普登 (UNM) 2007 Q2 法說會逐字稿

Good day and welcome to the Unum Corporation second quarter 2007 earnings result 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 head, sir.

Great, thank you and good morning everyone. Welcome to the Unum group second 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. As a result actual results may differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are located in the section 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, and subsequently filed Form 10-Q. Our SEC filings including our Form 10-K and Form 10-Q can be found in the Investor Information section of our website at www.unum.com.

Take note that the statements in today's call speak only as of the date they made and we undertake no obligation to publicly update or revise any forward looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on our website, also in the investor information section.

As you know, yesterday afternoon Unum Group reported earnings for the second quarter of 2007. Net income in the quarter was $153.5 million or $0.43 per diluted common share compared to net income of $125.2 million or $0.38 per diluted common share in the second quarter 2006. Included in the results for the second quarter is a net increase in the provision for the cost related to the claim reassessment of $53 million before tax or $34.5 million on an after tax basis. Also included is an after tax net realized investment gain of $6.5 million.

Adjusting for these items income from continuing operations was $181.5 million for the quarter or $0.51 per diluted common share, which is an increase of 31% compared to the year ago second quarter operating results.

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

Thank you, Tom and good morning. As Tom mentioned yesterday we reported $0.51 per share from continuing operations point of view which is both ahead of our plan as well as the market consensus. Looked at another way our pre-tax operating earnings increased 29% over the comparable quarter last year and our core operations operating earnings increased actually 43%. And frankly, as you can imagine I'm pleased with those results.

I'm very pleased that our continuing operation businesses, basically all three operating segments, had favorable results -- record quarterly earnings at Colonial, continued excellent results at Unum UK and continued positive momentum in Unum U.S. and I will have more comments to make on those in just a moment. I'm also very pleased with how our investment portfolio has reacted in what we know is a very challenging time and Tom will have a few comments to make on that in a few moments. But again our investment portfolio, I believe, is very well positioned even in the more volatile environment we are operating in today.

I'm very pleased with how we continue to build capital strength and financial flexibility. Certainly that's been one of our great charges the last two or three years and you will see in some of my comments in a moment we continue to make good progress in that regard. But I'm also very pleased with how we've continued to invest in the future. As I look at the second half of this year all three of our businesses have some very exciting new products and service offerings they are rolling out in the market place, probably the most notable is an offering called Simply Unum that our Unum U.S. business will be rolling out, which again I think holds great prospects as we look in 2008 and beyond.

All in all I think a very strong quarter. I'm also obvious very pleased that Standard & Poor's adjusted their outlook on the company from a neutral to a positive yesterday. I think that's another validation of the kinds of things we have done the last three or four years, very much are heading this company in the right direction. And couldn't be more pleased with how the results emerged this quarter.

Now what I'd like to do is touch on a few things in a little more detail starting with the operating businesses. Unum U.S. excluding the additional cost of the reassessment, which Tom talked about, put in a very strong quarter with pre-tax earnings growing 52%. The improvement in the claims management process supporting our group income protection lines certainly was a key variable in that, where not only did we see earnings improve but continued to see a steady progression of improvement in the benefit ratio with the benefit ratio in the second quarter being 92.7%, which is down 70 basis points from last quarter and actually 240 basis points from the second quarter of 2006. And as you can imagine with the kind of progress we have made, I think we are all very confident in our ability to achieve our guidance we have given out in the past, which is we will be between 90 and 92% by the fourth quarter of this year.

But the Unum U.S. story goes beyond that. We had actually had very strong operating results in our group life and accidental death and dismemberment line, and as well in our supplemental and voluntary lines and in fact saw pre-tax earnings growth of 15 and 14% respectively in those two areas. Those two pieces also added substantially to the performance of this business this past quarter.

We did see sales momentum pick up from the first quarter, though again it's down slightly from the second quarter last year and a little bit below our expectations. But again the core market sales which is again a very important area of focus for us, we actually saw growth in case count and again even though the premium number is down, we saw a very good set of leading indicators which I think give us good hope as we look to the back half of this year and into 2007 we will continue to see some good growth there.

We always know the large case sales activity is going to be somewhat more volatile. That's a business as we have said before can have -- go through different pricing cycles. We are going to continue to be very disciplined about how we grow that business, but quarter to quarter the large case sales activity we fully expect to be volatile based on our ability to get business at the right price. We are very comfortable at the quality of our decisions and quality of our pricing that we are making there in this market and I will assure you we are being very disciplined as we go into the large case market.

We did see some good sales momentum in a couple other areas we focused on for 2007, namely our individual income protection product as well as our voluntary benefit lines within Unum U.S. We did see some nice growth and momentum building in those two product areas and can expect that to continue as we look over the next 12 months or so.

I think as everyone knows we have continued to make some refinements in how we position the sales organization to continue to support our objectives here and that will continue. But again, I think on balance we are all pretty encouraged with some of the early indications we see in terms of some of the things we have in the market. As I said earlier we actually have a very exciting new product and service offering that rolls out in the second half of this year which will probably have less of an impact on 2007 results but I think certainly will begin to set the stage for 2008.

I guess lastly I'd mention on Unum U.S. we certainly feel good about our grip on the marketplace. You may have noticed that premium persistency decreased somewhat in the group line. That was largely attributable to some losses from large case business and again as you know, we are very disciplined about being sure that we price -- we only go after business and keep business that can be done at a profit. So again I think that's very much a good message.

You will see that case persistency actually has been very favorable. I think that's a better indication perhaps of just the stability and strength of our relationships in the market. I might add both the premium persistency and case persistency we saw in the quarter was either consistent or slightly better than the expectations that we had. So again, those things are performing well. As Tom said we were very fortunate. Kevin McCarthy has joined us this morning and certainly Kevin is available to answer any questions you may have about the quarter or outlook for the business or competitive environment.

Shifting now to Unum U.K., again sounds a bit like a broken record, but again a very, very strong quarter with our U.K. business. Our pre-tax operating earnings were $77.7 million which was an increase of 39% in U.S. dollars and 27% increase in local currency. We certainly continue to benefit from the strength in the local currency, but as you can see from my description of the results, on a local currency basis we continue to see some very solid growth and bottom line performance. That bottom line performance to a large measure has been driven by the things we seen before which are basically favorable risk results and lower claims incidence. And again that's had a very positive impact on our U.K. results.

U.K. sales environment continues to be very challenging. Again, we see some fairly aggressive price competition especially in the group life side of the marketplace. Having said that, our results for the quarter were very strong. Sales were up 39% in U.S. dollars, and 28% in local currency. But again we are going to continue to be disciplined. If that pricing pressure continues to be there, we're certainly not going to chase price in the U.K. market just as we don't chase price in the U.S. market either. So again a very solid performance in the sales front in the face of a challenging business environment. Susan Ring, the President of our Unum U.K. business is available with us today if there are any questions on the quarter or the outlook for that particular business.

And last but not least is Colonial. Colonial had an excellent quarter, in fact a record quarter in terms of profitability. The profit of $64.9 million were 30% increase over the previous year. Colonial also achieved a very, very important benchmark which is hitting the billion dollars of inforce premiums. Again a very solid quarter all around for Colonial.

The bottom line results were certainly positively impacted by favorable mortality in the life line, as well as favorable morbidity in the income protection line and in fact the benefit ratio for the quarter was 47.2%. I think we certainly don't think that number is sustainable over the longer term. But frankly we don't see indications in the short-term there is going to be any material change in that. But again we recognize that's an unusually high level of profit margin in that particular business. But again a lot of very good things are being done there in terms of managing the risk side of the business and pricing side and expense side. Again, we are very, very pleased with the margin performance in that particular business.

Sales grew 7.5% compared to the second quarter of 2006, a little below expectations, I emphasize a little but there are some very, very positive trends which I think will trend well for the balance of this year and as we look to 2008. New account growth for example was up 12%. Even though our recruiting of new sales reps is down from a very, very strong first quarter, we actually are finding our new sales reps are becoming more productive more quickly, based on some training and education programs we put in place at Colonial. We saw some good momentum in the public sector businesses of Colonial. So again all in all I think just some very good leading indicators that I think tell us that we are very much on the right track to make sure that Colonial is continuing to grow, but grow with profitable sales activity as well and again Randy Horn has joined us today and Randy can certainly speak to any of its performance issues for the quarter and the outlook as well.

So again, what you hear from me with these three businesses is as I said before all three contributed to the strong results we had this past quarter. It's no one product, no one line. We consistently saw strong performance across the whole enterprise.

Now shifting my comments to the closed disability block. That segment actually had operating income when you exclude actually what was a positive adjustment associated with the claim reassessment of $29.4 million. That's somewhat above our more recent quarterly results. The interest adjusted loss ratio for that line, again making the adjustment for the claim reassessment actions, was 92.4% which is again very much in line with some of the experience we seen in the past. So again, nothing unusual from an operating point of view in that block of business this past quarter. Obviously the focus in this particular area is on pursuing a more efficient capital structure for that line of business. And I will have more to say about that in a moment.

Now if I could shift just to a quick update on the regulatory and legal matters, certainly the most prominent of which is the progress we made on the claim reassessment process. As you know, that was part of a settlement agreement we had with the states back in 2004 and 2005. And I think as we previously said many times our objective of that claim reassessment process was very much to do the right thing, to be sure that we are compliant with the agreement we have in place, and in doing so strengthen the relationships we have with our regulators, and I feel very good about the progress we have made.

But I also feel very good about the progress we've made in completing that claim reassessment process. Now we expect actually to substantially complete that process by the end of the third quarter which is about a quarter ahead of schedule. And certainly a lot of people worked awfully hard to make that happen. And we certainly want to thank all of those that have contributed to that.

We actually now at this point have made a little less than 90% of the decisions. There are no more mailings going out to claimants. There are no more new claim requests coming into the company. So we actually sit today with a much better picture of what the prospects look like for the next quarter or so with that process. In fact, actually have done a fairly -- we've done an initial financial review of the remaining forms that we have to process between now and to the end of the third quarter. Based on that review we increased the provision for the costs related to the claim reassessment and Tom will have to spend a few minutes talking about that in more detail in a few minutes.

Now while the cost of this unprecedented process has been higher than we anticipated, the revised estimates are actually still within the plus or minus $60 million range that we previously announced. These costs are not obviously financially material and as I said before this process really will be completed in the next two or three months. So it will be fully behind us. And I am very confident the way we've handled this process and the way we've gone about to continuing to straighten the relationships with our regulators is really going to pay -- is going to be good for this company going forward. Again, I feel very good about this process and frankly our ability to move through this period of time very, very successfully.

And lastly just on a legal note, we did make some good progress this past quarter on further putting some of our past legal issues behind us, probably the most visible of which is, we entered what's called a stipulation of settlement with the plaintiffs to resolve the Federal Securities case and have provided for the financial impact of the settlement in our second quarter results. I will say there has also been some good activity in other cases and I'm hopeful over time we can continue to put some of those smaller matters behind us as well.

So all in all, I would say that neither the regulatory issues nor the legal issues get in the way of our ongoing business operations, but I think as I've said very openly it's a priority of mine that we satisfactorily get these issues behind us and I'm very, very pleased with the progress we've continued to make in the second quarter in that regard.

And lastly, just to talk about capital and capital management, first, just say that we are certainly very much meeting or exceeding the capital targets that we set for ourselves. Our risk-based capital remains at or above our target level. Leverage remains at or below our target level and are still very much on track to have excess capital at the holding company of over $900 million by the end of this year. Obviously as we move to the second part of the year, thinking about how we deploy that excess capital that we've generated from operations we will certainly be a focus of management and the board, but very much on track with all of the capital initiatives we have with the company.

Obviously there will be a lot of questions I'm sure about the status of the securitization project. As we all know, that's a project designed to look at maybe a more effective capital structure to support our closed disability block of business. We've made some great progress I think over the last quarter. As we said many times, this is a fairly complex process because it involves discussions with regulators and rating agencies and others. But at this time I don't see any stumbling blocks that would prevent us from proceeding with some kind of a transaction.

We are obviously very closely monitoring the market conditions, but -- and I mean the bond market conditions and financial market conditions. But currently we don't see any significant issues that could impede the reception of a transaction in the market. Again, we will keep an eye on that. But again at this point we still believe the kinds of things we are contemplating would be executable in the marketplace today. And we do expect to still be in a position to have some type of transaction this year. Again a lot of variables still to work through and a lot of approval still to gain. But we still very much believe we are on track to do something this year.

I guess as I close before I pass it back to Tom again, as I think again we look back at this quarter as one where we had some very strong operational performance across all of our businesses. As evidenced by the guidance which we will talk about in a few moments, we believe that performance is sustainable. Our confidence certainly is growing in the prospects for 2007 and 2008. I'm very pleased with the progress we made with the claim reassessment process and very pleased we will be able to complete that process early and be sure again that process is behind us as an uncertain element as you look at our Company.

And going forward obviously the primary focus continues to be where it is, which is generating solid results across all our businesses and maintaining the momentum we built the last couple of year's. I would like to turn the call back to Tom who will provide with you a little greater detail on our business segment results after which I will provide a few closing comments. Tom.

Thank you. To re-iterate we reported after-tax operating earnings from continuing operations of $181.5 million, or $0.51 per diluted common share. This compares to $138.5 million or $0.42 per diluted common share for the second quarter of 2006. Again, operating performance across our three primary business segments was very strong.

Our consolidated return on equity for the second quarter, again this excludes the revision to our reassessment costs with 10.5% in the ROE for our core operations of Unum U.S., Unum U.K. and Colonial, was 14.4% which is in line with our results in the first quarter. We were pleased with both the consistency and strength of performance for both our consolidated core operations. As you know from our earlier comments and from the earnings release, during the quarter we did increase the provision for the cost related to the claim reassessment process. On a consolidated basis this reduced our overall after-tax operating earnings of $181.5 million by $34.5 million on an after-tax basis. I will provide greater detail as we move into discussion of operating segment performance and discuss the current state of the claim reassessment process.

The Unum U.S. segment growth in before-tax earnings, again this excludes revision to the reassessment costs, was 52% in the second quarter of 2007 compared to the second quarter of '06. The group income protection line showed continued steady improvement. The benefit ratio for this line declined an additional 70 basis points from 93.4% in the first quarter of 2007 to 92.7% in the second quarter. Though we benefited in the quarter from lower claim incidents compared to the second quarter of 06, we continue to attribute much of the improvement to our claims management performance. As we noted before, the changes we made going back to early 2006 have noticeably increased the consistency of our performance and as Tom said we remain confident we will be able to achieve our stated guidance of a benefit ratio in this line in the 90 to 92% range by the fourth quarter 2007.

Continuing with our Unum U.S. operations, our group life and AD&D line continued to have steady, stable performance with much of the positive performance in the quarter attributable to the group life line as the AD&D line results were actually lower this quarter due to a little bit higher incidence level.

Operating income increased by 15% compared to the second quarter 2006. During the quarter the group life line benefited from lower claim incidences which in combination with the pricing and underwriting discipline that we've had in place for several years contributed to the healthy return for this line. As we have mentioned to you before, we continue to sacrifice top line growth for the benefit of strong margins in the group life line of business.

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 individual income protection recently issued line and also the voluntary benefits line. Our long term care line of business continued to lag the performance of the other products within this supplemental and voluntary line of business.

We continue to find the sequential progress of the results for our voluntary workplace benefits to be very encouraging. For the quarter this product line had 6% premium growth over 2006 with a very favorable benefit ratio at 58.8% compared to 63.3% a year ago and 60.3% in the first quarter of 2007. The recently issued individual income protection business 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 while we look to reprice portions of the individual long-term care block of business.

Overall, for Unum U.S. we continue to shift our mix of business to the core -- to the group core market and also the supplemental and voluntary lines. As a result of our mix shift and our stated commitment to pricing discipline, we do expect to have a little bit lower premium persistency in the coming quarters, however, we do not anticipate any material negative impact to the number of cases or the case persistency for the group core market segment.

Moving to our U.K. operations, our Unum U.K. segment again reported outstanding results. The primary driver for this quarter's results continued to be low claim incidence in the group long-term income protection line. Benefit ratio for Unum U.K. in the second quarter was 62.2%, and this compares favorably with the year ago second quarter of 68.7%. The segment has continued to maintain very good expense management and we continue to benefit from the favorable currency exchange rates.

The segment pre-tax earnings in U.S. dollars were up 39% and in British pounds grew by 27%. A premium growth within the operating segment was 23% or 13% in pounds. And sales for the segment increased 39%, which equates to 28% also in pounds. Again, our 10K filings include the U.K. segment results in both U.S. dollars and British pounds.

Turning back to the U.S. operations, as Tom said, Colonial had another great quarter. Operating income was up 30% which achieved a new quarterly record for quarterly earnings. The benefit ratio for the quarter was 47.2%. This compares very favorably to 52.7% a year ago. As with our last quarter report, the improvement in the benefit ratio continued to be attributable to favorable claims experienced in the income protection and life lines.

Premium income persistency within this segment remains strong. On a year-over-year basis for the quarter, sales increased by 7.5%. Continued focus on sales recruiting and retention resulted in new account growth of 12%, however, the average case size continued to decline during the quarter.

Our new agent contracts declined by 10.4% in the quarter, but the number of average weekly producers increased by 5.1%. We believe that the changes that we have made along with the initiatives underway will continue to foster development in our sales organization and accelerate the growth through enhanced productivity as we move through 2007.

Let me also quickly highlight that in the corporate segment we recorded a litigation settlement accrual of $11.6 million before tax for the Federal Securities law class action suit. Again the 10Q will have an update on all material regulatory and legal matters.

Finally, the recent trend of strong statutory earnings continued with after-tax operating income of $140.1 million this quarter for our traditional U.S. insurance subsidiaries. This includes the charge for the revised claim reassessment cost of $53 million or $42.3 million on a statutory after-tax basis.

Let me switch to an update on capital management metrics. We continue to project that the RBC ratio for our traditional U.S. insurance subsidiaries on a weighted average basis will be maintained at the 300% level. Additionally we continue to anticipate having holding company liquidity in excess of $900 million by the end of this year.

As we stated in our last quarterly announcement in the first quarter of 2007, we were able to retire $150 million in outstanding debt with the remarketing of our Aces convertible securities. During the second quarter, we settled the purchase contract element of the Aces securities and on May 15 we issued 17.7 million shares of common stock. Now this conversion generated $300 million in cash proceeds and this is currently being held as part of our holding company liquidity. In addition, we retired ,this during the second quarter, we retired $34.5 million of our 6.85% notes that are due in 2015. And our leverage ratio excluding the nonrecourse tailwind debt is now at 24.8% which is in line with our leverage target.

Now let me move to the claim reassessment process. We have completed the mailing of all of the required claim reassessment notices to claimants. Less than 1% of claimants currently have unexpired time remaining to complete and return the claim reassessment information forms. Therefore, at this time we have 99% of the potential inventory of claim reassessment forms returned to us with the claim reassessment decisions completed on 88% of the forms. As a result, we now estimate that we will have substantially completed the claim reassessment by the end of the third quarter or two or three months ahead of schedule. Though we have not finalized the claim reassessment on these remaining forms, we have conducted a financial review and have incorporated this analysis into our emerging experience.

The additional information regarding the second quarter revision to our estimate includes three things. First of all the overturn rate in the most recent reassessed claims was higher than we had assumed. For the second quarter of 07 the overturn rate averaged 48% and was 45% for the first six months of 2007. Secondly, the average overturn rate was 40% at June of 2007 on an inception-to-date basis and this compares to 37% as of the end of December 2006.

Secondly, the average incurred cost per reassessed claim during the first six months of 2007 was above the assumption that we had used in our third quarter 2006 revision. And third, we are on track with respect to our assumption concerning the total number of claims projected to be reassessed which remains at approximately 23,000.

As a result of these three trends, during the second quarter of 2007, we increased our estimates of the benefit costs for the claim reassessment process for our group long-term income protection line within Unum U.S. by $76.5 million to reflect these new assumptions. Although the experience relative to our assumptions for the overturn rate was slightly higher for our individual income protection closed-block segment, experience now indicates that the total number of claims to be reassessed for this segment will be less than our assumptions. Therefore we determined that our previous estimate for benefit costs for claims re-opened in the segment needed to be revised downward and we released $10.7 million of reserves during the second quarter 2007.

Additionally, as a result our recent experience, our estimate for the additional incremental direct claim reassessment operating expenses is now projected to be $12.8 million lower than our previous estimate. And again this was due to our projections for an earlier completion of the reassessment process. As a result of this revised outlook we released, the excess expense reserves during the second quarter of '07 with $10.3 million released in the group long-term income protection line and $2.5 million for our individual income protection closed-block segment. These adjustments to our claim reassessment costs decreased before-tax operating earnings for our Unum U.S. group income protection business by $66.2 million and increased the before-tax operating earnings for our individual income protection closed block by $13.2 million.

So in aggregate the revised estimates again lowered our consolidated income by $53 million before tax and $34.5 million on an after-tax basis. And again this aggregate charge was within the previously disclosed range of plus or minus $60 million.

At the present time we do not anticipate we will need to further revise our provision for the claim reassessment costs and expect the claim reassessment process to be substantially completed by the end of the third quarter. And I will remind you the regulatory examination of the claim reassessment process is expected to be completed by the end of 2008. And again I direct you to our website where we have posted some supplemental information on the reassessment results for the second quarter.

Now I would like to make a brief comment on the investment environment and our portfolios before turning the call back to Tom and going to your questions. The current volatility in the interest rate market which led to higher treasury rates in the second quarter as well as wider corporate spreads, has actually been a positive for us. The new money yield for our second quarter was 6.31% compared to 6.07% in the first quarter and in addition, we have used this market opportunity to put in place an additional $230 million of hedges for our group long-term income protection portfolio. As you know, our hedging strategy has been an important tool for us for the past several years in managing interest rate risk and periods such as we are experiencing now provide opportunities for us to effectively manage this risk.

On the topic of subprime mortgages, we currently have no exposure within our $4.2 billion portfolio of mortgage and asset-backed securities. The average credit rating of this portfolio remains triple-A. And just to provide you some additional detail of this $4.2 billion total, 95.5% is agency paper and therefore carries a triple-A rating. The remaining 4.5% which is roughly $190 million is made up of nonagency mortgage-backed securities, all of which are triple-A rated and some asset-backed paper and 97% of that is triple-A rated. And I know there have been a lot of questions around ALT-A securities. We do have approximately $92 million of ALT-A securities and these are all currently rated triple-A and we are trading at market prices in a range of $0.93 to $0.99 on the dollar as of yesterday afternoon.

Overall, we feel that our investment portfolio is in excellent shape as we have positioned it over the past couple of years in anticipation of a tougher credit cycle. Our high-yield exposure is currently 5.9% of invested assets which is a historically low exposure for us and will be pleased to answer or address any specific questions you may have regarding our investment holdings in the Q&A section. So with that review, let me turn the call back to Tom for his closing comments.

Thank you, Tom. And just some brief closings. We're certainly very pleased with the quarter. We recognize there are some opportunities for improvement as there always will be. But we also recognize we developed some momentum that we need to focus on and continue to drive into the future. But I would say we do have some confidence in the future that we can continue this momentum, which is why we actually have raised our guidance for this year. We have revised upward our operating earnings guidance for the full year 2007 to a range of $2.01 to $2.04 a share, that obviously excludes the second quarter claim reassessment charge. That's up from our previous guidance of $1.91 to $1.95.

Certainly we also continue to expect our group U.S. income protection benefit ratio to be within 90 to 92% range by the end of 2007. As you can see over the last five or six quarters we've had consistent improvement quarter to quarter, which again we expect to continue the rest of this year. Our new guidance drives total consolidated return on equity for 2007 to a range of 10.2 to 10.3% from previous guidance of a range of 9.7 to 9.9%. And our ROE for our three primary operating segments to a range of 14 to 14.2% and again that's up from previous guidance of around 13.1 to 13.4%.

So again solid quarter. And we believe that we can continue to maintain that momentum into the future and as we look to 2008 and do the same as well. With that, operator, we are ready to begin the question and answer segment.

Thank you. (OPERATOR INSTRUCTIONS). We will take our first question from Nigel Dally from Morgan Stanley.

Thank you, good morning. First, I guess on the closed-block securitization, clearly we've seen a lot of turmoil in the fixed-income markets. Many of the buyers of collateralized debt have been hit hard and spreads have widened out dramatically. I'm assuming this makes a closed-block securitization less attractive. So couple of questions here. First, how has your view on the potential cost of the debt changed? I think in the past you were thinking about LIBOR plus 30. I'm assuming that's going to be wider now. And second, spreads continue to widen up. At what point does the securitization no longer make sense?

Certainly, again as I mentioned in my comments, Nigel we need to be conscious of market conditions and right now we feel like the market conditions are still favorable for a transaction. Again, I think you are right. There is a lot of turmoil in certain segments of the market. But we are talking about securitization that is a little more, I would say -- Tom -- in the traditional form and especially if it's wrapped with insurance. But Tom, you may want to speak a little more specifically to some of the things you are seeing and hearing.

You know, we obviously watch this closely. We've talked to our advisers. They have done checks of the market and all of the indications we are getting is there is still a good appetite for this type of risk. It's a fairly specialized buyer and our sense is that there is still continues to be a very strong appetite.

Yes, the spreads look to be a little wider, but we aren't seeing anything right now that would suggest that the transaction doesn't look to be economically favorable for us. As Tom said, we continue to watch that very closely. It's all systems go at this point.

I would say, Nigel, what we don't want to do is stop the work that's involved in positioning ourselves structurally to do this. So I think we all continue to work very aggressively with all the different parties necessary to structure this. Again as Tom said, the market conditions today if we were to do it are favorable; if they prove not to be at a time down the road we can certainly delay it and wait for more favorable market continues but want to be prepared and that's why the focus is very much on positioning ourselves to be able to execute a transaction if and when the market is available.

Definitely makes sense. But I guess, do you have an estimate as to what pricing of the debt and how that potentially has changed?

No, we don't want to get into that.

No problems. Thank you.

Thank you.

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

Good morning. Tom, I certainly saw you summed it up of no one product or no one line this quarter, so I will keep my questions at just some fairly straightforward ones.

First on the multistate, with respect to having it wrapped up by the end of the third quarter, I assume that's really from your perspective there's still going to be a review of it by their regulators, I guess just to ensure that things went according to plan and that will take until early next year or maybe mid next year to get the final sign off -- would be the first question.

Second, obviously I noticed the S&P outlook changed yesterday. I think I assume it's fair to say but you can confirm it, that they have scrubbed the investment portfolio quite recently as well as that reflects their confidence that you will get the securitization done. Can you just reassure there?

Then for Kevin, I was wondering if we could just talk a little bit about pricing trends as we head into the sales season for you. What you see out there and also where you feel the block is now. It's been a long, sort of journey back. has the thing finally repriced and perhaps with that if you could comment on what you're thinking about what the discount rate -- is still -- rates are still up a fair amount from where we ended last year and as we head into '08 if you are thinking of any changes there.

Let me take the first one around the multistate. I think you are right; when you look at the regulatory settlement process, the reassessment was a piece of that process. As we said, we now expect to have that process -- that claim reassessment process substantially completed by the end of the third quarter.

I will say throughout this whole process we've continued to keep the regulators informed about the reassessment process. We meet on a fairly regular basis with them so they can see as we've gone through time how we are fulfilling our requirements into that reassessment process and obviously there will be another one of those discussions when we finish it. But I didn't -- I would want everyone to know we continue to have ongoing discussions so they can monitor our progress on a more regular basis and so there therefore shouldn't be any surprises as it relates to the claim reassessment process.

The other part is what Tom mentioned in his piece, which is they are also doing a review of claims just as a normal course of new claim activity as opposed to the reassessed process, and that will be finished up by mid year 2008. Again we have constant levels of discussion with the regulators to be sure if there are things they see or do that we continue to find ways to share information back and forth. So you never know until it's completed but I do think that there has obviously been a healthy commitment on our part to be sure we are doing the right thing and there's been a healthy communication between ourselves and the regulators to be sure if there is something they are seeing that is of a concern, that those things have a way to raise themselves up and that's been the case since we launched this process. So that's why I say, I think we feel pretty good about where things stand, but it really is never finished until that second piece is completed which is that claim review, which will be no later than the middle of 2008.

Now, with respect to the S&P 500 announcement and the investment portfolio, Tom do you want to take that?

Really all of the rating agencies request a lot of information. During the quarter we provided information on the investment portfolio. Specifically in the mortgage backed securities. So they have all done a very thorough review of that. Again, I think I don't want to speak on behalf of the rating agencies, but the numbers we see and the exposures that we have we are all very, very comfortable with.

On the securitization, what I read into the S&P announcement is really more kind of a confirmation of good operating trends. And so the improvement in the outlook is really more due to that than the expectation or the requirement that we do a securitization. Now I think what they also say in the announcement is that they are in effect comfortable with the securitization. So it's not like we have to do the securitization to keep the rating, and if we do the securitization, they are comfortable with the structure of it. They are comfortable with how we plan to redeploy the proceeds and so we -- on either measure we feel very comfortable in effect with what they are saying being the rating.

Tom just to interject there for a sec on your comment about redeployment of proceeds, I take it that means as into capital management/buy-back program?

Yes. If you think about it, in the securitizations we would -- we've said we would have kind of an efficient capital structure for the closed disability block and that would free up capital. So the question that the rating agencies really focus in on is how are we going to redeploy that capital and what kind of financial profile do we want to create for the remaining business.

If you think about it, in effect the options are to hold onto the capital, to have a higher level of holding company liquidity, or to put the capital into the insurance subsidiaries to raise the RBC, or to buy down debt, or to buy back stock. So it's the mix of all those four things that kind of drives again what the credit profile of that remaining business looks like. So we've worked with the rating agencies to kind of massage that. And in effect have a plan that we've put on the table that we think creates a strong credit profile but one that we think can be good for shareholders as well as policyholders as well as creditors. That's what we put together. I will leave the answer at that.

And if I could add one more piece Colin, too, I think there really are two sources of capital that enter that process that Tom talked about. Certainly the securitization is one. If we are able to certainly do that this year, that would be one source of capital that would be put through that sieve that Tom talked about. But the second thing is, we are still on course to have over $900 million of excess capital and that will also be one that would be [go] through that same process, because certainly putting that to work is going to be important as well. So there are two sources there. One is obviously more certain, the other one is certainly one we think is going to happen but those are -- I say, Tom, those are the two sources of capital.

Exactly.

We were having discussions with the agencies and with regulators on about as we speak. With that, let me pass it to Kevin in terms of just the overall environment and some of the pricing issues and things that Colin had talked about.

Good morning, Colin. The marketplace is pretty much I would say the way it has been. Large case marketplace continues to be sort of extremely volatile. We are pretty careful about managing our inventory in that marketplace and taking shots only where we think we have sort of a value proposition that will be sustainable over the long-term of our relationship with a client.

The group life marketplace in particular in the large case marketplace, shows an incredible amount of competitiveness including extended rate guarantees in the four, five and even seven-year range which we just don't think are reasonable from a risk management standpoint. So we are staying away from that.

Smaller case marketplace, of course it is competitive but for us I see good, solid, steady progress. Our case sales are up in the small case marketplace 19% year-over-year. Our packaging is strong. I think 36% of our business in the first half of the year is three lines of business. Another 40% two lines of business, 68% of our business is in our target segments which tend to be more focused on risk management principals around lower incidence industries. So for us I think pricing is very stable and I think it is leading to strong small case sales results.

So I think for us what you're going to see is continued progress in the full marketplace and continued progress in the supplemental marketplace and choppiness on large case, depending what's available in the marketplace for reasonable inventory.

In terms of the renewal program and where's the block at, a good solid progress there. As you know that's been a multi-year effort. Our rate increases this year are smaller than they have been in previous years, averaging around 8.5% on businesses that we're placing. Persistency is down and that reflects our continued our focus on as Tom mentioned in his remarks, getting our large case block of business to profitability and managing it to sort of right sizing it. I can tell you that the average increase on the business that terminated, which is driving some of that premium persistency down, was about 25% in the LTD block. So we continue to show the results there where our case persistency is in the 86 to 87% range, our premium persistency in LTD is around 84% and in STD is around 75%. So I think that just reflects continued discipline we are showing in our renewal program.

I do expect renewal volumes to continue to go down and the necessary increases that we would need to place in the future to continue to go down as well as we continue to clean up that block.

And then just on the discount rate?

Yes, Colin I will take that. It's Tom White. We don't have any plans right to make any adjustments to the discount rate. We have held it stead for a couple of years now, and our target has been to maintain at least a range of 50 to 60 basis points. I would say for LTD and for most of the other lines of business we are actually a handful of basis points above that. So we've got some cushion. Actually in the second quarter that widened out a little bit because of the move up in treasury rates and also the widening in spreads that we saw in the quarter. So we were in good shape there.

That's something we will reassess at the end of the year whether or not there needs to be some sort of adjustment. But as it stands right now I wouldn't want you to anticipate a change to that, because again just in the last couple of weeks we had a 40 or 50 basis point drop in treasury rates. So again there is a lot of volatility. Our strategy is to maintain a nice cushion there, which we've got, and to try to take some of the volatility out of that.

Thank you.

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

Thank you, good morning.

Good morning, Joan.

I have a few questions. The first is on the U.K. You had talked about a normalized loss ratio a bit higher than what we were seeing. Do you think now that there may be a structural shift in that marketplace and that we should be looking at this type of loss ratio as really something that is supportable going forward? That's my first question.

My second question has to do with the holding company cash position or the excess cash at the holding company that you expect at the end of the year. Can you talk about what part of that $900 million is really free and clear, has no future obligation that's tied to it, that you will be able to think about redeploying one way or the other?

And then my third question, has to do with your expectations of long-term growth. We've had very good results this year. The loss ratios and a lot of the businesses are at terrific levels. Top line growth is a little bit sluggish. And I'm just trying to understand where the long-term growth opportunities are. Do you think there is more margin improvement? That we are going to accelerate top line growth. How are you looking at that, Tom?

Good. Three very good questions, Joan. Maybe I will ask Tom to just talk to the loss ratio briefly for the U.K. and maybe ask Susan Ring just to supplement that a little bit as we talk about the market environment, because I think, we try to give guidance that there is -- we recognize there is some very attractive margins there. And we have been talking for awhile there could be pressure on those. Having said that, we have not actually seen that be the case but maybe Tom and Susan --

Yes, again just to get the numbers straight. First quarter benefit ratio was about 61%. Second quarter was about 62%. We would think in terms of kind of a mid-60s benefit ratio as a long-term benefit ratio. So we are running a little better than that right now. And again as Tom said, we really don't see anything that's going to lead us to believe that's going to immediately pop back up to 65%. But it's probably more of a kind of a gradual move, a drift upward to that roughly mid-60s range.

And Susan if I could ask you to speak briefly, I think the other part to this discussion is the growth prospects there and again I think for many who follow, for example the U.S. marketplace, they're not as familiar with the fact that U.K. market is underpenetrated and there are some things going on there that frankly are very important as we think about both the growth in top line and growth in bottom line in the future.

Yes, sure Tom. Just to add to Tom's comments on the benefit ratio and the question that Joan asked, I wouldn't say that there is any structural shift within the U.K. that is causing that, and would cause that to therefore continue at the really low levels we are seeing at the moment.

So we have experienced very low incidence, particularly in the group income protection line and during the first half. And we wouldn't have as Tom say see that we're going to see a sudden sort of surge or anything like that. And that the mid-60s is more of the long-term trend that we would expect.

And as far as growth prospects are concerned, to Tom's latest point, we are seeing a very aggressive market within the U.K. and competitors are taking more interest in our lines of business. And -- but we are seeing some really good trends particularly in the levels of emerging new business we are writing and rather than in existing business switching around from provider to provider. One particular trend we are seeing is significant numbers of cases that have been self-insured in the past and now moving into insured solutions. So that is obviously attracting business into the market we haven't seen before. So we are optimistic about being able to improve the market penetration levels that have been static for sometime now.

Thank you. And then I think, Joan, your second question had to do with holding company cash and Tom if you could take that one.

Sure. Right now the holding company liquidity is around $525 to $530 million. And we expect that to grow up into the $900 million plus range by the end of the year. And that excludes any potential from a potential securitization.

What is free and clear in there? You know, I think before we'd indicated that we wanted to hold some amount in reserve, if you will, for the reassessment. That's basically done with. We kind of take that off the table.

I think from a prudent capital management perspective it's wise to hold roughly one times your fixed charges. So you can look at the common stock dividend plus the interest expense for a year and kind of assume that's roughly a level that we would be comfortable holding and something that the rating agencies typically like to see. So that's what, $250 million plus or minus a little bit. I don't have the exact number in front of me.

And then with the -- we think a lot of this can be impacted by the potential securitization. So as we kind of think of capital management plans, we have to tie that in and I guess I want you to kind of take away, Joan, is that we are going to hold some cushion in there and you can roughly think of it in terms of about one times the annual fixed charges that we have.

Just tell me again where the extra $400 million is coming from between now.

That would be dividends out of our insurance subsidiaries. Again, all this is predicated off of having about a 300% RBC ratio on average for our U.S. insurance subsidiaries. What we do is, as earnings come through, we will take dividends out of those insurance subsidiaries and kind of maintain that roughly 300% RBC ratio.

I would say, Tom, therefore the starting point is, before we decide to make a conscious decision to hold back for liquidity reasons -- for example, for interest -- it's all liquid assets.

Right.

And so -- but then there is a conscious decision as to how much do we continue to keep for liquidity purposes as you point out, how much do we continue to move between those subsidiaries to strengthen the RBC of the subsidiaries, versus how much is being used to continue to equalize the debt and equity sort of part of the puzzle.

Right, right.

So that's where -- that's the sieve this is going to go through, both with the operational cash flow as well as with the (inaudible) cash flow.

And then Tom, quickly, the last question was just on some of the long-term growth guidance you were giving.

I want to be conscious. I've got three other people that I want to get questions from here, but just in terms of long-term growth you can kind of think of -- we've got three segments we're looking at. Colonial, we've said that we want to have sales growth kind of in the high single digits to low double-digit rate of growth. That's going to drive premium growth of 7, 8%. And we think margins can be pretty steady there. So that's the kind of numbers on Colonial.

Unum U.K. we think is a growth rate in the mid to high single digits. We think we've got a great opportunity longer term as a voluntary benefits market develops in the U.K. and also as disability insurance, the penetration of disability insurance widens. So that's potentially some upside over the long term in the U.K.

And within in our Unum U.S. business I'd probably separate the group life, LTD, STD business separate from some of our supplemental lines. I think mid single digits is probably a good rate of growth, longer term for that business, maybe a little higher in the core market but it's going to be dragged down a little bit by the large case and how we're moving away from that. And then as you look at the voluntary and supplemental lines we think the growth rate can be, again, high single digits, maybe creeping into the low double-digit, 11, 12% range. There's a lot of opportunity in the voluntary marketplace and selling those products with -- you know, to our current LTD and STD customers. So briefly those are kind of the rates of growth that we're looking at for businesses long term.

Thank you.

Thanks, Joan.

We'll take our next question from Tom Gallagher at Credit Suisse.

Hi.

Good morning, Tom.

How are you doing? Let's see, three questions. I'll ask them one although a time. First, on the closed block securitization, can you talk about what steps are left from an approval standpoint and also have you discussed I guess just overall what the capital plans are with the rating agencies in terms of how much you're going to potentially free up and over what period of time?

Sure. I don't want to get into a whole lot of detail. We're talking about a proposed transaction, but, you know, we've said we need to get regulatory and rating agency approval, and we are working on those processes right now. So those are ongoing.

Absolutely, yes, we have presented plans to the rating agencies on not only getting the securitization rated but also the -- our plan for how we would redeploy the capital and in effect what the credit profile of the remaining businesses would look like. Again, that's not anything that we want to publicly discuss right now but absolutely we have presented those plans to rating agencies.

Okay. Next question is, just looking at the disclosure on the reassessment on page 5, looking at the largest percent that still needs to be reviewed is 97 and 99, and your overturn rate is the lowest there. Are you assuming it's going to remain at that level or what is the assumption on the 97 and 99 block?

Our assumption for those older claims is that probably that overturn rate will go up. I think what's kind of happened is, as we make decisions, some of the more complicated claims get pushed back a little bit, because they take more time, and they are ones that we probably have or we do have a higher probability of making a payment on, but we have to figure out what is the right payment to make, and so that requires more information.

So I think what will happen, is that the 97 to 99 overturn rate, you see it's 23% on here, that's probably going to go up just as we get some of the more complicated claims at the end of this process. And that's what we have assumed in our $53 million.

Okay. And, Tom, is that going up to the average or just going --

I think the average -- the 40% average probably moves up a little bit, yes. And again, that's embedded in our assumptions.

Okay and last question from me. If you look at the reduction in IB&R portion of your reserves, for both group income protection and IDI, it was $130 million this quarter. That's the largest we've seen in awhile. Can you just discuss how much of that is related to the higher overturn rate this quarter and also if we should assume that this level of reduction goes down substantially when the overall reassessment process is completed?

Yes, on the IB&R I don't have the IDI number in front of me but basically, if you strip out the ins and outs, and keep in mind with the IB&R and the way it gets reported there, the payments that we're making under the claim reassessment included, and also when we've had these reserve increases, it is included in there -- when you strip those out from the first to the second quarter, the group income protection IB&R really didn't change. In fact, I think it increased very, very slightly.

And again, that's going to be driven by two things. One is the growth of the block of business. So as premiums, in this case premiums are declining slightly, that's going to cause the IB&R to come down a little bit. Also the claim incidence trends. If claim incidence is stable to declining, which it is for us, then that's going to also cause the IB&R to come down. I realize there's some noise -- I would say for group income protection the impact was virtually nothing from first to second quarter. I think from year end to the second quarter, you know, we're down a little bit there but again that's going to be driven by the size of the block of business and the incidence. And really, you know, when you kind of strip that out, it really does not have an impact on the benefit ratio there are within the reserves, just focusing in on the IB&R really doesn't tell you anything about what's going on with the benefit ratio. The reason the benefit ratio is better is because we've had much better claim recovery experience and we're doing that in an environment where the incidence has been flat to declining slightly, so that's really what's driving the overall improvement. It it's the positive things that Kevin McCarthy and Jack McGery are doing within the claims management organization.

Tom, just a follow-up on that. If I look at -- if I add back the claims reassessment addition of $77 million it would imply there was a net change in IB&R, this is just in group income protection of $95 million in terms of a reduction. I guess my question is, is that $95 million related to a release from the claims reassessment process because the overturn rate was elevated? And then second question would be, if we look at 3Q, assuming there are no additions to reserves -- can we assume that we're not going to see anywhere near that level of change?

What you'll see in the third quarter would be no additions. Certainly don't anticipate any additions at this point, but as we make claim reassessment payments it is going to flow through, and you'll see noise from it in the IB&R. I don't want to get into a mathematical discussion of what's going in and out there, we can do that off-line, but again, the bottom line, from March 31 to the end of the second quarter, and you strip out all of the claims, the group IB&R was virtually unchanged over that period of time.

So it's fair to say maybe --

Tom, I'll let you make your assumption about. That I want to get two more questioners in if we can.

Sure. I'll follow up. Thanks.

Thank you.

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

Thanks very much for extending the call after the hour.

Sure.

Obviously you've gotten some very good commentary out of S& P. You've indicated that you're talking to the other rating agencies. Suppose they either are not on board or better yet,--let's say Moody's has no view on this or is not on board. Do you need Moody's to be on board, supportive of the process to go forward with the securitization this.

On the securitization process?

Yes.

Do we need them to be on board? You know, I'd say general we want all of the rating agencies to be on board. We're not going to have a 100% buy-in, necessarily. I think what you saw from S&P is that they're comfortable with what we're doing. I think in general the other rating agencies are comfortable with what we're doing. I don't want to speak specifically about each rating agency because not all of them have made public comments, we're not going to do anything here that is going to hurt our ratings overall, we think there are some very, very positive things that come out of this securitization, a more efficient capital structure for the closed disability block, having debt that's related to that non recourse debt that matches up with the runoff of that block of business is a very positive thing from a financial point of view, and then again, you know, we think we've put together a strategy for redeploying the capital that can be positive for shareholders, for creditors, for policy holders. So there's a whole strategy and a lot of different, you know, elements of that, that we're trying to weave into it. So bottom line is we think it's very positive. I think S&P has, in effect, endorsed that, and, you know, we're about the process to make sure that the other the rating agencies are comfort afternoon. Do we have to have absolutely every one of them on board? I don't necessarily think so but we're not going to do anything silly that's going to cause a negative impact to our ratings.

If I can add two, things going on. One, the companies continue to make operating and financial progress aside from the secure ti. Everyone might be in a different spot in terms of getting credit for the progress the companies made. That was obviously a part of S&P's message yesterday was not so much the securitization but the progress the companies made operationally and financially, and secondly is the transactional side, which is the securitization. As Tom said we want to continue to work with everybody to advance the progress. The second time, as we think about a transaction, we don't take a step backward in that progress. We're confident we can do that.

Second and final question. If you are -- and I know you want to get to the final questioner, so I'll do this quick. If you are forecasting increasing competition in the U.K. market wouldn't that portend and higher rather than a stable benefit ratio in the 65% area?

We're at low 60s right now, and I think the -- our assumption is that the more competitive environment will move that up into the mid 60s. To the extent that the environment gets more competitive beyond that, we'll just have to balance what kind of growth rate we're looking at relative to what kind of profitability. I will say that the 61-62% benefit ratio by itself is generating a 32-33% ROE which is very strong in the financial services world. So, sure, that can -- we can manage a little bit, whether or not we push a little more for growth and maybe accept a high 20s ROE just to pick a number out. It gives us some flexibility. I would say that we do think that over the next few quarters that you will see that benefit ratio move up a little bit, but again, you know, roughly a 30% ROE, right around there is still something we'd be very happy to live with.

Thank you.

Thank you, Eric.

and it appears we have no further questions at this time. I'd like to turn the conference back over to Mr. White for any additional or closing remarks.

Well, I'll just do a quick closing comment, operator. This is Tom Watjen. We know there's been a lot of pressing needs everybody has to follow other companies and other earnings releases. We appreciate that. With that, I think this will complete our second quarter earnings call.

Thank you. You may disconnect at this time.