普登 (UNM) 2007 Q3 法說會逐字稿

Good day and welcome to the Unum third-quarter 2007 earnings results conference call. Today's call is being recorded.

At this time for opening remarks and introductions I'd like to turn the call over to the Head of Investor Relations, Mr. Tom White. Please go ahead, sir.

Thank you, and good morning, everyone, and welcome to the Unum Group third-quarter 2007 analysts 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 currents or historical fact, as a result, actual results might differ materially from results suggested from these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located on 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, and subsequently filed form 10-Qs. Our SEC filings including form 10-K and 10-Q can be found in the Investor Information section of our web site at www.Unum.com. Take note that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentations can be found on our web site in the Investor Information section.

As you know, yesterday afternoon, Unum Group reported earnings for the third quarter 2007 and also announced the securitization transaction involving our closed block of individual income protection business. We will cover both of these topics in our prepared comments this morning and will allow time to address your questions. We do intend to stick to a one-hour time him due to the other earnings-related conference calls scheduled this morning.

As we reported last night, net income in the quarter was $187 million or 52 cents per diluted common share compared to net loss of $63.7 million or $0.19 per diluted common share in the third quarter 2006. Included in the results for the third quarter 2007 are net realized after-tax investment losses of $30 million or $0.08 per diluted common share. Adjusting for this item, income on an after-tax basis was $217 million for the quarter or $0.60 per diluted common share.

On the call this morning are Tom Watjen, President and CEO of Unum Group, the heads of our three major 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 third-quarter operations and closed block securitization and the related capital redeployment plan. Tom?

Thank you, Tom, and good morning. As you might imagine I'm pleased with the results for the quarter which frankly build off the momentum we've seen the last several quarters. As Tom mentioned, excluding net realized investment losses we reported earnings per share of $0.60 cents for the quarter. When you exclude a reserve release in the U.K. and a tax liability reserve release related to a U.K. tax law change, that adjusts down to about $0.56 cents per share. Our pretax earnings compared to the third quarter of '06 increased by 28%, and our four operations pretax earnings actually increased by 32% when adjusted for the Unum UK reserve release this quarter and broker settlement charges. In the quarter we saw strong financial performance across all our operating segments including, by the way, some positive sales trends in each of our businesses which I'll talk about in a few minutes. We also essentially compared our claims reassessment process, which as you know has been something the company has taken seriously and worked very diligently to put behind us, I might add about a quarter ahead of time. As Tom mentioned, we also successfully completed a securitization of our closed block segment which significantly accelerates the company's transition from a capital user to a capital generator. We have as a result formalized our capital management strategy to guide our capital-related actions and announced as you saw, a $700 million share repurchase program. And again, I'll have more on that in a few moments.

Also importantly we've continued to invest in our ongoing growth and development activities in all of our businesses, which to me is critically important to our future success. In Unum US, Simply Unum, a comprehensive product and service offering was introduced the past quarter and has begun to launch across the country. We're seeing good initial success in the marketplace. Colonial is embarking on an exciting new branding program to compliment the new marketing efforts. While this will increase our expense levels slightly in the short term, we expect it to lead to accelerate long-term growth. Unum is launching two new exciting products including a limited benefit medical product as well as upgrading its medical GAAP products. And in the U.K. we have launched a new claims management service enhancement, a new absence manager reporting and management information tool, and also relaunched our group life and critical illness offerings with some exciting, new product features. So again, you can see why I'm actually pretty pleased with the quarter because we not only performed operationally in the quarter, but we've also done some very important things which we think set ourselves up for additional successes in the future. As Tom mentioned, I would like to spend a few minutes just talking about a few of these items in greater detail.

Let me just start with the operating results, where again, all three businesses contributed significantly to our performance this past quarter. In Unum US excluding the prior year claim reassessment charge our pretax earnings for this business increased 39%. Improvements in the claim management process continued to enhance results in the segments group income protection line. The group income protection benefit ratio for the quarter was 92.1%, down another 60 basis points from the last quarter, and when you exclude last year's claim reassessment charge, down 240 basis points from the third quarter of 2006. We continue to be very confident that we'll be within our guidance range of 90% to 92% next quarter and expect this to continue to trend down as we look at 2008 and 2009. We also saw strong results in our group life and accidental death and dismemberment line of business, where our pretax earnings actually increased 31%. And saw some solid results in our supplemental and voluntary lines of business, where although they were down slightly from a year-ago quarter were still relatively strong and generally consistent with our expectations. Unum US sales increased 4% in the third quarter of 2000, slower somewhat than we expected but we're encouraged by a number of factors which I want to talk about. First off we saw some very strong case sales which were up 30%, which come with a smaller average premium which affects the overall sales statistics. We also saw that although the core market sales were below last year due to the highly competitive market nature of the mid-market, we're encouraged by trends we saw in the less than 500 life marketplace., where our sales for group income protection and group lifelines were up 13%. So again, some very solid results in that less than 500 life marketplace. Large case sales activity continues to be challenging, and we intend to remain disciplined and selective in our pursuit of this business. This will continue to cause sales results to be fairly volatile. We were down 6% for this quarter for GIP and group life. However we're comfortable with the pricing decisions we're making in this business and the discipline we're showing about going after business in the large case business. We did see good momentum in our recently issued individual income protection product, as well as our voluntary benefit lines which as you know from prior discussions, are two businesses that we very much have targeted for future growth. And a total supplemental benefit line, benefit sales were actually up about 12% for the quarter. I add to that,, premium persistency continues to be strong and actually improved somewhat from the second quarter in our group line. And case persistency also remains very stable and volts is running with or slightly ahead of the plans that we set out for ourselves ahead of the year. And Kevin McCarthy is available to give more detail on the results as well as any trends that we're seeing in the marketplace.

Now shifting to Unum UK, our any tax earnings of $101 million increased 54% in U.S. dollars and 43% in local currency. This was driven by solid performance which again continue to influence our results this quarter and joining some of our prior quarters. Results for the quarter included an adjustment to our long-term assumption for claim reserves which increased third quarter of '07 operating income by GBP 8.2 million or $16.6 million. The benefit ratio is approximately 60% when you make these adjustments, still a very, very solid result for our U.K. business for the quarter. Sales were down about 13% in U.S.dollars and 19% in local currency, as market conditions remain very competitive and we're seeing strong pricing pressure across all of our lines, especially in the group life line.

There are some very encouraging trend, though, that I want to point to just as I mentioned with our U.S .business. Floor activity remains very positive--market activity remains very positive. Group income protection and group life sales in the less than 500 life market grew 33% in U.S. dollars, while the greater than 500 life sales declined actually 50% in US dollars. As in the US, our focus is on growing our core market business and being opportunistic in the large case marketplace which, again, I think will continue to cause you to see some volatility in our large case sales activity. Again, a consistent theme to which we talked about respect to the U.S. I would add that the third quarter of '06 was a difficult sales comparison because in last year's results we benefited from some of the retirement-age changes that went through the system in the UK which actually helped support some additional sales which put some pressure on the comparisons between the third quarter of 2006 and the third quarter of 2007. Now while exchange rates continue to provide a favorable boost to our underlying operating results, on a local currency basis we're still continuing to perform on a very, very strong basis in what's a very tough market environment. And Susan Ring has joined us on the call to fill in additional detail in the quarterly as a result as well as to get an update if necessary on the market conditions in the U.K.

Now shifting to Colonial, our pretax earnings increased 20% to $62.5 million. Results continue to reflect positive benefit experience across all major public product lines, life, income protection, and cancer and critical illness. And the benefit ratio for the quarter was 48.6%. As we said before, we continue to expect it to drift upward gradually although again we are not seeing specific signs that this is occurring as of yet. Sales in Colonial grew by 2.2% compared to the third quarter of '06. Again, I'm encouraged by some the underlying themes that I see in the Colonial sales activity. We saw good growth in our core market, which for Colonial is -- represents employers with less than 100 lives, where in that market actually our sales grew 9.5% this past quarter, while the large case business which again Colonial's market is defined as greater than 500 lives, were down 17.6%. Again, you see a very consistent theme in terms of emphasis around all three of our businesses on the core markets. We did see generally very strong performance in the core markets, and where we are compromising growth in order to protect the profitability from the large case side of the business. In Colonial there's a number of activity trends that I continue to think are very encouraging for the long term. New account growth for the quarter was up 7%. New sales recruiting was stronger this quarter, increasing about 11% over the year-ago quarter.

As you can imagine, new agent recruiting, training, and productivity remains our primary focus in terms of trying to position our sales organizations to support our future growth. And Randy Horn's on the phone today, he can provide further color on results for the quarter or any comments or questions that you may have with respect to the market conditions in the voluntary marketplace. Now shifting to the individual income protection close block. On the profitability side, our pretax earnings were about $29.4 million, which again is adjusting for prior claim reassessment releases, was relatively consistent with prior quarters. Our interest adjusted loss ratio was 92.4%, again also consistent with our general results over the last several quarters. Obviously the most significant event affecting this particular area of our company was the successful completion of our securitization, which covers approximately 95% of this segment statutory reserves. This is another important step toward better positioning this business for the future, a process which frankly, as you know, we began in 2004. As we have said previously, we have limited ability to improve the ROE of this closed income protection block through operational improvement. But through this transaction we've put in place a more efficient capital structure, and created capital which can be used to enhance our overall corporate results. And Tom White will provide details on that particular transaction in his comments.

Let me now shift to third capital management. A topic that in the past frankly wasn't as importance to us because we are generally in need of capital. I think as you know, our company has actually transitioned from a company that needed capital to over the last couple of years one that's created capital. And the transaction, the North Wind transaction, certainly has accelerated that capital position the company now has, which has caused us to formalize our capital management guidelines which now have driven our action necessary terms of how to use the excess capital and deploy the excess capital, in a manner to create value for our key stakeholder. As relates to that policy and strategy, our first priority is maintain sufficient stability to support our operations over various economic cycles and to give us the flexibility to respond to opportunities in the marketplace while positioning for improvements in our current ratings. The targets we've set for ourselves include the following, risk-based capital of 300% or higher for our traditional U.S.insurance subsidiaries, leverage of 25% or lower, and holding company liquidity to cover one year of fixed charges plus the capital accretion which will depend upon the business and economic circumstances at the time. Any capital not needed to support the business growths or continue to improve our business strength will be used for share repurchases. And as you know we announced two very related actions yesterday; our decision to reduce corporate debt by $800 million in the near term, and to repurchase $700 million in common stock next year which will improve our earnings per share and return on equity in future years. In fact, once all these actions are completed, we expect to have a favorable impact on earnings per share of approximately $0.08 to $0.10 cents and have a favorable impact on our return to equity to the tune of 70 basis points.

As I close my introductory comments, as I said there's an awful lot that's included in this quarter's announcements. But again at the end of the day, there's a relatively simple few messages I'd like to leave you with. First is we have a very strong operational quarter across all of our businesses. Secondly, the claim reassessment process is now essentially done, and obviously that's been a great source of focus with investors, as well as obviously with management over the last couple of years. The other thing is we obviously successfully completed North Wind, a transaction which certainly has changed materially the nature of our company. It also symbolizes a significant move from being a capital user to a capital generator. Hopefully in the future we'll continue to be doing things that continue to generate capital, and then we can put that capital to work in ways that support all of our key stakeholders. I do think the $700 million announced repurchase is a strong step in that regard. And our focus going forward is simple. It's continued to improve the operations of our business. The greatest area of opportunities continues to rest with our Unum US group of business. Again we recognize that there's still more we can do operationally, to continue to save our performance and continue to build up the momentum we've had the last five or six quarters. Now I'll turn the call over to Tom White, who will provide a little more detail on our quarter, after which I'm make a closing statement. Thanks.

Tom. I'll keep my comments on the operating results for the quarter brief, but I do want to highlight the following operating results. Within Unum US we continued to see improvement in the group income protection benefit ratio and profitability in the quarter. While incidence was slightly higher in the group loan income protection area, incidents was lower in the short-term area, in the improvement and recovery performance in the claims management organization continues to drive the improving benefit ratio trend. Also in the group income protection line of business, income from miscellaneous investment income was less in the third quarter of '07 relative to the second quarter of '07 by approximately $6 million reflecting a lower level of bond call activity. Within Unum UK as Tom mentioned excluding the reserve release, we continue to see favorable claims experience, lower incidence in the group income protection, and especially favorable results in group life certainly aided results in the quarter. However we expect to see some moderation in the group life results and some gradual driftup in the ratio that was 60% in the quarter adjusted for the reserve release. And at Colonial again, excellent quarterly results with favorable experience in all primary product lines. We continue to expect to see a gradual rise in the benefit ratio to more normal levels in the low 50% area. However, we're not seeing anything today that would lead us to expect a sudden shift upwards in that benefit ratio trend. Our consolidated return on equity for the third quarter, and this would exclude the U.K. reserve release and the U.K. tax adjustment was 11.2%, and the ROE for our core operations of Unum US, Unum UK, and Colonial was 14.8% under the previous method of calculating leveraged ROE and is 15.5% based on our revised method. Finally, the trend of strong statutory earnings continued with third-quarter net income of $275.9 million net gain from operations after tax of $297 million -- $297.2 million for our traditional U.S.insurance subsidiaries. And for the nine months of '07 the net gain from operations after tax, and this will exclude the second-quarter reassessment charge, totaled $623 million.

Now I'd like to move to a description of the North Wind securitization transaction that we announced yesterday. And I'd like to point out that we have posted a supplemental Power Point description to our web site to help describe the transaction. The North Wind transaction is a securitization which creates a more efficient capital structure for our business, one that is validated by the financial markets and rating agencies. you can think of the transaction in two primary steps, first is an insurance securitization, and second the redeployment as a result of the securitization. There are four basic steps in the securitization, first is the formation of a new holding company, North Winds Holdings which used debt, second is capitalizing a newly created captive reinsurance company, North Wind Re, third is the reinsuring of approximately 95% of the closed disability segment statutory reserve, or about $11.1 billion to this new reinsurance company, and fourth is the payment of extraordinary dividends from the seating insurers, Provident Life and Accident, Paul Revere Life and Unum Life Insurance Company of America, to the holding company. And these dividends totaled approximately $1.3 billion. The $800 million of floating notes that were sold in a private offering yesterday are nonrecourse to Unum Group creditors. They were priced at a 78 basis points spread off of three-month LIBOR. They are AAA rated based on NBIA guarantee and the underlying ratings -- the underlying ratings are in the mid single A category. So in fact we're swapping corporate debt for nonrecourse debt which is tied to the performance of the closed block. So with the securitization we're now able to hold less capital in aggregate to support the portion of the closed disability block that has been reinsured. That is, we'll hold approximately 200% risk-based capital instead of the approximate 300% that was held before. And again this, level of capital is validated by the rating agencies and the financial markets, and this translates into approximately $400 million of capital that's freed up. Now we've also replaced a portion of Unum's capital with nonrecourse financing that's tied to block's performance. That being the $800 million debt that's issued. So as you will see in this Power Point presentation, the netted proceeds from the securitization taking into account expenses, cross ownership of subsidiaries and GAAP to statutory differences resulted in a release of capital of $1.13 billion.

The next step is the use of proceed. That is redeploying this $1.13 billion along with the $925 million holding company liquidity that we will already have, or we already, have resulting from operations. Again the capital management philosophy that Tom described will guide our redeployment plans. These plans include reducing our corporate debt by $800 million to again establish a leverage ratio of approximately 25%. This deleveraging will be completed in the second quarter 2008 and includes the retirement of $150 million of senior notes that has already occurred, that being done in February of 2007. A bond tender offer of up to $400 million that was announced yesterday afternoon. The call of a $150 million bond issue that was also announced yesterday, and other miscellaneous debt reductions totaling approximately $100 million.

Second we'll boost our risk-based capital for the traditional US insurance subsidiaries to the 320% level. And again, there is higher than our 300% long-term objective as we try provide the conservative cushion, and that in dollar terms is approximately $350 million.

Thirdly, we'll set a target for holding company liquidity which will initially be roughly $300 million, and again, this is somewhat more than the one-time annual fixed charges that we're targeting.

Fourth step is the repurchase of $700 million of common stock. And this will be initiated once the other actions are complete. And we would expect to initiate the share repurchase once the corporate debt repurchase is complete, and that should be sometime in mid-2008. You will see in the presentation that our projections only include a portion or approximately 25% to 30% of the estimated 2008 net cash flow. So we think we have a fair amount of flexibility that we've built into these projections.

So to summarize, the primary benefit of the transaction is to increase financial flexibility of both our insurance subsidiaries and holding companies. We improved return on equity by approximately 70 basis points, subsequent to the completion of the debt reduction and share repurchase. And also the earnings per share accretion results from the share repurchase. Secondary we'll have higher RBC ratios for our traditional U.S insurance subsidiaries. Third there's no change to leverage. Fourth, we maintain a strongholding company liquidity position.

I will take your questions on this transaction on the Q&A session, and we'll also cover this in more detail at our November 19, investor meeting.

Now I'd like to quickly move to the claim reassessment process. We have now substantially completed the process with 2,533 claims reviewed in the third quarter. And the remaining balance of only 210 claims is being finished here in the fourth quarter. For the third quarter, the overturn rate was 53% and for the process to date, the overturn rate has been 41%. Any remaining reassessment costs will not have a material effect on our operations, and the final examination under the multi-state regulatory settlement agreement has begun with the anticipated completion date by mid-2008. Again we've provided supplement disclosure on the reassessment and it's posted on our website.

Now, I'd like to close with the comments on the investment portfolio. We continue to see opportunities for us with the current volatility and the widening of corporate spreads in the quarter provided for more favorable yields on new investments. In fact, the new money yield for the third quarter was 6.48%. This compares to 6.31% in the second quarter and 6.07 in the first quarter. And this has helped to stabilize the portfolio yield. From a portfolio quality perspective, there have been no material changes in the quarter. As we reported to you last quarter, we had no subprime mortgage exposure in our $4.2 billion portfolio of mortgage and asset-backed securities. 95.4% of the agency paper with AAA rating and the balance is made up of nonagency mortgage backs which are all AAA rated and some asset backed paper which is 97% is AAA rated. Our Alt-A exposure remains at $92 million at September 30, however, subsequent to the end of the third quarter, we did sell $58 .1 million of these holdings as we build liquidity for our capital redeployment plan. So our current alt-A holdings are $33.6 million, all of which are AAA rated.

The net realized investment loss in the quarter, after-tax loss was $30 million. And this was driven by two factors. $18 million of that is caused by DIG B36 accounting and results from wider credit spreads. And the other $12 million is related to a block of securities that we have identified to sell as a part of the North Wind transaction, as we liquidate securities and move cash to the holding company for corporate debt repayment. The loss entirely interest rate related. The book deal on this block of securities was a 556, and the market yield was a 719. And the average quality was an A-1. And by selecting this particular block of securities, we will better preserve our portfolio yields and not impact the reserve margins in our business lines.

So overall, we feel good about the investment portfolio. It's in excellent shape. Our high yield exposure is at 5.8% of invested assets. And again, we'll be happy to address any specific questions you have on our investment holdings in the Q&A session.

So with that, let me turn the call back to Tom.

Thank you, Tom.

And to summarize, this was a quarter with a lot of component pieces. I think actually we had no less than six public announcements of different pieces of different aspects of our results. But again, to me, it's a very strong message, a very message of strong operating performance, continuing to build off of the previous quarters. As Tom mentioned, a very strong investment position and strong balance sheet. Obviously critically important in these more volatile times that we're operating in now. We've obviously entered a phase in terms of capital management and strategy and the completion of the securitization is obviously an important part of that, but it's also, as I mentioned before, the actions we're taking to return capital to both debt holders and shareholders I think is an important thing, this is a very different company. Last but not least, the focus of the Company, frankly is the building off of our core franchises. We've got some good platforms to build from, the focus is on leveraging those platforms. And there are good programs underway that will continue to lead to great growth and good opportunities in 2008 and beyond. Now with respect to guidance, based on our recent results and the outlook for the balance of this year, we are revising upwards our full-year 2007 ,our operating, earnings guidance to a range of $2.14 to $2.17 per share, from our previous guidance, from a range to $2.01 and $2.04. We plan to provide 2008 guidance at our investor's meeting in New York. So we will look forward to seeing as many of you as possible at that meeting on the 19th. At this time, operator we would now like to begin the question and answer session.

Thank you, sir. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We'll take our first call in just a moment. We'll take our first question come Colin Devine with Citigroup.

Good morning.

Good morning, Colin.

Of course, tough to ask a lot of questions after this kind of quarter. I will take you up on the offer to have Randy talk a bit about the voluntary business. I think that would be very helpful. And then also on the capital management front, now that you've got two securitizations behind you, you know there's still frankly another block of liabilities I guess potentially, what about $8.8 billion of them sitting in the other segment. Is there any opportunity to do some more capital management and perhaps move some of those out?

Good questions, Colin. Let me if I could ask Randy to pick up the first one just in terms of what Randy, you and the Colonial team are seeing in the voluntary market. And maybe related ask Kevin to talk about the brokerage voluntary market because I think as everyone knows we've got two entrees into the marketplace. Randy, why don't you get started?

Sure, Tom Good morning, Colin. In terms of the benefit ratio side of things, as Tom mentioned earlier, we're seeing very stable results in all of our product lines. Not seeing any pressures on that in the short term. As was mentioned earlier on the call, we anticipate that drifting up, but very gradually as we introduce new products into the marketplace. And a deal with competition effectively. Nothing dramatic in the short term. I'd say, Colin, over all, from a competitive side, no competition out there. But nothing that's terribly concerning or gives rise to, you know, concerns on our part that we can't meet that -- that competition. As Tom Watjen mentioned, we've introduced a couple of new medical products recently that we're very excited about. We think that's going to give us some good lift. Making some investments in our branding. We think that's going to be very helpful to us. And we anticipate some good sales lift going forward at a double-digit pace. We were up just 2.2% in terms of our annualized sales premium in the third quarter, but as Tom mentioned, we saw some good, underlying trends in terms of new accounts, new rep recruiting, good training results of those new reps and productivity from them. So all in all, I'm very encouraged, and I think there's a very positive outlook for the voluntary business in our core markets.

Thanks, Randy. Again, if I could ask maybe Kevin to speak on behalf of name Unum US. Again, there's also a trend and the focus very much within that business, Kevin, and the voluntary market, as well.

Absolutely. Good morning, Colin. On the Unum US side and the voluntary business, first of all, from the risk side, our benefit ratios remain solid. Growth has continued. We had the solid 12% supplemental premium growth this quarter. And of course, as Tom mentioned, we're pretty excited about our Simply Unum launch that started during the third quarter with some pilot office, and will go to a full-fledge launch in January. And that will allow it to leverage our existing client base, which is up as you know 90,000 existing employee benefit customers. It allows us to leverage our field force which we think is sort of the broadest book on the sales in-service side of the country. And it allows us to leverage the investments we made in enrollment, in service capabilities, and communications, all of which are reflected now and high customer satisfaction ratings. So voluntary markets, a real growth opportunity for us as well as it is for Randy. And we're real excited about where we're going.

Kevin, could you also touch on LTD pricing trends, in terms of, this is a big renewal season obviously.

Yes. We continue to sort of do pretty much what we've been doing in the past in terms of renewals. In the '07 renewal program, the increase in LTD was about 7.5% or so. That program is basically sort of -- the terminated business, of course, as we continue to purchase the business, the price increases that we were asking for in the 20% to 25% range. So that's on the renewal side. New business pricing, well, it's up a bit. Premium per life I think is -- is up about 5%, our influence block.

Down slightly, I think year to date on our new business, primarily driven by our shift in mix a little bit. We had a pretty high concentration of professional services business last year. We have higher indemnities. And so PPL goes down as you shift to what I'll call more mid-market kinds of -- middle income-type prospects. But pricing has been fairly stable. I think it's been stable for us as reflected in the PPLs. I do think that the competition in the larger end of the market remains sort of commoditized. And the inventory of solid opportunities for the large-case marketplace has been fairly weak this year, and so we've seen the competition creep down into the mid-market.

Thank you, Kevin. And Bob, maybe if I could ask you to speak a little to the issue around possible additional securitizations and the whole team of capital management going forward.

Sure. Good morning, Colin. Our past concentration on securitization as you know has been focused on tail wind, focused on the long tail Ltd claims business. The North Wind transaction now was focused on our individual income protection closed block. We identified these as, you know, very early on as being relatively inefficient capital, that was allocated to those lines of business. We'll continue to keep looking for opportunities so that not only, are in pockets of areas where we feel that the capital allocation that is being attributed to the blocks of business are inefficient from an overall perspective, and also, to try to find opportunities where that , the cash flows and the underlying business also fits the market profile that might lend itself to this type of a transaction. So, you know, obviously we feel relatively relieved that we've gotten this rather large transaction that has taken quite a bit of energy and time to complete, is completed. But we'll continue to -- to be looking at the remaining portion of our business for

Would Susan's business lend a possibility to that?

There are probably components of her business that would have similar profile to what we're -- what we've done here in the states, yeah.

Okay. Thanks.

Thanks, Colin.

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

Good morning, Tom.

Good morning. First question is, can you comment on what drove the high level of statutory earnings this quarter? Was it just underlying performance or anything unusual going on there?

Yes maybe, Tom, or Bob?

Yes, I'll take that one. Yes Tom, we did actually -- and I think in the footnotes in the statutory supplements, you'll find a comment related to that in the statutory section of the stats supplement. That in the period we did implement a new reserve system. We actually brought it together, we call it Force, f-o-r-c-e. And that new system is a new reserve system for the individual income protection lines of business. As you know, we are a creature of a number of companies that have come together. And along with those companies a number of legacy systems, both, you know, manual, spreadsheet, as well as automated systems came together.

And we've been working over the last couple of years to bring those systems together into one consistent valuation system that really is much more efficient, more effective, is more trackable from a standpoint of an audit perspective. And also has better controls from a Sarbanes-Oxley perspective. So we did implement that system in the quarter. We did have statutory earnings from a tax perspective. We actually experienced about $100 million tax savings as a result of the implementation of that system as we brought tax reserves much closer to our overall statutory reserves in the calculation of tax reserves under that system. And we also experienced about $15 million of other statutory to savings on it. So about $115 million of that, I believe it's $297 million of statutory earnings is attributable to the implementation of that system.

So Bob, I think actually adjusted for that, a little over $180 million of statutory earnings. Which looking back actually is a pretty strong result. Again, I think because of good fundamentals like we talked about with our overall report.

Exactly, Tom. It was still, you know, even without that, it was a strong quarter. You know, for statutory, as it was for GAAP.

And is it fair to say when you think about the run rate of statutory earnings that, you know, we're looking at, what, $600 million plus as a run rate here? I think you've talked about $500 million as being more of a base case.

No, I think the running of four quarters in excess of $600 million, and right now we're not seeing anything that would modify that trend.

Okay. And then just a question on the securitization transaction. All in all, if there's any adverse experience in the future on -- on the closed block, are there any call-back provisions for Unum, or is this full-risk transfer?

Well, you know, the business is in a -- in a wholly owned subsidiary of ours. Basically we've securitized the $800 million so it is all nonrecourse on the $800 million. So the timing of the cash flows coming from the business will go toward paying off that debt. Once that debts has been completely paid off, the business still remains a part of the Unum group. So the downstream, once that -- that $800 million has been -- has been completed, it still remains our business. So the long-tail nature of that block of business still belongs to Unum Group.

Bob, it's worth saying, though, that reinsurance agreement put forth in 2004 continues to exist today. Actually to protect against adverse development.

Exactly. I mean, basically, there were 15 different reinsurance agreements that were related to this block of business. And all 15 of those reinsurance agreements still remain in place. So to all of that reinsurance is intact with the block.

Okay. Thanks, you guys.

Thank you.

We'll take our next question from Tamera Kravec with Banc of America.

Good morning, Tamera.

Hi, good morning. Sorry I've been jumping on and off. So if this question has been asked, I apologize. I wanted to just circle back to the premium growth issue and the group income protection line. And talk about, you know, when -- I know you're being disciplined in the large case, the middle market remains competitive. But when do you think is a reasonable time frame to expect some premium growth out of that business?

Maybe I'll ask Kevin to speak to that because you're right, there are some things coming in and out that I think can cause some -- you know, that need to be clarified actually.

Good morning, Tamera. Well, our business grew substantially in the quarter in terms of sales, 13%. And I think that momentum will continue into the fourth quarter. We have put additional marketing activities in place in the third quarter, in the mid-market that I think will reap some benefits as we go into the fourth quarter of next year.

But I think the real emphasis in terms of growth will start to show up with our Simply Unum launch next year, when we are able to package our group income protection, LTD and life business part with our voluntary parts on one service platform and mechanism and enrollment support. And I think that in turn will generate a good, solid, and improving growth rate over the 2008-2009 period. The other thing I would say, is I think we are very focused on persistency in our group lines of business. As you know, sort of the tradeoff here is you stay disciplined in the large case business. You purge your underperforming life stage business, and in turn you try to grow your smart market business while retaining those customers, and I think our case, persistency has improved the year versus last year, in our group lines. And our premium persistency has been improving throughout this year. It's our earned premium prognosis is also favorable.

Okay, thanks. And the interest rate margin, any thoughts there just given, you know, the Fed's cut twice now. And there's some debate over whether they'll go further or not. Any thoughts on whether we should start thinking about that again?

Tamera, this is Tom White. We don't see an issue there. We target a reserve margin of about 50 to 60 basis points. And in the group income protection line, we're above that right now. And it's been actually growing marginally here over the last couple of quarters. So we're in good shape and we don't anticipate any adjustments here in the near term.

Okay. Thank so much. Great quarter.

Thank you.

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

Thank you very much, and good morning to everyone.

Good morning, Eric.

My question -- I have one question regarding the securitization. It's probably best directed to Bob Grievey. It seems to me that the entire success this sort of pinned on very detailed turn on I should say very detailed modeling of these whatever 700,000 people and when and how long they'll stay on claim and so forth. I have two related questions. First, as we think about all of the variables that drive profitability, incidents, recovery rates, death rates, interest rates, is there one variable in the list that trumps all the others and stands out and that just drives the able of an MBIA to get comfortable and to put in prematorum, what's the one thing is f there is one thing to get right from a modeling point of view? And second, would it be reasonable to presume that MBIA used an independent actuarial firm to do its own modeling of the cash flows, modeling independent of Unum's? And if so what was the name of that actuarial firm? Thank you.

Yes, Eric, two things I guess. Obviously you're astute enough to see that this was a very complex, you know, modeling exercise from a technical standpoints. And, you know, as you know, there's a lot of factors that go into it. I would say, you know, this business was heavily tested, not only by our own people but also we obviously had our own external actuarial firm that was working with us on the transaction. And then, you know, other constituents including the MBIA for example had their own experts looking at it, as well. I would say there's really two factors that are kind of key central factors in this business, and it doesn't matter whether we're modeling this block of business or we're modeling some of our remaining. And those two are incidents assumptions and our recovery assumptions.

You know, basically, you know, the frequency and severity of morbidity in this business are really the drivers. Incidence is driven primarily by potential economic conditions, and what's going on in the overall economy and the recovery is also influenced by that but also influenced by our operational effectiveness. As we've seen, we've been in a period of time where both of those have been improving for us in recent times. So those are the two driving factors. And MBIA did, as you are aware, utilize their own external actuarial firm. We had our own external actuarial firm. And, you know, MBIA did use M&R for their review.

And -- okay. Why don't I leave it at that, thank you very much.

We'll take our next question from Jeff Schumann with KBW.

Good morning, Jeff.

Good morning.

Congratulations on the transaction and a very strong quarter.

Thank you.

I'm wanting to step back and take this all in. It would seem to me that you're arriving now at a very different point than you've been. Obviously you have to execute a few more things. But you've got the securitization exercise kind of completed now after a few more years. You've got the claims reassessment behind you. Some things that come off the table. Your operational effectiveness has come up a certain extent. Now you have much more capital flexible. On the other hand, as Tamera pointed out, you still have a couple of major businesses where premium growth is negative. You can probably turn that over time. But that is a bit of a challenge. I'm wondering, is this a point when you could contemplate maybe an acquisition that could maybe accelerate growth in a couple of areas, give you an opportunity for some cost efficiencies? You seemed pretty emphatic that the use of capital would be all about share repurchase. But I'm wondering if acquisitions are now sort of entering your thinking at all?

Jeff, it's a very good question. You're right actually. The announced securitization was certainly a very big part of the question. But it's also a turning point for the company having shifted as we said before from a company that as recently as a few years ago had to raise capital to actually generating it from operations, plus added to that the securitization. We're in a much different position as an organization. I would say you're absolutely right. The focus first and foremost is to take each of our three businesses and continue to be sure we don't lose moment that we've already built up there. So there are some operating opportunities to improve.

I would also say that some of the places where we don't see growth or where it's perceived as we're not seeing growth is actually a conscious decision from a risk management point of view not to grow. For so for example, Kevin was talking about a large case marketplace. That's a conscious decision to be disciplined here and be opportunistic. So I guess we're not as concerned about the growth side just because I believe we think we have good initiatives in place to -- in all of our businesses to grow the business that we think we can grow profitably. Most of the small, mid--sized businesses across all of our businesses, and be more opportunistic in the large case market. Having said that, you know, we are going to continue to look at things, if we find things that can be additive to what we have today in place, but I don't know that -- that that's necessary for us to achieve the objectives that set for ourselves.

Okay. Great. Thanks, Tom.

Great, thanks, Jeff.

We'll take our next question from Mark Finkelstein of FPK.

Actually, just a quick question for Susan. One of the opportunities in the U.K. was to start selling a voluntary product with some legislation changes, and I'm curious what the current status of that is. I guess how much is being invested and when you see the timeframe for, you know, that initiative to be undertaken?

Yes, sure, Mark. Thanks for the question. I mean, I certainly continue to see opportunity for the U.K. marketplace. You're right, the legislation that's coming out and actually around about now is certainly going to help us in that. And we're doing some very detailed customer research at the moment to make sure that we're putting the right products in place and so on. And clearly we see this sort of time frame during which we'll be launching. And sort of the tail end 2008. But really properly in the beginning of 2009.

Okay. And then one final question on the closed block. I guess -- I guess the small piece that wasn't part of the securitization, was that purely a kind of a statutory entity consideration, or were there any other factors that didn't allow that I guess a 5% block to not be included in it?

This is Bob Grievey, Mark. We actually included everything that we could get through a thoroughly efficient regulatory process. We included the current domestic states for these three primary carriers, also included California and, of course, the receiving state which was Vermont. The 5% that was excluded, we didn't feel that there was a marginal benefit for, you know, including additional states in that, including the state of New York. So, you know, we've designed transaction to be much more effective from a standpoint of just efficiency getting through all the regulatory hurdles.

Okay. Thank you.

Thank you.

Once again, ladies and gentlemen, it's star-one on your touch-tone phone if you do have a question. We'll go next to Liz Warner with Merrill Lynch.

I just have a quick numbers question. You had provided the $0.08 to $0.10 cents in earnings and 70 base I points in ROE related to the freeing up of the individual block. Are those for '08 or '07?

Liz, this is Tom White. That's assuming that all of the capital redeployment is done at once and what the -- the operating results on an annual basis would look like once that's done. Now reality is that we'll be doing the debt repurchase, most of it here in the fourth quarter. There will be some that will be finished up in the first few months of 2008. And then the share repurchase would probably be initiated late second quarter, early third quarter, something like that. And then once all that's done, then we're looking at, you know, when you pro forma that in, that's how we get to the 70 points of Roe and earnings accretion.

That's good. Thanks a lot.

Thank you.

There are no further questions in our queue at this time. I would like to turn the call back to our speakers for any closing remarks.

Good. Thank you, operator. And thank you all again for taking your -- taking the time to join us on the call. And this will complete actually the third-quarter earnings call. I do again want to remind you of our investor meeting coming up on the 19th. Hopefully we'll have the chance to see many of you there. Thank you.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.