarter of this year, but again, you tend to see some more volatile sales activity in large case business. I think that very much was the story for the first quarter.

I will say I know there has been some discussion about the environment. Kevin can talk about this a little later in the Q&A session. But we're not seeing any significant changes in the competitive landscape. And so we don't, therefore, attribute our sales activity in the quarter to increased competition or pricing pressures. But again we do have some very specific execution plans in place to be sure that we do raise the level of activity in the small and mid sized marketplace, and continue to be opportunistic in the large case marketplace, and if you think back, we've had similar plans for different issues and underwriting and claims and so when we put our efforts up to getting these things positioned properly, we have a strong history of delivering on those results and again I think we can certainly go into that in more depth in the question-and-answer session.

In a related point, persistency continues to be very good. We did see the slightly lower persistency in the large case business which we signalled to the marketplace when we released our fourth quarter results. We knew there were some cases coming up for renewal that we were going to terminate because we simply couldn't meet the pricing expectations that we thought were pretty aggressive. So again that did materialize in the quarter. You will see from the statistical supplement, we are now providing case persistency, which we think will give you an ability to give a look not just at premium persistency, which gives you a sense of how the block is persisting, which can be a little volatile from time to time based on large case, but case persistency will give you a little sense of the stability we have, especially in the core market business, and that information is now available to you in the statistical supplement.

It is becoming a bit of a broken record talking about Unum U.K. and Colonial, both of those businesses performed well in the quarter. Let me start with Unum U.K. Unum U.K. reported pre-tax operating earnings of $75.1 million, which was an increase of 38.1% in U.S. dollars, and 23.5% in local currency. This again, as you know, comes off a very strong set of results in 2006. So we've continued to see that very strong quarter performance that we enjoyed in 2006 carry over into 2007. The results were driven by very favorable benefit ratios, primarily driven by lower claim incidents, and again, good risk management practices.

We also saw a strong recovery in sales in the quarter. As you recall, the first quarter sales of 2006 were somewhat down. They're up 78% in U.S. dollars and up 58% in local currency for the first quarter this year. So again, some very nice sales activity, especially in the group income protection line of business. As implied by some of the percentages I've given you we certainly enjoyed a somewhat favorable foreign exchange and benefited from the strong British pound, actually.

Now with Colonial, again, a very good story, pre-tax operating income increased 29% to a record level. Margins are at some of the highest levels they've ever been. So again, good consistent profitability coming out of our Colonial operation. And in large measure, it is coming because of strong expense management, but also some very favorable claims experience we're seeing across all of the product lines. Sales were relatively flat. Only up a little less than 1% for the quarter. Again, a lot of activity, a lot of very good things happening in terms of direct recruiting, and also in terms of just the case count growth, but we're seeing there is actually a lot of the growth is coming in the smaller end of the marketplace so that is bringing down the sales numbers, but a lot of what I consider the leading indicators are showing some very good results there. So even though the sales are down below our expectations, some of those leading indicators I think are quite strong, which speak well for the second half of this year, again recruiting is up, and again, those are all early indications of what could be some good results in the future.

So again, all three operating businesses had good strong performance for the quarter. As I said before, each of them showed good steady improvement for the quarter, and somewhat different dynamics in each of them, but again, we're very pleased with the operating of them but again we're very pleased with the operating performance of those three businesses.

The other element obviously is the closed block. The closed block has slightly lower earnings for the quarter. That business continues to wind down and can be somewhat volatile. I will say the interest adjusted loss ratio is certainly very much in line with what we've seen the last couple of quarters. Underneath that we saw some good claim recovery trends. And some good incidence trends. We saw slightly higher level of benefit payments, but again, on balance a pretty steady result for the closed block for the quarter. As you know, the story with the closed block is more around what are you doing to manage the capital? And I will come back to that in just a second just to give you an update on where we are in the process of looking at some of the potential transactions or securitizations which might help us manage the capital a little bit differently.

Let me touch on two other areas very briefly before I turn things back to Tom. As you know, one of the important events of the quarter here was the announcement of some branding changes and some logo changes, and again, this is very much part of what I think is a natural step for this company, to begin to move from -- we were focused very heavily on balance sheet and capital, and we are very focused on margin expansion and will continue to be focused on those two areas but certainly we want to now also be sure we are focused on disciplined consistent profitable growth, and a piece of that involves being sure that the -- we enhance some of the branding and markets efforts of the company, and the brand launched that we announced several weeks ago has been very successful and the new tag line, Better Benefits At Work has been very well received in the marketplace.

We think it reflects the position that we retain in the market as the leader of employee benefits and again, so it has gone very well in terms of acceptance of our customers and our brokers and our employees, and I think you will see us be more visible on this in the balance of this year, and into 2008. And certainly we're not going to be spending, a significant levels of new advertising dollars but we are going to be spending some money to promote the brand to bring awareness to the company, and some of the value propositions we have in the marketplace. And some of you may have seen the injury report on ESPN. That's one indication of the kinds of things we will continue to do to take this new brand and the new logos and the new tag lines and make sure we're more visible in certain venues. Again, it simply brings greater attention to the company which we again will help to support some of the disciplined profitable growth objectives we set for ourselves.

The second thing I would touch on briefly is capital management. As you know, that was a very significant priority for us three or four years ago. It continues to be a very strong priority. It has taken a backseat to profitable growth and margin expansion. But still, the quarter was a very strong one from a capital and a financial management point of view. Risk-based capital remains very strong at around the 300% level. Our debt leverage is about 25.5% and Tom will talk about some of of the recapitalization work that actually happened in the quarter with some debt buy downs, and we had a very strong quarter from a statutory point of view with $143 million in after tax operating earnings from a statutory basis.

I would say that is up from about $87 million from the first quarter of 2006, so again, a very strong improvement there. As it relates to the securitization, we continue to make good progress. As we've said all along, this is a process that is going to take some time, and we established the framework for a transaction when we did tailwind last year, so obviously that framework gives us a leg up but there is some complexities with the closed block that required additional time.

It certainly requires more regulatory involvement because the business resides in three states, and it requires some consents from reinsurers, all of which we're making good progress on and also requires continued discussions with the rating agency. We can talk more about that in the Q&A but I'm very happy with the progress we've made in the past quarter to move that whole project along and continue to provide you with updates as appropriate. But that's really how we address the performance of the closed block. We are seeing as I said before, solid operating performance but we do want to look at how we actually have the capital allocated to that particular block of business. Again, with the quarter results, where they stood, we're not changing the focus for 2007. It is really a very simple three part exercise.

First we want to continue to be sure that we are diligent of consistent execution across all of our businesses and all of our products, including a couple special areas of attention are obviously on continuing to improve our Unum U.S. group income protection results, which again we have seen some steady progress here the past four or five quarters and we're very encouraged by that. That I would also add we want to obviously continue to be sure we're focused on developing consistent disciplined profitable sales growth across all of our businesses, so that is certainly another element of focus that we've got as we look into the upcoming year.

The second thing is putting our capital to work effectively. As you know, we expect without North Church to have a little over $900 million of excess capital available at the end of the year, and we're continuing to look at how we want to think about deploying that capital as we move through the year but obviously a big focus point also is North Church and make sure we look at every angle with potential securitization with the closed disability block.

And last but not least, is we successfully put the claim reassessment process behind us and any of the other regulatory matters. On the claim reassessment process in the first quarter, the results were very consistent with the assumptions we made last fall, so we feel pretty good about where that whole process stands and at this point we probably have about three quarters of the decisions completed and probably information on almost 90% of the potential decisions. So again, our level of understanding of what that process looking like is much, much, greater than it is today. Which is why as you probably know is one of the things would he have done is shrunk the potential range for the round, the potential cost of that. I think you will recall, when we took the charge in the fall of last year, we talked about plus or minus $90 million and we adjusted that down to plus or minus $60 million based on the fact that we have additional information which I think is very encouraging, we should be very encouraged as these processes take the shape that we expected as a result of the analysis we did in the fall.

Let me turn things back over to Tom White for a further detailed discussion of the business segments and I will come back and make a few comments around the guidance and the few closing costs. Tom?

Thank you, John. Yesterday as you know, we reported after tax operating earnings of $174.6 million, which is $0.50 per diluted share, and it compares to $129.2 million, which was $0.40 in the same quarter 2006. During the quarter, as Tom described, operating performance across our three primary business segments was very strong.

In fact, while our consolidated return on equity for the quarter was 10.5%, the ROE for our core operations of Unum U.S. and Unum U.K. and Colonial was 14.6%. So a good result there. The Unum U.S. segment growth in pre-tax earnings was 41%, first quarter '07 over first quarter 2006. The group income protection benefit line showed continued steady consistent improvement. The benefit ratio for this line declined an additional 60 basis points from 94% in the fourth quarter of '06 to 93.4% in the first quarter of 2007.

Though we benefited in the quarter from favorable new claims incidents, we attribute much of the improvement to our claims management performance. The changes we made going back to early 2006 have noticeably increased the consistency of our performance and in fact, we've got about a 200 basis points improvement comparing the first quarter of '07 back to the first quarter of '06. And as Tom said, we remain confident that we will be able to achieve our stated guidance of a benefit ratio in this line in the 90 to 92% range by the end of 2007.

Also, within the Unum U.S. operations, our group lines and AD & D lines continue to have steady stable performance. Operating income increased 13% compared to the first quarter of 2006. During the quarter, the line benefited from favorable mortality rates in combination with the pricing and underwriting disciplines that we've had in place for several years here. With respect to pricing, we continue to sacrifice top line growth for the benefit of strong margins in the group lifeline.

Our supplemental and voluntary lines also produced a strong quarter, with operating income growth of 14%. Overall improvement in this line was driven by results in the recently-issued individual income protection and also the voluntary workplace benefits lines as our long-term line of business slightly lags the results of the same period of 2006. We find the results related to the voluntary workplace benefits area to be very encouraging. For the quarter, the line had 5% premium growth over 2006, with a benefit ratio of 60.3%, compared to 64.1% in the fourth quarter. The benefit ratio improvement was due in part to favorable mortality rates.

The recently issued individual income protection had 3% premium growth, while maintaining a relatively stable benefit ratio. And again, with respect to the long-term care line, our strategy continues to be to focus on the group long term care line The individual long term care business remains solidly profitable. We have filed for rate increases on certain older products within the in force individual long-term care-line and are beginning to see some of of the resulting premium increases on those policies where approvals have been given. We anticipate that the bulk of the increases will flow in later in 2007, and more so in 2008.

The Unum U.K. segment again reported outstanding results. The primary driver for this quarter's results was low claim incidents, and this is reflected in the benefit ratio. The benefit ratio in the first quarter was 61.1%, which compares favorably with the year-ago first quarter of 67.5%. The segment has continued to maintain very good expense management and we continue to benefit from the favorable currency exchange rates. As Tom has said, the pre-tax earnings there in U.S. dollars were up 38.1% in constant currency, or in British pounds, that's up 23.5%, with respect to premium growth, the increase is 16.1%, in U.S. dollars, and 4% on a constant currency basis. And actually, the 10-Q, we are going to start putting in an income statement for Unum U.K. in British pounds.

Our long-term focus for Unum U.K. continues to be to expand the group income protection market, and explore the opportunity for voluntary workplace sales in the U.K. while always trying to protect the very strong levels of profitability that we're seeing in this segment. We are meeting these objectives, in the first quarter in fact about 50% of our group income protection sales were to new customers, and these are customers who did not have disability coverage previously. Tom said Colonial had an excellent first quarter. Operating income was up 29%. Benefit ratio was 49.2%. Compared to 52.1 a year ago. The improvement was reflective of favorable claim experience. Premium income and persistency within the segment remain strong. And you know, we did mention that sales increased by .6 of a percent and basically the new case count increased by about 8%, but this was offset by smaller average new case size. We continue to focus on development and recruiting of new agents, and to this end, the new agent contracts increased by 12.9% a quarter.

Let me now move quickly to two accounting pronouncements effective January 1, 2007. We adopted the provisions of SOP05-1, which provides guidance on accounting for deferred acquisition costs, on internal replacements of insurance contracts, and also FIN48, which clarifies the accounting for uncertainty in income taxes, recognized in our financial statements. The SOP05-1 decreased beginning of year retained earnings by $445.2 million, which was within the range that we discussed last quarter, and was outlined in our 2006 form 10-K. The FIN48 increase beginning of year retained earnings by $22.7 million, so with the adoption of SOP05-1, and FIN4, this did reduce our book value per share to $19.56. This is on a basis that excludes the unrealized gains and losses and for comparative purposes, the book value at year-end 2006 would have been $19.17.

As Tom said, we continued to build and execute on the capital plan which we laid out for you at November, 2006 investor day. For 2007, we continue to project holding company liquidity, to build to in excess of $900 million by year-end. We continue to project that the RBC ratios for our U.S. life insurance subsidiaries on a consolidated basis will be maintained at the 300% level and then we will look at the benefits of additional deleveraging. Our leverage ratio was 25.5%. That is with the retirement Our leverage ratio was 25.5%. That is with the retirement of $150 million of debt related to the remarketing of the ASIS security that occurred back in February. In addition, we had a really strong statutory earnings quarter, $143 million on an after-tax basis in the first quarter, and looking back over the last four quarters, the after-tax operating earnings on a statutory basis had been $658 million. So good results there.

Turning back to the ASIS securities as I just said, we did purchase and retire $150 million of the debt related to those securities in the February 2007 re-marketing of those. The mandatory conversion with the settlement of the common stock purchase contract will take place on may 15, here so in the next couple of weeks, and this conversion is going to generate $300 million of cash conversion is going to generate $300 million of cash proceeds which will enhance the holding company liquidity, or will be a part of that $900 million that we're projecting, and further, the settlement will result in the issuance of an additional 17.7 million shares of common stock.

Let me conclude with a few comments on the claim reassessment process. As you know, we've posted some supplemental disclosure on the Web site and I would encourage you to take a look at that. But for the the first quarter of '07, we completed the reassessment of another 3,201 claims. The total number of claims reassessed currently stands at 17,179, which is about 74% of the total number that we expect to reassess. Our current estimate of the total number of claims to be reviewed has declined somewhat.

We revised it to a point estimate of 23,086, and this compares to our initial estimate of 25,196, and we've reduced this because we're just seeing a lower response rate in the 2003 to 2005 close year claims, and also in the 1997 to 1999 close year claims. The results for the quarter were generally in line with our reserve assumptions. The overturn rate was 42% in the quarter. And the overall overturn rate, or overturn rate now equates to 38%. And this is consistent with our assumptions and I remind And this is consistent with our assumptions and I remind you that the overturn rate, as of year-end 2006, was 37%. At present, the 2002 to 2000 -- excuse me, the 2000, 2001, and 2002 claim years are now over 90% completed. And we are in the process of beginning to review more of the -- the more recent claims, and also those 1997 to 1999 claims. As Tom said, as a result of of the current information, we are revising the reasonably possible range from plus/minus $90 million, to plus/minus $60 million.

We believe this range covers the uncertainty that is inherent in this claims management -- or claims reassessment review process. Also, lowering the range this quarter, this reflects the fact that we've completed our review of 74% of the claims, and have information on another 17%, and that the claim decisions recently have been in line with the assumptions that we set back in the third quarter. So we remain on track to complete the claim reassessment process by year-end 2007, and I just remind you that once that is completed, there will be a regulatory review which we would anticipate being included -- concluded in the summer of 2008.

So with that, I would like to turn the call back to Tom.

Thanks, Tom. And just a couple of brief comments to close before you go to your questions, I think you noticed from the release that we have adjusted our earnings guidance, certainly based on the strong results we saw in the first quarter, plus our outlook for the rest of this year, we've moved our operating earnings guidance for 2007 to a range of $1.91 to $1.95. From the previous guidance of $1.83 to $1.87. As I said before, we continue to expect our Unum U.S. group income protection benefit ratio to close the year in the range of 90 to 92% and again our confidence continues to grow as we continue to make progress at each and every quarter.

Now, our guidance, our new guidance drives some changes in our corporate return on equity for 2007 to a range of 9.7 to 9.9%, from our previous guidance of 9.0 to 9.5%. And the ROE for our three primary operating segments to a range of 13.1 to 13.4% from our previous guidance of around 12%. So again, we think this is indicative of the fact that we saw some good fundamentals here in the first quarter, we certainly are looking forward to the balance of 6 the this year to continue to have some of those strong operating trends continue into the balance of this year, and I think that is reflected in our guidance. So as I close, you know, certainly in our guidance. So as I close, you know, certainly this is another good strong operating quarter for us. We know that each one -- each quarter, we have to continue to show continued improvement and we think we have this past quarter. We're pleased with the progress we saw in Unum U.S. GIP, and loss ratio, to the active efforts of our claims management organization and some of the things we put in place last year. Obviously we're also very pleased with the continued consistent performance of Unum U.K. and colonial. Now we know we can't let up. We know each quarter we got to show again we will continue to deliver solid consistent results. And we know we are not meeting our objectives in the sales area and we believe we have very strong employees to continue to turn those parts of our business into a more positive part of the story and I'm very confident that those plans will lead to the desired outcomes in the second half of this year. So at this time, Cindy, we loo like to move to the question and answer segment.

Thank you. (OPERATOR INSTRUCTIONS). And we will take our first question from Jeff Schuman at KBW.

Good morning. And a couple of questions. First of all, I was wondering if you could clarify your outlook for the ongoing earnings drag associated with SOP 05-1. I think originally you had baked $0.02 to $0.04 of the annual impact into your guidance. And secondly, I was wondering if you could talk to us a little bit about the emergence of the loss ratio improvement in group income protection. You've had -- you're not only showing nice improvement, but it has happened on such a very inconsistent basis, that is a little bit different than what we normally expect in disability business. I mean even the U.K. business, which is very profitable, does show a fair amount of loss ratio volatility. Understanding that Kevin has tightened up a lot of procedures, but is that sufficient that we can expect this kind of very, very steady loss ratio performance in group income protection? Or is there still a lot of inherent volatility to be expected from here?

Two good questions. And maybe I will ask Bob to address your first one regarding the SOP impact on the earnings guidance going forward.

Jeff, as we have looked at the pattern of our terminations in implementing the back adjustment for the quarter, we are not anticipating that there will be a material impact to our earnings for the year, as a result of the implementation, obviously, as you're aware, it does shorten up the amortization pattern for our deferred acquisition costs and our group lines of business. There is a little -- there is a slight positive in the Unum U.S. line of business, and a slight negative in our Unum U.K. business, but overall we're not anticipating the impact to be material.

And actually, Jeff as it relates to how the group LTD business emerges or group income protection emerges, I will ask Kevin to talk about that as you know, one of the goals when we made some of the changes was to develop more or consistent operating performance and we can't control the volatility around incident but the hope is we can control the volatility around operating performance and maybe Kevin will give an update how that has all transpired.

As Tom said, I think on the operating performance in the claims organization, the many actions that we've implemented over the last 12 months continues to become more and more effective and more pervasive throughout the claims organization. And I think that is driving a real consistency of recovery performance. There is still the potential of volatility though in the loss ratio that can range from incidents related volatility to social security offset related volatility that can happen, some seasonality as well, so I wouldn't necessarily suggest that it is going to always be like clock work, but I do think that the operating end of recovery performance has been very, very consistent over the last three quarters, and I expect it to continue to be so.

Great. Thank you very much.

Thank you, Jeff.

We will take our next question from Tamara Kravec at Banc of America Securities.

Thank you. Touching on the U.K. disability benefit ratio, this is the second quarter we've seen it be so strong. Can you comment on the sustainability of that going forward, just in light of the comments you just made on the seasonality and what not? And then just on the claims reassessment, can you just remind me, on your original reserve assumptions, I think you were forecasting a 50% overturn rate for the remainder of the claims, given the reserves that you have, and now you've moved that down to plus or minus 60, and so is the assumption for the overturn rate still 50%?

Tom?

Let me see if I can get both of those, Tamara. On the U.K. benefit ratio, at 61%, that is a little better than we would expect to see over the long term. Now, I don't think -- I don't want you to interpret that to mean that it is going to immediately jump back up to somewhere in the mid-60s. I think over time, it will probably gradually work its way back up.

We had -- there are kind of two things going on in there. One is the acquired blocks of business continue to kind of run off in a very, very nice way and those were transactions that were just priced very well, and had been administered very well. So we're still seeing a little bit of benefit there. But even in the underlying business, we saw, you know, very favorable claim incidents quarter in the U.K. So I don't think 61% is sustainable over the long term, but again, we're not really seeing anything in that business that would suggest it is going to deteriorate very quickly. But you know, probably somewhere in the mid 60s is a reasonable benefit ratio for that business.

On the reassessment, when we established the plus or minus $90 million range, we were coming off of a couple of quarters where we had a 50% overturn rate on those claim decisions. So we felt like 40% was probably the right number, and we based our single point estimate, or the reserve that was established on that 40%, so we thought that, okay, if it does stay at 50%, what is the -- what is the potential upside? And that is why we established that plus $90 million number. Now, with the passage of a couple of quarters, the overturn rate has been roughly around 40%, and we've got the number in the supplement on the Web site. But that has come back down, and because of that, and because we passed through another 6 or 7,000 claims, we just feel that we canning bring that upper end of that range down to 60 million from 90 million, and just based on the passage of time, and the fact that the last 6,000 claims have been in line with the assumptions that we set.

Okay. And if the claims reassessment turns out to be much better than you expected, say next quarter or in two quarters, would you be in a position to release reserves? Or would you just hold on to those for whatever regulatory reason until the process is complete?

This is Tom. We want to wait for this process to be complete before we ever would think, I think about that. I think what are you seeing though is as we continue to get closer to completion of the process, our confidence level in what we've set up can grow, because we've made more decisions and we have information on those new decisions still to be made. So I think what is likely to happen is we will continue to adjust that range around that estimate, and I think, Tom, going forward because again we just simply have more information. But I don't think we would do anything with the reserves we have in place until this time that full process is fully completed.

And that will be year end.

And quickly on share buyback. If you can just update us on where your thought process is given the aces, and given the stronger statutory income you had in the first quarter, and just, you know, kind of balancing that with the agency outlook?

It might be just the best way to deal with that maybe if Tom White can give an update on the rating agency discussions, bought again, a decision like that, obviously falls in the mix of a much broader discussion with the rating agencies about just our results, our plan, even the possibility of a closed disability block transaction, so maybe Tom, maybe in the spirit of Tamara's question kind of embedded into kind of the ratings agency update.

Yes, this year, we're taking a little different approach with the rating agencies. Typically, we have our annual reviews fairly early in the year. And we've actually pushed those back a little bit. I mean clearly what the rating agencies are looking for from us is further improvement in the benefit ratio for group income protection and also to see the reassessment get behind us, and if we have those meetings early in the year we can talk about plans, but we can't show them actual results so we've moved those meetings back a little bit. I will say that in terms of the quarter relative to what rating agencies are looking for from us, it was an excellent quarter, and the reassessment is in line, the benefit ratio improved, and statutory earnings were very strong, and you know, more consistency in the results, margins expanded and I think all of that kind of translates into successfully executing the strategy and just having consistent results.

So our message to the rating agencies is, look, we're delivering on our business plan, in fact we exceeded our business plan this quarter, and we think ultimately that should translate into better ratings for us. But we really won't go to rating agencies and ask for the order until a little bit later in the year when we've got a little more information on the two things that I mentioned. And as Tom said, directly on share repurchases, we've got to take that into the context of the broader capital management plan, you know, the potential success we might have with the closed block securitization, and what that means for the managing the overall capital structure, and putting some of that excess holding company liquidity to work. So we're not making any statements right now on share repurchases, but we feel like we're definitely moving in the direction where we have a heck of a lot of flexibility, financial flexibility, and I think at that point, share repurchases can very easily be a part of that whole puzzle.

Okay. Great. Thank you.

Thanks, Tamara.

We will take our next question from Colin Devine at Citigroup.

Good morning, gentlemen.

Good morning, Colin.

A couple of questions. First, for Tom Watjen, looking at the U.K., Colonial and the voluntary business, obviously very strong results. Could you just give us your view on sort of how sustainable those are, do each of those each sort of overearning a lot or sort of within the range you would expect for each one of them, so we can just sort to really gauge what the underlying earnings horsepower if you like of Unum is?

Secondly, for Kevin, you've gone through three major initiatives with the group LTD line from trying to get it repriced to fixing the administration, to now you're in charge of sales as well. Can you give us just a bit of an update and score card in terms of where you stand on each one of those? On the securitization, sort of number three, is third quarter sort of a reasonable time frame to expect something to get done for this? And then lastly, I appreciate the stock buybacks are off the table, until really toward the end of the year, but I presume the rating agencies would have no problem with you continuing to buy down debt.

Four very topical points, Colin. Let me -- as you pointed out, let me start with the first one in terms of U.K. and Colonial and sustainability. As we said, also in our prepared comments and you have seen in the results the margins in those two businesses are very very strong and in many cases quote at or near the record levels in terms of margins. I think what you heard from us the last two or three quarters is just because those levels are as high as they are, we all sort of expected it and Tom said it in the early comments that may not be fully sustainable into the future but we haven't seen any evidence from the underlying operational performance whether it is claim activity or things like that suggest it is not sustainable, but as a practical matter for planning purposes those margins will come down a little bit but I hate to be wishy-washy but we just haven't seen operating evidence to that effect that is going to happen. So I think there is a little caution in terms of the future margins. But so far there doesn't appear to be any operating evidence to suggest that those margins are under pressure. As you know, both of those businesses are very different.

Colonial is more of a an individual product sold in a voluntary benefit and supplemental work site basis and you see relatively predictable behavior with that block of business, assuming products and the pricing is appropriate. And under Randy Horn's leadership, that very much has been the case. So it has been a very targeted market. Those margins tend to be less volatile. The business tends to be less volatile. And that's why even though they are very strong we still think it will come down a little bit but given the nature of the product and the business, it is hard to see when that is going to happen.

U.K. has more of a heavy group emphasis and in general, the group can have a little more volatility attached to it but we have not seen indications in the market that there is something going on in the business that would suggest that happening in the near term, but I think from an intermediate term point of view, I think all plans point to that to happen. With respect to the score card for Kevin, maybe I will pass it to you Kevin, on a number of dimensions, where you're right there have been some good results across many of aspects of the business and still some work to be done in particular.

Good morning Colin.

Hi, Kevin.

Let's talk about the claims piece first. The major actions that we wanted to take in claims were around the organization and work flow effectiveness, and inventory management and quality assurance. All of of those major changes are in place, I don't expect to have to make other major changes. I do think that we continue to make refinements, you know, for increasing precision in a couple of areas, and some narrow areas, we attack the biggest issues first and we still have a couple of smaller ones we're still working on.

So I think that will contribute to some continued marginal improvement in terms of recovery performance. But the claims process is largely in place. On the underwriting, or repricing side, we made great progress over the last couple of years and we have very consistent discipline in both our rural program and our new sales pricing. We do have some work to do as you know on the larger case end of the segment and we have been aggressively pursuing that and that has been reflected in the slightly lower persistency results driven largely by the large case business and our desire for consistent profitability in that segment. And I think that will continue, even into the renewal program for 2008. We will still have some business to attack. But the profits and the progress is well under way.

The sales organization, we're approaching it in a very similar fashion. As we shift our mix of business, from larger markets to our four markets and as we shift our mix of business also from disability oriented sales to packaged sales, we are doing some redesign work around our sales rep organization, particularly broadening the portfolio of our four market reps. We're doing some work around broker and territorial alignment as well. We initiated the assessment of that during the first quarter here which we think had some effect on our first quarter sales results but as we moved into disciplined execution, I think the sales results will recover, in the second and third quarter and I have great confidence in our management team in the field that we will get it done. As Tom said earlier, we have already started to rebound a little bit in April and I expect sales will continue to improve throughout the year. We are still early in the process, as opposed to the underwriting and claims process but the process is under way.

The only thing I'd add is in underwriting, it's more a function of when the business is available to make renew and make that pricing decision. The infrastructure is in place, the team is all in place so I think those aspects of things have been very much settled in and settled in for quite some time. It is when have you access to a renewal to make that pricing decision is probably the part that you can't accelerate. Absolutely. Colin, with respect to the securitization, I think as we said before, this is more complicated, it is larger, but again, we are working very, very diligently to get this done. I hate to hesitate to say the third quarter although I actually feel pretty comfortable the third quarter is not an unreasonable expectation but in part much of our ability to sort of pick the timing of this is a function of other parties an our discussions of other parties. I think for the most part we finished all of our internal work associated with this, so virtually all of our time and effort are based on working with outside parties that need to be parties to this transaction. As you know, they are really three general groups. The rating agency discussion. Discussion with the appropriate regulators and some reinsurance associated with that block of business where we need to continue to be sure that the reinsurers are in support of any possible securitization. So there are three groups of discussions that are actively under way. As I said before, the vast majority if not all of the internal work associated with looking at something like this is behind us, but it very much is working with all three of those different constituents and we are obviously are pushing very very hard and as quickly as we possibly can and so far I think all of those audiences are trying to do the same as well and that's why I think the third quarter is a reasonable time and the reason I can't be precise though is because we are dependent on others as we try to move through that process but I can say they are all working very diligently and expeditiously at this point.

You also have some new insurance commissioners.

Exactly right. With the regulators they have been very responsive and attentive and giving us the chance to walk through some of the thinking. But that can be one of the things that can influence speed of execution. But I wouldn't want to suggest that they're holding back. They have all been very, very responsive to this point.

Now, with respect to the debt buyback, versus stock, Tom, you may want to talk about it. I think one of the bigger issues would be, do we do anything that has any recapitalization element to it before the bigger game plan. I think that's probably the big thing we struggle with it a little bit.

Yes, obviously, if we are successful with the securitization, and how successful, will play very heavily into some of the capital management plans, clearly buying down debt, you know, is positive for us from a number of view, not just the rating agency view, but one of the metrics that we're still a little tight on is the coverage ratio, and to the extent that we can deleverage a little bit, that is going to help that metric. But yes, it is all a part of a broader capital management plan that we are being flexible with at this point.

And to a degree we did that this past quarter with what we did with the aces, basically retiring half of the aces.

Yes, we did retire 150 million of that so it does bring the leverage down to 25.5%. And that is even with the -- that reflects the change in the balance sheet, because of the DAC adjustment and the lower equity.

All right. Thank you very much.

Thanks, Colin.

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

Thanks very much. And good morning.

Good morning, Eric.

So my first question concerns this possible, hopefully later this year, putting up with the capital associated with the closed block. I understand that it is sort of the end game here that you free up the capital and reach it, but help me understand how this would economically benefit Unum group in the sense that this is an underperforming block of business, that it is a whole year, but you cannot take a business that is underperforming and somehow make it dramatically better, maybe an improvement on the margins, you're going to have to pay somebody somehow to take this off of your hands, and that loss is part of the cost of the transaction. So what I'm asking is, all in, my first question, is, all in, when you consider the significant costs associated with the hit that you're going to have to take, why did you say better off with this transaction and even in concept if you could explain that to me. Thank you.

Tommy, you want to take that one?

I guess, Eric, if you start with the premise that the business is underreserved and bad margins and things like that, I can see how you would get to the skeptical -- the skepticism that I read in your voice. We've got -- it has to be proven out how the cash flows work, and you know, how the overall structure of the transaction works and this is much more of kind of a statutory exercise than it is a -- in looking at the GAAP results on this business. , It is looking at cash flows, and what debt can this block of business support, and also what is the right amount of capital, you know, as we capitalize this, you know, like 300% RBC, and so the exercise is to look at -- to see if we can prove that there is a lower level of capital that would support this business. Again, it is a closed block and run off, and what kind of defendant can be supported by this. So -- and then, you know, that frees up the amount of capital that we can use for other purposes. So that is the analysis that we're doing. And -- but, I think if you do start out with the initial premise that this is an underperforming block of business and the cash flows are poor, then I can see how you would get to that conclusion but again, it is going to be borne out in the analysis that we

Two more quick questions. First, with respect to Colonial, I don't recall, maybe I just missed this, you're saying that Colonial had sort of a margin issue, I've tended to think of Colonial over the years as operating in fits and spurts from a top line perspective, with occasional issues in the distribution channel. Has Colonial had a margin issue? And are you doing something to fix it? My question, in other words, is what is driving this margin improvement at Colonial?

Yes, I hope I didn't say anything that implies it has a margin issue. The margins have always been strong in Colonial and have shown some steady progress under the new leadership and the approach that Colonial has taken into the market the last three years. What is driving that, in part of that, not just the last quarter, but a period of time, part of that was due to the fact that there were some segments of the marketplace that Colonial participated in that they have done some work to reprice and reposition some of the businesses and some of the products in that but by no means is this the same issue that Kevin is dealing with in the Unum U.S. business and there were pockets, certain regions and/or products where it has not been meeting margin expectation. And allow that business to relapse.

And that has been happening consistently over the past three years. So that is part of what helped the margin continue to improve. But again, they really have focused much of their effort in parts of the marketplace which is their strength which is the small and mid-sized employer where again there is some very strong profitability and consistency that can come out of that marketplace. So again, I hope nothing that was said earlier suggested there was a margin problem but there has been some nice margin expansion that has come through the efforts of the Colonial team.

Last question is actually for Kevin, and it relates to the top line. Ketch was saying and I'm paraphrasing now that in the quarter now being reported, it was an issue involving, I hope I have this right, alignment of the company with brokers and reps. If I -- I'm just hoping he can sort of elaborate on it, get into a little bit more detail on sort of what happened in the quarter to cause this weakness. I know Tom, you called it in your opening remarks just an execution issue. What in this context does that mean? What was the failure to execute issue? What specifically happened? And if you could elaborate on what specifically you're doing to get back on track? Thank you.

Great, Eric, good morning. Good morning. Three quick points. One, a significant portion of our drag in the quarter in terms of first quarter sales was as Tom said large case volatility. We expect that. Our disciplined price pressure strategy indicates that when there are cases that look like they value what we offer and willing to participate at the pricing level we think is necessary for the risk, then we bid, and if it isn't like that, then we don't, and that is going to be choppy in the large case quarter to quarter. That was one significant drag.

Secondly in the quarter activity levels were down. That is probably the execution item that Tom was specifically being focusing on, or referencing. Activity levels were down. And closing ratios were down in our core markets. Thirdly, what I was referring to is as we shift our mix business from large to core and from purely traditional group products to an expanded portfolio to include supplemental products as well in that core market police, we have to go -- place we have to go through a process of training and developing further our group reps an making sure those reps are appropriately aligned by territory and have brokers that cover those packaged sales. And we are going through that process, and we will take a little bit of time to go through that realignment in a systematic way and we are well into the process now and that's why I expect the sales to recover.

Thank you.

Thank you, Eric.

We will take our next question from Darren Arita at Deutsche Bank.

Good morning.

Good morning.

With respect to the premium consistencies for group income protection, should we expect it to stay at the first quarter levels for the remainder of the year? Or was it sort of, one quarter blip here with the large cases coming off?

This is Tom White. The way we report that number is it is the actual, for the first quarter, and then it embeds a projection for what we're seeing for the balance of the year. So theoretically, if we're perfect in our foresight for the business, then that benefit ratio won't change so it shouldn't -- it will move a little bit, from, the second to the third to the fourth quarter, but we do have -- we do embed a protection for the balance of the year so it should be pretty steady for the rest of the year.

Okay. Thanks. And in the U.S., can you talk a little more about how claims recovery experience is tracking with your long-range assumptions?

Kevin, you can pick up on that?

The claims recovery as I said earlier, the operating processes have gone extremely well. Those processes of course are reflected in the improvement of the loss ratio. 200 basis points of first quarter '07 versus first quarter '06. We are well on track towards our targeted level of loss ratio in the 90 to 92% range by the end of this year. And that's going to be driven largely by continued effective recovery management performance.

I guess I was just wondering in the past, there was a graph provided on how the rates claims recovery rates were below the long range assumptions and it was moving up to that assumption, and was wondering if we extended that graph further, what that would look like.

Darren, that is a chart that we've used in our analyst day presentations, and that recovery experience is basically at the long-term expectation.

Okay. Great. Thank you.

And we will take our final question from Saul Martinez with Bear Stearns.

Good morning. A follow-up question on the securitization. Can you expand a little bit on some of the challenges you mentioned? But specifically as it relates to the rating agencies, what are some of their concerns? And also, do you feel you need to be comfortably or close to getting investment grade credit ratings from Moody's and S&P for a securitization to make sense for you? Second question is just if you can elaborate a little bit on why you're comfortable with competitive conditions in your core marks especially in light of some -- marks especially in light of some concerns raised by market participants by the competitive dynamics and where they're headed there.

I will take the first one and maybe ask Kevin to take the second one. Actually as it relates to challenges I'm not sure I would classify them as challenges. I think at this point what we're saying is we are having ongoing discussions. Those discussions are about the details of the securitization, of which as you can imagine, given the size of the block of business, there is a lot of analysis, there is a lot of what-ifs, there is a lot of sensitivities that are being done, and again, I think at this point, it is safe to say there is a good exchange of information back and forth, Tom. I don't think you would use the word challenges at this point. I think there is a process that takes time, we're in that process, and there is good cooperation I would say by all parties in that process.

And Saul, I would say we don't feel we need to have an investment grade rating at this point to successfully execute a securitization. And just expand on Tom's comments a little bit, one of the things that we're going to look at, if you take the closed block, their cash flows off of that and it has to support the debt there, and then there is a remaining business that is producing a certain level of cash flows, and there is a certain amount of debt, and so, you know, a big issue in all of this is what do we do with the money that is freed up? How does that get redeployed? And so that is kind of a give and take. And you know, we have to build a capital structure in effect for each of those businesses, you have the tail wind piece, or the closed block securitization and then the remaining business. So a lot of the work with the rating agencies is around what is the remaining business look like, what are the cash flows, and how are we redeploying some of those proceeds?

That's my point. I'm not making -- I'm not suggesting that you can't do the securitization without investment grade credit rating, but -- and I think that these are points that Joe has made in the past. Does it make sense without feeling very comfortable that you're on your way, given that you may have constraints with what you can do with the capital, in terms o redeploying the capital if the rating agencies, if you're still concerned -- or if there is not clear progress towards getting investment grade credit ratings from both S&P and Moody's.

Again, I don't think we -- we're sensitive obviously to being sure we don't do anything that would impede our progress towards that goal. But again, as Tom mentioned in his comments, you look at the fundamental operational performance in the quarter, it was incredibly strong from a credit point of view, in terms of the risk-based capital, the statutory earnings, the reduction in leverage, it goes on in terms of the things that are there, so the underlying operational performance, I think continues to support the goal we have of an improved rating.

And at the same time, you layer on top of that north charge and the closed block discussions, and those are separate discussions, but we obviously don't want to do something that would impede our on objective and Tom you said it well, the two can be done separately as long as we continue to feel we make progress in the underlying operational side of the business which is ultimately leading to an upgrade somewhere down the road. Which is very much how we think about it. So they're not technically related, as long as we're confident we're continuing to make good progress towards that underlying goal of investment grade, which we believe we, are and again, the operating results in this quarter are I think very much supported that.

Okay.

Now, just the other question, maybe for Kevin.

Good morning, Saul.

Good morning.

It is tough to comment on competitor's use of competitiveness. I think competitiveness are often driven by anecdotal situations as opposed to analytical ones. I think our renewal programs have produced over the last several years an average rate increase that may give competitors a view of price that is maybe different than our own. But when I look at our case persistency and the very consistent performance of case persistency as we have adjusted our pricing levels, and as I separate and differentiate as did you between the large case market place and the core marketplace, we think the value proposition in the core marketplace has much more to do with the quality of our offering, the quality of our service, and the breadth and depth of our execution in the field sales rep level and the quality of our sales reps and we don't think it is a price competitive sort of issue for us, we think it is more breadth of coverage and attacking the marketplace with a quality offering. So we don't see any of the pricing tracking we do, we don't feel a lot of volatility of it in the core market.

Great. Thanks a lot.

Thank you all for taking the time to join us. Again, we all stand available to the extent there are any follow on questions from anybody. But operator, I think that will complete our first quarter 2007 earnings call.

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