普登 (UNM) 2007 Q4 法說會逐字稿

Good day, and welcome to the Unum Group fourth quarter 2007 earnings results conference call. This call is being recorded.

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

Thank you, and good morning everyone, and welcome to the fourth quarter 2007 analyst and investor conference call for Unum Group. 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 might 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 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 our Form 10-K and Form 10-Qs, can be found in the investor information section on our website 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 presentation, can be found on our website in the investor information section.

As you know, yesterday afternoon Unum Group reported earnings for the fourth quarter 2007. Net income in the quarter was $160.5 million, or $0.44 per diluted common share, compared to net income of $276.1 million or $0.80 per diluted common share in the fourth quarter 2006. Included in these results for the fourth quarter of '07, are net realized after tax investment losses of $16.5 million, or $0.05 per diluted common share. These losses were driven by the Digby 36 accounting which resulted in a fourth quarter after tax investment loss of $23.3 million. Excluding this Digby 36 accounting impact, net realized after tax investment gains were $6.8 million in the fourth quarter.

Also in the fourth quarter of '07 we recorded after tax debt extinguishment costs of $36.1 million, or $0.10 per diluted common share, related to our fourth quarter debt repurchases, which were executed as a part of our capital redeployment initiative. Adjusting for these two items, income on an after tax basis was $213.1 million for the quarter, or $0.59 per diluted common share.

On this call this morning are 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 Vive President, Chief Financial Officer, and Chief Actuary. At this time I would like to turn the call over to Tom Watjen.

Thank you Tom, and good morning. You wouldn't be surprised to hear me say that I'm very pleased with the accomplishments of this company over the course of 2007, and certainly our results of the fourth quarter, I think reflect some very good work and a continuation of themes that have actually been building over the last several years.

In the fourth quarter, excluding net realized investment losses, and debt extinguishment cost, we reported earnings of $0.59 a share, which is 13% higher than the $0.52 reported in the fourth quarter of 2006 and ahead of the consensus estimate of $0.54. Our before tax operating earnings, compared to the fourth quarter of 2006 increased by 16%, with strong risk results across the company.

We closed the year with record annual earnings in both Unum U.K. and Colonial, and had very, very, strong performance in Unum U.S., where we saw continued improvement in our group disability line of business, as well as strong performance across most of the other lines of the business. Core market sales trends were strong across all of our business segments, including Unum U.S., Unum U.K., and Colonial. Let me give you a for instance. Our case count for 2006 saw strong growth across all those businesses. In Unum U.S. our group disability case count grew 7% in 2007, our group life case count grew 12% in 2007, our Colonial case count grew 11% in 2007, and our U.K. case count grew 16% in 2007. So again, strong performance in our core markets across all of our businesses. I will say we continue to remain disciplined in the large case markets, as we still see fairly aggressive pricing actions in certain segments of the market.

You'll also note in the quarter too, we actually saw some expenses increase. But as we go through that details of those expense increases, I think you'll find that much of those are either specific one off expenses in the quarter, or in fact in many cases, investments that we're making in the business to assure ourselves that we're positioned well to profitably continue to grow the business in the future. Tom will have more to say on that in just a few moments.

I have to say, I'm also extremely pleased with our overall investment results. Obviously, this is a very, very challenging investment environment, and our investment income continues to be very strong. Through the efforts of our investment professionals, I believe our portfolio is very well positioned for these obviously unsettled times we have today, again Tom will have more to say on that in just a moment.

I mentioned earlier, that we're making investments in the business. Even though we're very pleased, obviously, with the results in the quarter, and the trends that we saw over the course of 2007, we recognize that we have a tremendous opportunity to continue to grow our business, and requires investment in all three of our businesses. Simply Unum, a comprehensive product and service offering in our Unum U.S. business, has been launched on a limited basis, and we're very pleased, actually, with the initial market acceptance. We are continuing its rollout in the early months of 2008, and are excited about its potential.

Colonial has launched a new branding program, to complement the corporate marketing efforts we launched a year ago. We believe this will help lead to accelerated long-term growth in sales and agent recruiting. And in the U.K., we have also continued to pursue a number of new product and service offerings which include over the long-term, evaluating the voluntary benefit marketplace opportunities in the U.K.

Now, as you know with our third quarter announcement of earnings, we also announced our strategy for capital management, which obviously is going to play an increasingly visible role in for creating shareholder for this company. Let me touch briefly on a few items related to our capital management initiatives.

Our first priority remains to maintain sufficient financial flexibility, to support our operations in both good and bad times while also positioning for improvements in our credit ratings, and, of course, responding to opportunities in the marketplace. While the U.S. economy certainly appears to be at a weaker position, we closed the year in a very strong capital position, and have a great deal of financial flexibility.

Our traditional U.S. life insurance company ended the year with a risk based capital ration of 344%, substantially higher than our 300% target. Our leverage excluding the non recourse debt, and capital of Tailwind and Northwind Holdings, finished the year at 21.4%, well below our 25% target. Our holdings company liquidity was slightly in excess of a billion dollars, well above our target to cover one year of fixed charges plus a cushion for business and economic volatility. Now given the strength of our capital position, and the progress we've made in redeploying the capital following our securitization, and frankly, despite the challenging business environment, we fully intend to proceed with our previously announced share repurchase as soon as possible.

Let me also spend a few minutes on each of the businesses, because those can tend to get lost in a quarter like this, but again as I mentioned earlier in my comments, we had strong performance across all three of our businesses. Let me start with Unum U.S. Our pretax operating earnings for Unum U.S. increased by 23%, with strong performance across most of our product lines. A lot of the attention is given to our group disability line of business. Again, we saw some good improvement there with the continuation of solid claim improvements in the quarter. The group disability benefit ratio for the quarter, was 91.5%, down another 60 basis points from the third quarter, and 250 basis points lower than the fourth quarter of 2006. The benefit ratio was within our guidance range of 90% to 92% for the fourth quarter, and we remain confident that reducing the benefit ratio to the 88% to 89% ratio by the end of 2008, or early 2009 time frame, is a realistic objective.

We also enjoyed, though, strong results across the other product lines, including our group life and accidental death and dismemberment line, where pretax income increased 30%, and the supplemental and voluntary lines of business, where earnings grew 20%. While sales were -- declined approximately 8% in total for the fourth quarter of 2007, there's a lot of very, very encouraging trends. Our core market sales, which again, just to remind you, this is sales to employers with less than 2000 lives. Our core market sales were actually very strong, increasing 20%, and at this point represent 65% of our total group sales, which again, is a very important point as we think about the mix of business shift that has happened with this company.

Large case sales activity continues to be challenging, and we intend to remain disciplined and selective in our pursuit of this business. We have good momentum in our voluntary benefit line of business, with sales actually increasing over 14% for the fourth quarter, and in our individual disability recently issued sales, which were lower in the fourth quarter, though -- from the fourth quarter of '06, but actually increased a very respectable 8% for the full year of 2007. Premium persistency in our group lines was lower in 2007 than in 2006, but that was primarily driven by the loss of aggressively priced large case business. Case persistency however, remained generally stable, reflecting the stability of our block of core market business. Kevin McCarthy is available to give your more detail on our results, as well as any trends that we are seeing in the marketplace.

Now let me shift, If I could, to Unum U.K., where we reported pretax earnings of $85 million for the fourth quarter, or a 4% increase over the fourth quarter of 2006. This completes a record year of earnings for Unum U.K. We continue to see a very strong risk results with the benefit ratio of 60.8% in the quarter, and 59.3% for the full year. Fourth quarter sales were lower in part, due to a difficult sales comparison with last year, when we benefited from accelerated sales from a legislative change involving employees' retirement age. Excluding the sales from this legislative change, sales for Unum U.K. increased 12% for the fourth quarter, again, a very respectable result. Susan Ring is available to address any questions you may have on what we're seeing in the U.K. market.

Last but not least, Colonial. Colonial actually reported a 16% increase in pretax operating earnings to $58.8 million, which again also wraps up a record year for that business in 2007. Results continue to reflect positive benefit experience across all of our major product lines. Expenses were higher than normal this quarter as we invested in Colonial's new branding launch, an action which is designed to help improve our long term growth prospects.

Our sales for the quarter were actually very positive, increasing 12% compared to the fourth quarter of 2006, with strong results across each market sector. We saw good growth in our core market activity with sales in the less than 500 life market increasing 14.5%. We're also encouraged by the general market activity we see, with new account growth up over 11% for the full year 2007, and new sales rep recruiting increasing over 9% for the full year. So again some very good early indicators for 2008. Randy Horn is also available on the call this morning to address any questions you may have about what we're seeing in Colonial, the marketplace, then also specifically any questions you may have about the investments we've made in branding and new product development in the Colonial business.

In summary, I could summarize 2007 as being a very, very successful year for the company. Let me touch on a couple reasons why I think so. First off, we have a strong operation-- we saw strong operational performance across all of our core business segments with favorable risk results, especially in our Unum U.S. group disability area. But again, the good risk results actually permeated all of our businesses in 2007.

We also saw some very strong investment performance, that's not just with the investment income results, but again, even the positioning of the portfolio, I believe, is very well positioned for what seems to be some very unsettled times in the market today. We continue to strengthen our capital position. We obviously announced in the third quarter our longer term plans for how we're going to manage capital, but, again, the capital position in the company is very strong. We retained all the flexibility that we wanted to retain. As we said before, we intend to continue to proceed with our $700 million share repurchase program, that we announced in the third quarter.

We also continue to improve the relationships with many of our key constituents, especially with the regulators. In part that was driven by the successful completion of the claim reassessment process, but it goes beyond that. I think we built a deeper, more trusting relationship with regulators, which will bode well for 2008 and beyond.

And lastly, we've continued to invest in the business. As strong as the year ended, we recognized that there's even greater opportunity out there, and we're continuing to make investments in the businesses, to actually assure that we continue to maintain that profitable yet disciplined growth we've talked about to you in the past.

Again, the plan ahead is a very simple one. It's execution. We've got good plans. We're coming off some strong results in 2007. Again, I can assure you the entire organization is focused on the things necessary to be successful in 2008. With that, I'll now turn the call over to Tom White who will provide a little more detail on the quarter. Tom.

Thank you. I'll keep my comments this morning on the operating results fairly brief. But I do want to highlight the following. First, some operating results highlights.

I'm start with the Unum U.S. group disability line. As Tom said, we continue to see improvement in the group disability benefit ratio, and profitability, and profit margin in the quarter. New claim incidents was slightly lower for group LTD, compared to the third quarter, and our claim recovery performance continues at solid levels. Also within group disability is our STD line of business which continues to perform very well, also with stable claim incidents trends.

The investment income in the fourth quarter saw-- we saw several million dollars lower than the average of the past few quarters, and this reflects a lower level of bond call activity, within this line of business. Finally, expenses ran somewhat higher in the fourth quarter, again, this is for the group disability line, and this is largely due to higher investment in advertising and branding expenses, and also product and service development costs, as well as higher incentive accruals.

Moving to the Unum U.S. group life and AD&D line, we saw an exceptionally strong level of profitability in this line, this quarter, with a benefit ratio of 69.5% compared to 75.9% in the year ago quarter. Expenses also ran somewhat higher in the fourth quarter in this line, again reflecting the similar expenses as those recorded in the group disability line.

Finally, the Unum U.S. supplemental and voluntary line, we also had a strong quarter here in this line with BTOE increasing 19.6%, driven by generally strong risk results, and premium growth of 7.6%. Also in supplemental and voluntary, the income from miscellaneous investment income was favorable in this line, with approximately $5 million this quarter, from higher than normal bond call activity. This higher than normal bond call activity and net investment income in the fourth quarter was partly offset, though, with higher operating expenses in the period.

To summarize the results for the Unum U.S. as a segment, we had strong risk management results, which more than offset expenses that were above our normal quarterly run rate. Net investment income in aggregate was in line with our expectations. And these trends produced growth in pretax earnings of 23% for the fourth quarter.

If we move to Unum U.K, we continue to see generally favorable claims experience in the U.K. operations, especially within group life, with the benefit ratio remaining stable, compared to the results of the past several quarters, at 60.8%. Before tax operating earnings growth was approximately 4% in dollars, but did decline 2% in local currency. As we indicated at our investor day, we expect to see a slower rate of earnings growth, and a slight downward trend in the margin for Unum U.K. as we invest in new growth opportunities.

However, we fully expect the margins and ROE to remain quite strong, and this quarter was no exception, as Unum U.K.'s unleveraged ROE was a very robust 29.5%, and the pretax margin, again, this is pretax earnings relative to premiums, was 33.8%. Net investment income in Unum U.K. in the quarter benefited from favorable performance on the-- in the index linked bonds, and then you'll see expenses in Unum U.K. were about $4 million higher than normal, primarily due to the accrual of the remaining lease payments, on a non-occupied facility over in the Unum U.K. operation.

Moving to Colonial, again, excellent quarterly results with favorable experience in all the primary product lines. We continue to, again, expect a gradual rise in the benefit ratio to more normal levels in the low 50s, but expect that very gradually over time. You'll notice that the expense ratio for the Colonial segment in the fourth quarter is higher than normal. This includes advertising and branding expenses, as well as new product launch expenses that were about $4 million above our normal run rate, as we launched our new branding initiatives for Colonial. We expect to incur advertising and branding expenses in 2008, at a similar level as in 2007, however, in 2007 those expenses were incurred entirely in the fourth quarter, whereas in 2008 the expenses will be incurred more evenly throughout the year.

The closed disability segment, the results were $23.4 million there, and generally consistent with our expectations for this segment, following the securitization that we announced last quarter. Importantly, the claim trends were stable this quarter, with new claim incidents remaining fairly stable, and solid recovery experience, again, in the closed disability segment.

A couple of other items to mention. The tax rate, you'll see that the rate on operating income, and this is excluding the debt extinguishment cost, and the realized investment gains and losses, was lower than normal, at 30.5%. This is primarily due to the release of a FIN 48 tax liability, of approximately $7 million. Also you'll notice debt extinguishment costs with the $400 million debt tender, the $150 million bond call, and other deleveraging activities in the fourth quarter, we incurred after tax debt extinguishment costs of $36.1 million. With this activity, we've completed $752 million of our planned $800 million in debt retirement.

Our consolidated return on equity for the fourth quarter was 11.5% and for full year 2007 was 11.2%. The leveraged ROE for our core operations of Unum U.S., Unum U.K. and Colonial was 17.1% for the fourth quarter, and 16.7% for the full year 2007, very strong results there.

Finally, the trend of strong statutory earnings continued in the fourth quarter, with our fourth quarter net gain from operations-again, this is after tax and excluding special items-- was $227.3 million for our traditional U.S. insurance subsidiaries, and for full year 2007, the net gain from operations after tax and excluding special items, totaled $850.3 million, which is an exceptionally strong performance. Regarding the claim reassessment process, I'm very pleased to report that since the end of the third quarter, we have completed the reviews of the final 256 claims, and the final examination under the multi-state regulatory settlement agreement is well under way, and we anticipate its completion in the first half of 2008.

I'd like to close with a few comments on the investment environment and our investment portfolios. The current market volatility, particularly with the widening of corporate spreads on new investment opportunities, continues to mitigate much of the impact that we're seeing in the decline in treasury rates. Obviously the 10 year treasury was down about 56 basis points in the fourth quarter. The new money yield, for us in the fourth quarter was 6.18%. This compares to 6.48% in the third quarter, 6.31% in the second, and 6.07% in the first quarter. We had a high level of purchases of inflation indexed bonds in the U.K., which tends to lower the reported new money yield. The overall portfolio yield declined by four basis points; however, importantly, the interest reserve margins remained generally stable, compared to the third quarter 2000 levels that we outlined in our November investor day presentation.

We entered 2008 with hedges in place on approximately $600 million of expected cash flows, and this represents approximately half of the expected total cash flow to invest for 2008. From a portfolio quality perspective, we're happy to report that there have been no material changes in the quarter. You should note that we have added a page to our statistical supplement, which provides some details on the asset and mortgage backed securities portfolio.

I would like to highlight a few important facts that are frequent questions that we get, regarding the investment portfolio. First, we have no subprime mortgage exposure. Secondly, we have no CDOs related to asset backed, or residential mortgage backed securities. Our alt A exposure has been reduced to $5.5 million on a book value basis, and $5.8 million on a market value basis, and all of this is rated AAA. The book value of our private equity partnership exposure is $61.7 million. Finally, we have no direct investments in any of the financial guarantors, and our exposure to investments with wraps by financial guarantors is $148.6 million on a book value basis, and $152.6 million on a market value basis. The average underlying rating on these is an A-1.

Overall, we feel that our investment portfolio is in excellent shape, and well positioned for what will likely continue to be a challenging environment in 2008. Our high yield exposure at year end was 5.3% of invested assets, which is generally stable with the 5.8% exposure we had last year. The level of non current investments is only $2.6 million at year-end, and this compares to $16.2 million at the end of the third quarter, and $12.5 million at the end of '06.

We'll be pleased to address any specific questions that you have regarding our investment holdings in the Q&A session. With that, let me turn the call back to Tom for his closing comments.

Thank you Tom, I will keep my closing comments very brief. Let me just reiterate how pleased I am with our fourth quarter results and those for the full year. Again, this is a strong performance. We're very pleased with what's happened. Obviously, this didn't happen without a lot of hard work by all of my associates. I would like to thank all of them for the great work that was put into what has turned out to be a very good year for us, this past year.

We said at the investor day meeting in the fall, that we are a very different company. Let me just tick off four things, that I think are important to keep in mind, as we think about the close of the year. First and foremost, especially in this environment, this is important, we have retained substantial financial flexibility as an organization. We have a stronger balance sheet with a risk based capital at 144%, leverage at 344%-- leverage at 21.4% and as I said before, over a billion dollars of liquidity at the holding company.

Secondly, we've better positioned our portfolio-- investment portfolio with historically low levels of high yield bonds, and very limited, if any exposure, to the asset classes that are troubling many financial institutions today. Thirdly, we have a more diversified business foundation. This comes in part with the growth of our Unum U.K. and Colonial operations, but also has been supplemented by the repositioning of the Unum U.S. operations.

I can assure you, we have solid plans for 2008 and the focus throughout the organization is on developing disciplined profitable growth, and again, I very much feel that we're focused on that. So I get much different foundation for the future. Last, but not least, we've made continuous progress toward resolving the regulatory and legal matters which were initiated in 2003, and 2004. Now while we're not immune to economic volatility, we are significantly better positioned today than at any time in our past.

Finally, with respect to guidance, we are reaffirming the 2008 guidance we provided at our November 19 investor day, which was for operating earnings per share within a range of $2.35 per share to $2.40 per share. At this time, operator, we're ready to begin the question-and-answer session.

Thank you. (OPERATOR INSTRUCTIONS).

We'll pause for a moment to give everyone an opportunity to signal. We'll go first to Tamara Kravec, with Banc of America Securities.

Thank you, good morning.

Good morning, Tamara.

Good quarter.

Thank you.

Obviously you're happy to have '07 be a strong year. I have a couple questions. In light of the probability of a recession increasing, with industry experts and economists, how are you feeling about this business going into '08 with that probability rising, in particular, in light of your goal for the continued improvement in the benefit ratio in your group income protection business? That's my first question.

My second is just touching on reserves and just given the accelerated pace with which the Fed is lowering rates, and I think that's probably expected to continue near term. Are you readdressing reserves in light of your interest margin, if you could talk about that? And then just addressing the competitive environment, particularly in the less than 2,000 lives where you saw good growth.

Tamara, let me start with your first one and maybe ask Kevin to supplement my comments. Again, let me start with the fact, again, as you look at the company today, given the balance of our business, we don't feel as though we have anywhere near as much vulnerability to swings in the economy. By that, I mean you look at the contributions that Colonial now makes to our company, Unum U.K. now makes to our company, and even within Unum U.S., the fact that we have a more diverse product portfolio in terms of contribution from voluntary and group life and things like that, so again, I'd start with the point that the company is in a very different position overall, relative to where it was in the past. Maybe what Kevin can do is speak specifically to the Unum U.S. group disability line just in terms of just some of the things we've done there, and why we think we're in a better position than in the past.

I will say though, we're keeping a wary eye on the economy throughout, both as it relates to claim activities, also as it relates to investment activity as you said. So we're not taking this for granted. Maybe Kevin, just talk a little bit about the Unum U.S. exposure, especially group disability.

Thanks, Tom. Good morning, Tamara.

Good morning.

With respect to recession risk in Unum U.S. in group disability, a couple of things. First of all, just overall in Unum U.S., we're a different portfolio than we were four or five years ago. Our mix of business is now roughly plus or minus 30% group disability, 30% supplemental, 30% life. So we're not nearly as exposed on the disability side for the total Unum U.S. performance as we were in 2000, 2001. Our mix of business by industry is really solid. We don't have exposure of any more than about 14% to 15% in any one industry sector. Our mix of business by size as you know has been improving. Our LTD in force is now about 54% core, 46% large, and our sales in the fourth quarter, actually hit right on our 40, 20, 40 targets in terms of small, medium and large. So well diversified there.

Our claim management results have been extremely consistent over the last seven or eight quarters. Quality indicators are good. Satisfaction measures are still solid. Incidents has been pretty stable. Our renewal plans continue to operate effectively, and have consistently beat plans each of the last three years. So overall I think we're in pretty good shape.

If I could move to the second question, just around interest rates and the impact on reserves and Tom, you want to take that?

I think the important thing that we watch is certainly the interest reserve margin there; and if you go back to the investor day, we provided where those margins are. There was no material change in those in the fourth quarter.

I think the benefit that we have, despite the low interest rate environment, is the fact that we've got about 50% of our cash flows for 2008 already hedged. And so obviously there's a little market sensitivity to the other half, but with the mix of investments that we look at and certainly the widening of corporate spreads on investment grade securities, that's offsetting a fair amount of the drop that we're seeing in treasury rates. Now, having said that, as we look out for 2008, we really don't see any pressure on us to make any adjustments in those discount rate assumptions. If this environment were to persist for the full year, then we would have to revisit that. But we're in good shape here for 2008.

Okay.

And then Tamara, lastly just to the competitive environment, maybe ask each of the business heads to actually speak to that. Fist with Kevin, then I'm going to ask Randy and Susan also to speak to what's happening in their respective environments. Kevin.

With respect to the core markets, the smaller and medium size of the business, our activity was very strong in the fourth quarter. Activity was up 11%, closing ratios improved throughout the year. Packaged sales grew for us throughout the year. 38% of our fourth quarter sales were three lines of business, and 77% of our sales were two lines of business, so pretty strong across the board performance in our core marketplace. Case sales were up 13.

And so I think at least from the standpoint of our distribution system, and its ability to deliver terrific fourth quarter for us, good solid momentum going into '08. Supplemental sales were up as well. So I think the competitive environment in the core market, I think has much more to do with the way we execute, than worrying about what's happening with other companies, and I think our performance throughout the year continued to improve. So feeling pretty good about our core market performance.

Randy, you had strong core market performance as well, actually, maybe just speak a little bit about what you're seeing in your core market.

Just same as Kevin, Tom, and good morning, Tamara. Really not any major change in terms of the overall competitive environment, great activity in our core markets, our new account-- number of new accounts were up over 16% in the fourth quarter, and again, certainly there could be some economic pressures as we move into 2008, but again, I think we can overcome that with just staying focused on our core markets, and maintaining these very high activity levels.

Maybe lastly Susan, anything you want to offer on the U.K. environment?

Yes, sure. Where we're seeing most competition being most aggressive, I would say within the large case, small case, and in particular group life as well. So we're obviously maintaining pricing discipline, and focusing on our core markets as well. Within the core market, we're seeing close rate improvements, so they're all above targets, and plan levels, and quote activity is right up, versus plan, and that sale activity right across the board is very strong. So I think we're very focused on the core markets, maintaining pricing discipline where we're seeing most competitor activity. So we feel very good about 2008 as well.

Thanks, Susan.

Great. Thank you so much.

Thank you, Tamara.

We'll take our next question from Bob Glasspiegel, with Langen McAlenney.

Going to follow up on Tamara's question with a question on investments relative to a recessionary environment. How do you think about BBBs? Now you're getting paid more to take risks. Spreads have widened. Yet there is more risk to owning them, and perhaps co-linearity with your business. Is this a time to be taking more risk and taking advantage of being rewarded for it? Or are you thinking in terms of cutting it back, because maybe you might be doubling up some bets on the investment risk with business risk?

Bob, this is Tom. It's a good question. I'll offer a few thoughts, and maybe ask Tom White to supplement those. I don't think this is a time we're proposing to take additional significant risk. I think this is a time to continue the path we've taken, which is being very selective, very cautious, as you know, that's played well for us so far. You're right. Even though there's some buying opportunities out there, and I can't say we won't do a little of that, we really aren't going to be aggressively going and building the BAA or certainly the high yield position, maybe a little selectively here and there, because, again, the outlook is sufficiently murky, that to take an aggressive position right now, even though there could be some money to be made, frankly it's not what we're proposing to do. We do have the lowest level of high yield we have had in quite some time. It's probably almost a half of what it was at its peak, five, six years ago. We have also underweighted some of the sectors of the economy, which are cyclical in nature. For example, financial institutions I think we're roughly about half of the market weight. I don't think we're going to materially change much of that. There may be some things that people do opportunistically. But again, from our point of view this is not a time to be too terribly aggressive in some of those areas.

Bob, as you think about our investment strategy it has for many, many years focused on investment grade corporate bonds, typically in the BBB to single A range. And we think we're getting good value there. We will augment that by looking at a little bit of high yield. I'd say right now, we're not particularly excited about putting a lot of new money into high yield, even though spreads have widened. I think we feel like we're getting paid nicely for the risk that we're taking, in our core kind of BBB, single A corporate bonds. We also do a little bit in mortgage loans. You know, we do a little bit with private placements. And these are all investment classes that we'll look at when the-- we think there's relative value to be invested in, in those areas.

I can say right now that, we think the sweet spot for us kind of remains in that BBB, single A, and we feel like we're getting paid for the risk, and I guess when you first asked the question my first thought, I'd much rather be taking risk in BBB bonds than in subprime, or some CDOs, or some things like that. We're very pleased with where the investment portfolio is, and we've had had good performance. We've kind of had in our strategy for the last two or three years, that we were going to go into a softer cycle, and that's certainly happening, and I think we're as well positioned as we can be right now.

So don't look for the BBB weightings to change materially over the next couple quarters, is that the message?

That's the message.

Thank you very much.

We'll go next to Tom Gallagher, with Credit Suisse.

Good morning.

Good morning.

Couple of questions. First is can you give an update on the ratings outlook from either A.M. Best or Moody's?

Tom, you want to touch on that one?

Yeah, I think in terms of rating agencies, to me the numbers speak for themselves, and to have a negative outlook when we've got a 344% RBC, a 21.4% leverage, holding company liquidity at a billion dollars, and we just had $850 million in statutory earnings, I don't think a negative outlook is the appropriate outlook to have.

We have certainly met with all of the rating agencies. It would be our hope that those negative outlooks go away. Since we meet with them, and they let us know when they're having their meetings, and what their decisions are, I don't want to front run any comments that they may, or may not make. But again, you know, we present the facts, and I think the facts dictate and suggest that a negative outlook is not the appropriate outlook to have right now in the company.

Okay. And I guess specific to A.M. Best, I think the last few parameters they had in place included continued improvement in the disability loss ratio, which you have delivered on, and the closing of the multi-state.

That's a good point, Tom, because the A.M. Best has been watching the claim reassessment very closely, and one of the things they wanted to see was a completion of that claims reassessment process, and during January we actually completed the last of the claim reviews, so that's behind us, and we can check that off the list, and I would expect A.M. Best to-- with that issue off the table, that they'll look at the rating, and again, I don't want to front run any comment they may or may not be making, but I think you point out that the numbers are strong, and the issues that they have been focused on, have pretty much been addressed.

Okay. Next question, on the guidance on the group income protection benefit ratio, the 88 to 89, does this assume stable incidents in terms of just overall claims incidents and severity? And also, is most of the benefit expected to come from the repricing side? I guess what I'm trying to ask is, do you have some buffer built in, in case the environment does get worse from an incidents and severity standpoint.

That's a good question, Tom. Kevin.

Tom, Good morning. I think the 88 to 89 generally expects stable incidents, you know, plus or minus movement. We're also continuing to execute on our renewal program. We continue to move prices up a little bit where we can, and of course we continue to experience positive, consistent performance in our claims organization, and I still think we have a little bit of upside there, although that organization is performing on all cylinders now. There is a little bit of room to absorb incidents volatility, but of course the 88to 89 doesn't presume severe swing in incidents, and frankly we haven't seen that either over the last four quarters at all. We've been pretty stable.

Okay. And Kevin, from a leading indicator standpoint, as of right now, you're also not seeing any meaningful change from a claims incidents or severity standpoint, is that fair to say?

Yes, it is fair to say, we saw a little bumpiness in the fourth quarter. For example, manufacturing incidents was actually a little better than it had been. On the other hand, the financial sector was a little worse than it had been, but pretty much within normal ranges.

Okay. And just two more quick ones. The, I guess substantial improvement you saw in group life and AD&D benefit ratio, should we assume that's a highly favorable result, or are we also seeing the benefits of repricing? Because I believe, based on the mix shift you've seen on the group life side, you've also lost some large cases there.

I think you've got two things going on. We did have generally favorable mortality throughout the year. I think that was true across most of our operating units, in the life business. Of course, also, we have continued to execute on our renewal plan. We have purchased some large case group life business, which is why you've seen the total premium lines go down, but the margins have gone up, because we get better margins on the small and midsized market.

So we can assume a little bit of improvement, but probably not all the way, is that fair to say from a run rate standpoint?

Yes, we're operating pretty well there right now.

Last question for Bob Greving. A lot of noise on 4Q statutory results. Can you just at least explain some of the seating commission issues as it relates to both the special purpose vehicles, as well as the statutory entities? How would you thing about those in the context of your overall statutory results?

Yes, Tom. Good morning. Obviously there is noise in the period. We did complete the Northwind reinsurance transaction, and that does flow through our statutory results. Keep in mind that while the reinsurance agreements that went along with North Winds are internal, they're between four of our statuary subsidiaries. So each of the subsidiaries does get reported separately, from a statutory perspective.

Under statutory rules, any reinsurance agreement, even if it's internal between affiliates, has to be an arms length reinsurance agreement. Each one of those reinsurance agreements had to be in a position as if it were with a third party, and of course the state insurance departments make sure that those agreements are fair to the statutory entity that they are regulating in their stated domicile.

That resulted in a positive seating commission coming from both Paul Revere Life and Unum America They got paid positive seating commissions for their blocks of business, as that transaction was executed with Northwind Re, and a negative seating commission for Provident Life and Accident. Now, under statutory accounting, you're aware that that's very conservative accounting, and that requires negative seating commissions to be expensed and recorded as a loss immediately, and positive seating commissions to be amortized into earnings over time.

So you do see noise going particularly in the Provident Life and Accident block of business, and that's one of the reasons why we said that's kind of an extraordinary item, because that loss, as a result of that reinsurance got charged off immediately. Under GAAP you won't see that, because the amortization of both positive and negative seating commissions occur over time. We would be happy to go over that with you, Tom. I think it might be-- it's kind of beyond the call, but we'd be happy to go over that in more detail with you, when the statutory statements are completed and that accounting actually can be tracked through the overall financial statements, if you would like.

That's helpful. So the high level is simply the $219 million seating commission out of Provident Life and Accident, there's going to be a positive adjustment to Paul Revere and Unum Life of America, but it's going to be amortized to the P&L over time. Is that--?

That's correct.

Thank a lot.

Thank you Tom.

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

Good morning.

Good morning, Mark.

Tom just asked a couple of my questions. But let me follow up on a few things. One is, what are your persistency assumptions for 2008 in the U.S., and I guess when would you expect kind of the large case to stabilize and start to increase overall persistency?

Kevin?

I think persistency in 2008 for the most part ought to be pretty consistent with what we finished up 2007. I don't see any reason right now, to move that assumption either way. We're pretty much quote, unquote, through, sort of the large case performance management aspects of our business. We continue to go through a renewal program every year where we identify under-performers, and try to move those prices up. Or to the extent those customers won't accept those price increases, move them out. But I would say for the most part, our large case business is getting close to sort of being stabilized.

Okay. I actually missed the comment. Susan, can you just go over sales in the U.K. for the fourth quarter?

Yes, sure. Absolutely. I mean, if you compare our fourth quarter '07 sales to our fourth quarter '06 it's a bit of a tough comparison, because we had some legislative changes that took place on the first of October. So we actually had an increase in upsell activity during the fourth quarter '06. If you net that out, that comparison out, though, and neutralize that impact, then our fourth quarter '07 sales increased by 12%, 13% over 2006. So it actually was quite a substantial growth, if you remove the impact of the legislative changes.

If you look at the core sales, actually in the fourth quarter, we saw, very, very healthy close ratios which all came through, for all of our product lines, above plan. We saw upsell activity very strong in the fourth quarter and in fact for the full year. Quote activity levels were high, up at sort of 127% of plan expectation. And so fourth quarter sales, I think came through very strongly. Does that answer your question?

Yeah, that's perfect. Overall expenses in the U.S., I mean, obviously elevated in the fourth quarter. I think both U.S. and Colonial. Did that essentially-- is that kind of a one quarter thing, or how much of that should persist, kind of elevated expense ratios, into the early part of 2008?

Yeah, Mark, the vast majority of that, you can kind of think of as a one-time thing. Clearly in Colonial, we did about a year's worth of advertising spend in the fourth quarter. For 2008 that will be spread throughout the year. In Unum U.S.-and you'll see it in each of the three business lines there. But in Unum U.S., as we indicated, there's some higher expenses related to some advertising and branding that we moved up. There's some incentive accruals in there. There's a little bit of an impact of moving some of the people involved with the claim reassessment into operating roles, and they'll fill in as kind of normal attrition occurs, and some growth begins to occur within the Unum U.S. business, within the claims area.

So the vast majority of that, you can kind of think of as a one-time thing. We will have-- when you look at 2008 expense ratios, really across the board, they will be a touch higher than what we saw in 2007, and that's mostly within Colonial, there's a little bit of advertising that we're going to do. Maybe about a million dollars a quarter. I'd say in the U.S. there's a little bit that we'll be doing. There's some Simply Unum investments that we'll be making in the U.K., Susan is looking at the voluntary market. So there are investments that we're making there. I'm not talking about a dramatic move in expenses, a fraction of a percentage, but these are investments in what we think are some great opportunities for the company down the road.

Okay. Just a final question. I'm going back to a slide that you presented at your investor day, and it's the long-term disability incidents index. One of the interesting elements of that slide is, it actually shows incidents patterns starting to increase, at least on the slide, about four quarters ahead of a potential recession, and not without forecasting kind of whether we go into one or whether we don't go into one, but it sounds like incidents patterns were actually pretty stable in the quarter. And I'm just curious if you have any thoughts kind of showing that, in the slide typically you start to see the increase ahead of the recession. And you know, in this particular situation we may not be. Do you have any thoughts on that?

This is Bob Greving, Mark. The actual submitted incidents for our group LTD business in the fourth quarter was actually a little bit below what we were seeing in the third quarter. At least at this point in time, we're really not seeing any rising incidents as a systemic type of a pattern. We get a little bit of a blip up, little bit of a blip down, but nothing that seems to be systemic at this point in time.

Okay. Thank you.

This is a place, if I could, maybe to risk over answering, though, but in fact part of this can also be attributed, Kevin, to the mix of business shift, actually. I think one of the things, I don't think we gave an exhibit, but there has been noticeable differences in the incidents patterns between core market for example, and large case over economic cycles, and as our business mix has shifted to more of a core market focus, as you know, some of that is going to be likely you're going to see that, where the business is not as susceptible to economic swings.

Thank you.

Thank you.

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

I had a question about growth, but I actually want to precede it by asking a question about incidents that was prompted just by Tom's comments. In thinking about incidents and how well it's going, or not so well, or just the state of incidents, just how meaningful is it to look at the fourth quarter versus third? And by that, I guess what's behind my question is sort of this thought. Is it the only incidents that really matters in your business, not the trend in incidents, but actual to expected? Taking into consideration that incidents could be going up, and that could be a good thing if it's being driven by, say, a change in mix in favor of different industry groups, or different-- a change in the gender mix of your business. I'm thinking what matters is not the sequential change, but just how incidents is going relative to your expectations, period. What are your thoughts on that?

That's a good point. Kevin?

Eric, I think you're right on the money. I think absolute incidents matters more when you get severe swings that you're not planning for, and pricing for, and you have to react to it. When incidents moves in a gradual fashion, actual to expected is what we pay attention to because that's what drives our renewal programs. That's what drives our pricing strategies. It's also what we measure in terms of mix of business.

Okay, thank you. My growth related question is this. You know, understanding that the premiums have been shrinking as part of a very clearly articulated and very purposefully carried out plan, it's clear what you're saying, and it's clear that you're doing exactly what you want to do. That's coming through loudly and clearly. Should we presume, Kevin, that now that the large case business as you said, I think in response to Mark's question, or certainly an earlier question, should we assume that now that the large case business is just about stable, that we can expect soon, say in 2008, or let me just pose it in direct question form. When can we expect premiums in Unum U.S. to start growing? That's probably the simplest, straightest way to ask the question.

I would think realistically, probably more as we enter into 2009. I would expect core market sales to grow throughout '08. I'd expect supplemental sales to grow throughout '08. I think large case sales are still very choppy. It depends on what's available out there for inventory, as we maintain our discipline there. I do think persistency is largely stabilizing in large case, and I think the growth will start to turn as we get our Simply Unum platform launched, throughout 2008, I think you'll start to see some acceleration of core market and supplemental sales growth, which will actually, I think for the most part, show up in earned premium in 2009.

Thank you.

Thank you, Eric.

(OPERATOR INSTRUCTIONS). We'll pause for just a moment to give everyone an opportunity to signal. We'll go next to Al Copersino, with Madoff.

Thank you very much. Obviously, as Tom White listed, there are several metrics by which the balance sheet has strengthened quite a bit. I'm curious-- I probably could do the math, I guess, but I'm curious if you could tell us roughly what the ROE would have been, had your balance sheet metrics been at target, as opposed to above target? I said roughly speaking.

I think we'll have to get back to you on that, Al.

I'm not sure we know that. I think what you're saying is with the excess capital, the lower level of debt, et cetera, what does that mean.

Any one factor we might be able to do it in our head. Unfortunately, we're working simultaneous equations here.

You think through it, Al, you know from an RBC basis we're at 344. We're going to target around 320, given the environment, so you got 24 points of RBC. You know, our leverage at 21.4% is nicely below the 25% level, that we will target over the long-term. And then again, the holding company liquidity at a billion dollars, our one-times the annual fixed charges is about 300, so there's about a $700 million cushion there. That replenishes itself pretty nicely throughout the year. Again, I can't-- I don't know that I can work through all the math here, but, when you look at all those capital management metrics, we've got some pretty nice cushion on each one of them.

I think if you add all the pieces up, it come pretty close to about $2 billion over capitalization, or under leverage. So you can probably do the math from there on the ROE. I wouldn't dare to do that in live prime-time, but it does amount to about $2 billion of extra capitalization across the enterprise.

Okay, great. I'll take my calculator to it. Thanks very much.

Thank, Al. I think if we could, we'll have-- we'll take one more question and then obviously people will be available to take other questions after the call. But let's just go with one more, operator, if possible.

We'll take our final question from Chris Giovanni, with Goldman Sachs.

Hello, thanks so much for the question. It looks like A.M. Best just revised you outlook to stable from negative. So that risk appears to be off the table. I was wondering, as far as proceeding ahead with the $700 million buyback later in the year, I was just wondering, I know you mentioned you can't foresee the recession environment causing you to alter that, but what would cause you to consider either altering the amount or timing, of that buyback program?

Bob?

As you look at our overall capital program, we've indicated we're going to be cautious about deploying all of that, but obviously our stock price currently we feel is at an opportune level, for a share buyback. We have got, obviously, a very heavy capitalization well above our targets. Leverage is in great shape. I think if you look toward the latter part of the year, I think operations, if operations continue to be on plan and we execute our plan as anticipated, we'll be generating additional capital during the 2008 time frame, over and above what we've got there now.

We'll certainly keep an eye on the economic market. I mean, what's going on with our investment portfolio, and as well as our overall operational results. So we want to make sure that we've got appropriate cushions there. As Tom White indicated earlier, we feel that our reserve basis is in good shape. We don't really feel that we need to be modifying discount rates at this point in time, particularly with the hedging program that we've got out there.

But we'll be watching all of those parameters to be somewhat cautious, I believe, as we go through the year, particularly given the drum beat that we're hearing from the market, as far as potential recessionary activities across the board. But we'll be watching all of those things, and executing accordingly. But I do think that this is a time when, as Tom indicated earlier, we should take a serious look at whether or not we can't accelerate a portion of our share program.

If I could add to what you said. I think it would take a pretty severe economic set of factors in the short term, frankly. Again, as you said, and has been said throughout this call, we ended the year on a very positive note. We've got substantial financial flexibility, we obviously -- again, one of our priorities is always going to be sure we continue to maintain that flexibility, in the face of whatever economic environment we face. But it's hard to see something that would get in the way in the short term of our ability to execute the previously announced $700 million share buyback.

Great. Thanks so much.

Great, thanks Chris. Well, again, with that, let me thank you all again for taking the time to join us this morning. At this point, operator, this will complete our fourth quarter 2007 earnings call.

That does conclude today's conference. Thank you for your participation. You may now disconnect.