普登 (UNM) 2008 Q1 法說會逐字稿

(OPERATOR INSTRUCTIONS) Good day, everyone, and welcome to the Unum Group first quarter 2008 earnings results conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I would turn the conference over to your host, Mr. Tom White. Please go ahead, sir.

Thank you, Darrell. Good morning, everyone, and welcome to the first quarter 2008 analyst and investor conference call for Unum Group. As we get started, I want to remind you that our remarks this morning 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 also 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, 2007. Our SEC filings, including our Form 10-K and form 10-Qs, can be found in the investor section of our website at www.unum.com.

Please 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, also in the investor section.

As you know, yesterday afternoon Unum Group reported earnings for the first quarter 2008. Net income in the quarter was $163.1 million or $0.46 per diluted common share, compared to $178.3 million or $0.51 per diluted common share in the first quarter 2007. Included in these results for the first quarter of 2008, are net realized after tax investment losses of $44.7 million or $0.13 per diluted common share, and $3.2 million or $0.01 per diluted common share in the first quarter of 2007. These losses were driven by the provisions of Digby 36 accounting, which require changes in fair values of embedded derivatives in certain modified co-insurance contracts to be reported as realized investment gains and losses, and resulted in a first quarter 2008 after tax investment loss of $41.6 million, compared to a $2.2 million after tax loss in the first quarter of 2007.

So if you exclude this Digby 36 accounting impact, net realized after tax investment losses related to sales and write-downs of Investments, were $3.1 million in the first quarter 2008 and $1 million in the first quarter 2007. Adjusting for this item and excluding discontinued operations, after tax operating income was $207.8 million for the quarter or $0.59 per diluted common share, compared to $174.6 million or $0.50 per diluted common share in a year ago first quarter. On the call this morning are Tom Watjen, President and CEO of Unum Group, and Bob Greving, Executive Vice President, Chief Financial Officer and Chief Actuary, as well the heads of our three major operating segments, Kevin McCarthy, Susan Ring, and Randy Horn. At this time, I would like the turn the call over to Tom Watjen.

Thank you, Tom, and good morning. For us, the first quarter is proven to be a strong start to 2008, as much of the positive momentum has been building in our businesses over the past couple of years, carried over to the new year. Excluding net realized after tax investment losses, we reported $0.59 per share in operating income for the first quarter, 18% higher than the $0.50 per share reported in the first quarter of 2007. Our pre-tax operating earnings improved 19% when compared to the first quarter of last year, with core operations pre-tax earnings growth of 14%, primarily driven by strong risk trends across all of our business lines. In fact, each of our primarily business lines reported lower benefit ratios in the first quarter of 2008 when compared to the first quarter of 2007, which to me is a strong reflection of the disciplined approach we have been taking to the business the last several years.

Our investment portfolio credit quality continues to hold up well in this environment with minimal exposure to today's risky asset classes. We did experience some pressure on net investment income, due to lower than expected levels of bond calls and miscellaneous investment income, which is really a by-product of the low levels of refinancing and M&M activity we saw in the first quarter. We historically received around 14 to $15 million of this bond call and miscellaneous income, again per quarter, and frankly, we had zero this past quarter. This was especially evident in the investment income results that you saw in our Unum U.S. group disability and our closed blocks of business lines to business.

Our sales trends were mixed, but I am extremely encouraged by the growth that we saw in Unum U.S., which we actually saw sales growth in the quarter of about 29%. In our recent investor meetings, we discussed with you the important of volunteer products in the marketplace and our Company's focus around the core market, which is selling to the small and mid-size employer. Sales trends in these two important markets were strong in the first quarter, with core market group sales increasing 36.5% and volunteer benefits sales increasing 34%. While our reported sales results for Colonial Life and Unum U.K. were below expectations, when we get to the detail you'll see that there are some underlying positive trends in our core market activities for each of these two businesses.

Also in our recent investor meetings, we discussed our commitment to new product and services offerings to capitalize in the changing market dynamics. One such initiative was Simply Unum, a comprehensive product and service offering in our Unum U.S. business, which combines group and voluntary coverages on one fully-integrated platform targeted to the core market. Our limited roll out which began in late 2007 is producing very encouraging results. Now it's too early for Simply Unum to have an impact on our sales results, however we are encouraged by the broker and customer receptivity and early results are very much in line with our expectations.

On April 1, we rolled out the offering out to six additional field sales offices and plan to offer it in addition to 12 field sales offices by mid-year, and we plan to complete our nationwide roll-out as we receive state approvals for each of these products and services. I should add that Simply Unum is not the only initiative designed to further leverage our leadership position, and I think capitalize on some of the opportunities that are emerging in the marketplace. Colonial Life has begun to raise its profile in this market with a brand new program. We believe this investment, along with its new life and health products, and enhanced enrollment capabilities, will help lead to accelerated long-term growth in agent recruiting and in sales.

In the U.K., we are focused on a number of new product and service offerings, including a new dual benefit group income protection product offering, which provides assistance to both the employer and the employee in the event of long-term sicknesses. Again, I think all these initiatives are very much designed to capitalize on our leadership position and show that frankly, we are making additional investments in our business to assure that we in future quarters we can continue to produce predictable, profitable growth that we think is sustainable into the future.

Now, let me take a few minutes just to talk about each of our three business segments, and let me start with Unum U.S. Our pretax operating earnings, referring to Unum U.S., increased by 14% with strong performance across each of the three reporting lines. Improvements in the claim management process continue to enhance results in the segment's group disability line, with our BTOE for the quarter increasing 34.5%. The group disability benefit ratio for the first quarter was 91%, down another 50 basis points from the fourth quarter of 2007, and 240 basis points lower than the first quarter of 2007. Incident trends remain generally stable in the first quarter for both our LTD and our STD lines of business. I'm sure there will be some additional questions in the Q&A session about the vulnerability of that business to economic conditions, but we did not see any material change in the instances in the quarter, based on anything that is happening in the economy.

We remain confident that reducing the benefit ration to the 88 to 89% range by the end of 2008 or early 2009 timeframe is still very much a realistic objective. We also saw solid results across the other lines, including group life and accidental death and dismemberment, where BTOE increased 12% and then the supplemental and voluntary lines of business where earnings grew 7%. Unum U.S. sales were very strong this quarter, increasing 29% from the first quarter of 2007, with encouraging underlying trends both in our core market sales, our volunteer benefit sales, as well as our case count growth. And Kevin McCarthy is available to provide more detail on those results, as well as any developments that are occurring in the marketplace.

Now shifting to Unum U.K. our BTOE of $87.1 million for the first quarter was a 16% increase over the first quarter of 2007. We continue to see excellent risk results with the benefit ratio at 57.3% in the first quarter, and all three business lines produced lower benefit ratios year-over-year. Sales declined 10% in the first quarter on a dollar basis, reflecting a difficult comparison due to some legislative changes introduced in 2007 and also a very competitive market condition, especially for our group life products and our sales to large employers. As Susan Ring is available to address any questions you may have on both the results or the market conditions over in the U.K. presently.

Last but not least, Colonial. Out BTOE in Colonial increased 13% to $67.4 million in the first quarter, a record quarterly result for Colonial Life. Results continue to reflect positive benefit experience for the accident, sickness, and disability product lines. Expenses were back to a more normal level following our brand launch in late 2007, which elevated expenses for the fourth quarter. Sales were flat for the first quarter, a disappointing overall start to the year, but we did see encouraging signs with positive core market and new account growth. Randy Horn is also available on today's call both to discuss the results, as well as to discuss Colonial's marketplace.

Now, I'd like to move to a brief discussion of our capital management initiatives. As you may recall, when we announced the completion of the closed block securitization with our third quarter 2007 earnings release, we also outlined our capital management philosophy, which is centered on maintaining sufficient financial flexibility to support our operations across different economic cycles, while also positioning for improvements in our credit ratings, and of course responding to opportunities in the marketplace. And we have maintained a very, very strong capital position, which I think frankly at this point, gives us a great deal of financial flexibility. Our first quarter estimate of risk-based capital remains about 340% for our traditional U.S. life insurance company, substantially higher than our long-term target of 300% and our year-end target, 2008 target of 315 to 325%.

Our leverage, excluding the nonrecourse debt and capital associated with our securitization in Tailwind and Northwind holdings, finished the first quarter at 21.9%, well below our target of 25%. We intend to retire the $175 million of short-term debt due this month, which will move our leverage ratio even lower in the second quarter, and through the balance of the year, we are continue to certainly look for ways to optimize our capital structure. Holding company liquidity was $624 million, comfortably above our target to cover one year of fixed charges, plus maintain a capital cushion for business and economic volatility. Certainly, we completed the first half of our $700 million share repurchase authorization, which we authorized in the fourth quarter of 2007. In the fist quarter, through out $350 million accelerate share repurchase, we purchased approximately 14.5 million shares and at this time, we fully expect that we will complete the balance of the repurchase over the remainder of 2008.

I guess as I close, we are off to an awfully strong start for 2008. We saw strong operational performance across all of our operating businesses, again, driven by very strong risk results. We saw strong sales activity, especially in our core and voluntary marketplace. We continue to maintain a very high level of our credit quality in our investment portfolio in the face of what probably is a very challenging financial environment. We maintain financial flexibility and capital flexibility, driven by the strong balance sheet and capital position we have, plus the continued strong performance of our business. Again, we think that is very sustainable as we look to the balance of the year. We continue to improve the relationships with many of our key stakeholders, highlighted by the important conclusion of favorable terms of the California settlement agreement, which closely followed our successful completion of the multi-state review and assessment process. And as you can sense too, we continue to invest in our business to leverage the positions that we have in the marketplace, which again we think are really quite leveragable as we look forward, and there's some very good market dynamics out there ahead of us. Now, I'd like to turn the call back over to Tom White who will provide more detail on the quarter. Tom?

Great. Thanks, Tom. I'll keep my comments on the operating results fairly brief this morning, but I do want to provide the following highlights. First for Unum U.S., in the group disability line, we continue to see improvement in the group disability ratio, which has Tom said, declined to 91% for the first quarter. New claim incidence was generally stable in the first quarter with the levels we experienced, generally consistent with the levels we experienced in the first and fourth quarters of 2007. Our analysis of incidence trends shows no significant variations either in any occupational categories or by case size. We have cautioned that if recessionary pressures show up in our claims incidence trends, it will more likely occur with the lag. However, we see no current signs of economic pressure on this part of our business. Then additionally, the FCD line which can be a precursor to LTD claim activity, also continues to perform well with stable claims incidence trends evident in the first quarter.

Net investment income for group disability in the first quarter was somewhat lower than recent historical quarterly averages. And this reflects a lower level of bond call activity and prepayment premium within the investment portfolio, again as Tom described, as refinancing activity and M&A activities remain at low levels. You will recall that in the second, third, and fourth quarters of 2007, this activity was somewhat elevated as indicated by the higher levels of net investment income attributable to bond call premiums in those quarters. Finally, the expense ratio was somewhat higher in the first quarter of 2008 relative to last year, due to the slight decline in premium income and also higher product and service development costs.

Moving to the group life and AD&D line, we saw an exceptionally strong level of profitability in this line with a benefit ratio of 68.2%, compared to 75.2% in the first quarter of '07. The expense ratio for this line was higher this quarter, reflecting the higher sales volume and productivity, as well as higher expenses related to product and service development. Also you should keep in mind, that as our mix of business for group life shifts somewhat away from large case to more core market business, a slightly higher operating expense ratio will result. Finally within Unum U.S., the supplemental and voluntary lines, we produced a record quarterly income in this line with BTOE of $68.7 million, an increase of 6.8% which was driven by generally strong risk results and premium growth of 8.2%. And again, the benefit ratios for each major business line improved relative to the year ago results, any expense ratio also declined from the fourth quarter 2007 levels.

As Tom indicated, sales at Unum U.S. were strong, increasing 29%. Core market sales for our group lines, which I define as LTD, STD and group life, were very strong, increasing 36.5% for the first quarter, following an increase of 20% in the fourth quarter. We continue to be opportunistic in the large case market, and sales for the first quarter grew by 12.4%. Our mix of sale was also encouraging with 61% core and 39% large case sales, which is in line with our long-term objectives. Momentum continues to build in the voluntary benefits line with sales increasing 34% for the quarter, and individual disability recently issued sales which increased 8% for full-year 2007, grew by 13.8% here in the first quarter.

Finally, premium persistence see in our group line improved for each of our LTD, STD, and group life lines in 2008, compared to last year with terminations again focused mainly in the large case segments. So to summarize the results for Unum U.S. as a segment, we had excellent risk management results and the leveling out of higher expenses that were recorded in the fourth quarter of 2007, and these more than offset the lower level of miscellaneous net investment income associated with bond call premiums and pre-payment income. So these trends -- overall produced growth in BTOE of 14% for the first quarter.

Now, I would like to move to Unum U.K. There we continue to see very strong results from Unum U.K., with a 16% increase in BTOE to $87.1 million for the first quarter. Risk results were excellent with a benefit ratio of 57.3% for the quarter, compared to 61.1% in the year-ago quarter, and 60.8% in the fourth quarter of '07. Lower rates of claim incidence for both group long-term disability and group life, and an increase rate of claim recoveries for group long-term disability, drove these results. First quarter expenses in Unum U.K. declined from the fourth quarter levels, which were elevated due to the accrual of remaining lease payments on a nonoccupied facility.

Finally, first quarter sales as we mentioned, declined by 10% due on a dollar basis, due primarily to lower large case activity, as well as the benefit we experienced last year from sales driven by age equality legislative changes. Additionally, the group life market in the U.K. remains challenging with competitive pricing limiting our opportunities. We did see good core market activity with sales in the under 500 life market for group LTD and for group life increasing by 8%.

Moving to Colonial Life, we had excellent quarterly results, in fact a record quarter, with favorable risk experience in the accident, sickness, and disability product life. The benefit ratio continues to run below our long-term expectations, and we continue to expect a gradual rise in the benefit ratio to more historical levels going forward. You'll notice that the expense ratio for Colonial declined from the elevated level of the fourth quarter of '07. The first quarter 2008 ratio was 19.7%, compared to 21.7% in the fourth quarter of '07, and 19.3% in the first quarter of '07. We had high branding and advertising expenses in last year's fourth quarter and as we move through 2008, you can expect to see a more level pattern of spending, which will in turn translate into more consistency in expense ratio throughout 2008.

As Tom indicated, sales at Colonial Life were flat this quarter, but we did see some positive underlying trends. We saw good growth in the core market with sales in the under 100 life employee commercial market, actually increasing by 8%. However, sales declined by 5.5% in the over 100 employee commercial market. We also generally encouraged by the activity in the market. New account growth was up by 4.2% from the first quarter. However, again, average new case size declined by approximately 5%. New sales rep recruiting and productivity showed positive trends with new contracts increasing by 41% in the first quarter, and our key new rep production milestones continue to improve. And finally, persistency at Colonial Life was stable to slightly higher for its major product lines, relative to year ago results.

Finally moving to the individual disability closed block segment, these results were $13.7, million which were below our expectations, but it was driven entirely by lower net investment income. Similar to our Unum U.S. Group disability results, the lower level of net investment income results from an extremely low level of bond call premium this quarter, as refinancing activities in the market remain low. We also had lower levels of invested assets as a result of the fourth quarter of '07 release of excess statutory capital, again driven by the securitization that we announced last year, and that was capital that previously supported the closed block. Importantly, the risk transfer for the closed disability block remains stable in the first quarter, and you'll notice that the interest adjusted loss ratio was 90.1%, which was below both the fourth and first quarter 2007 levels.

Our weighted average share count, assuming delusion for the first quarter 2008, was 351.5 million shares compared to 360.7 million in the fourth quarter. During the quarter, we lowered the outstanding share count by 14.5 million shares, with the execution of a 350 million accelerated share repurchase. And you'll notice that the share count at the end of the first quarter of '08 was 346.3 million shares. Our consolidated return on equity for the first quarter was 11.2%, which was consistent with the full-year 2007 ROE. Book value per share increased to $22.06 per share as of the end of the first quarter, compared to $21.52 at March 31, 2007. You exclude the net unrealized gain on securities and the net gain on cash flow hedges, book value per common share increased to $21.06 at March 31, 2008, compared to $19.56 a year ago. Finally, the positive momentum in statutory earnings continued with our first quarter 2008 net gain from operations, this is after tax, was $148.4 million for our traditional U.S. insurance subsidiaries, compared to $143.4 million a year ago.

Now, I'd like to close with a few comments on the investment environment and our investment portfolio. The current market volatility, particularly the widening of corporate spread on new investment opportunities, continues to present opportunities for us. And despite the decline in U.S. Treasury yields in the first quarter, these wider corporate bond spreads enabled us to achieve a new money yield for the first quarter of 6.58%. This compares to 6.18% in the fourth quarter of '07, and 6.07% in the first quarter of '07. The overall portfolio yield you'll notice increased by 4 basis points relative to the year-end 2007 yield, and the interest reserve margins also increased slightly and remained comfortably above our 50 to 60 basis target.

From a portfolio quality perspective, we are happy to again report that there have been no material changes in the quarter. We've outlined our exposure to asset mortgage backed securities in our statistical supplement and I would like to take a minute just to highlight a few important investment facts that are frequent questions that we get. First of all, we have no subprime mortgage exposure. We have no CDOs related to asset backed or residential mortgage backed securities. Our Alt-A exposure is $5.2 million on a book value basis, and $5.5 million on a fair value basis, all of which is rated AAA. The book value of our private equity partnership exposure is $51.6 million. We have no direct Investments in any of the financial guarantors, and our exposure to investments with wraps by financial guarantors is $135 million on a book value basis, and $132.3 million on a fair value basis, and the average underlying rating on this securities is an A1.

So overall, we feel that our investment portfolio is in excellent shape and well positioned for what would likely continue to be a challenging environment in 2008. Our high yield exposure remains approximately 5.2% of invested assets. The current level of noncurrent investment is only $4 million, and as always, we are pleased to address any specific questions you have regarding our investment holdings in the question-and-answer session. With that, let me turn the call back to Tom for his closing comments.

Thank you, Tom. Again, before we move to your Q&A, let me just close by reiterating how pleased I am with the strong start we've had for 2008. While we certainly all agree this is no time to relax, which we are very pleased with where things are at this particular point, with a strong balance sheet and a more flexibility financial platform, relative to our long-term goals, our risk based capital is in excess of those goals, our leverage is below those goals, and our liquidity to holding companies is above those goals, all things that you would like to see. But we have a well positioned investment portfolio, with historically low levels of high yield bond and very limited, as Tom said, of any exposure to the asset classes that are troubling many financial institutions today, and very important, a more diversified set of businesses with greater sources of growth which enable us to operate better in any environment.

Now, we are certainly not fully immune to economic volatility or uncertainty. However, we believe we are significantly better positioned today, operationally and financially, than in any time in our past. We believe too, that we are positioned well to benefit from some of the long-term changes happening in the marketplace, whether the migration to voluntary products, dealing with the issues the employers and employees are dealing with, or the federally-funded challenges that MediCare and Social Security have. Again, we are well positioned to benefit from those and as you can sense from my earlier comments, we are investing heavily in our products and services, and people to assure that we are positioned well as the market leader to benefit from some of the market changes.

Finally with respect to guidance, we are increasing slightly our 2008 guidance b $0.02 per share to reflect the strong first quarter results. Our new guidance is for operating earnings for fully diluted common share within the range of $2.37 to $2.42. Now with that operator, I think at this point I could begin to move to the question-and-answer session.

(OPERATOR INSTRUCTIONS) We'll take our first question with Colin Devine with Citi. Please go ahead.

Good morning.

Good morning, Colin.

A couple of questions just sort of to flush out what is going on as you continue to transform the U.S. business. I was wondering if Kevin is around to talk about case count -- give us a sense of really -- from your customer base how that is changing? Perhaps if you have got Susan on the line, she could also talk about what is going on in the U.K. in that respect. Also, if you can talk a bit about the benefit ratio, just expand -- as you know the expense ratio is going to start to come up as the mix changes. What is driving the benefit ratio down? Is it the improvements in the back office, the repricing, or is it partially a function of the mix? And then lastly, for the closed blocks, if you could maybe just give us some sense of what a realistic earnings run rate, for it is now that has been securitized and you've taken some of -- ?

Good questions. Maybe Kevin, I'll just ask you to start on the case counts for Unum U.S. as well, maybe to tie into that the benefit ratio -- then we'll turn to Susan on the question for U.K .

Good morning, Collin. Case count for the quarter was up 31% in Unum U.S., so really, really strong results, following our fourth quarter results and core premium of course associated with that case count was up 37%. So the momentum that we established in the second half of '07 continues in terms of customer acquisition. And by the way, case persistency was up also in the quarter. So overall, customer acquisition and retention is going very well. On the group income protection loss ratio improvement, incidence were stable in the quarter. Recoveries were slightly improved, and I think that drove some of the improvement, certainly mix and continued in our renewal program, also drove some of the improved results.

I think too, those are not surprising results on the customer side when you look at the customer service scores, in terms of -- renewed, desire to do more business, and so forth, we just have some very fresh data on that in that regard, which is again very encouraging for the future .

All of our customer satisfaction ratings continue to go up, likely into renew, likely to recommend and a lot of recent information about our brand attributes and financial strength, service quality, all those ratings are up.

To jump in for a sec to sort of get at this, as the mix changes, the benefit ratio and the expense ratio are going to change. We have to target for where the benefit ratio is going to. Am I correct in understanding, and that's why I thought Tom noted, expense ratio is going to start to drift up. If for -- 88, what are we going to be looking at for an expense ratio?

I think the expense ratio will drift up a little bit at a time, probably in the 18 to 19% range for a while, but then I think as Simply Unum comes on board, it will work it way back down. Because we have efficiencies with Simply Unum as a result of having all of our customer management capabilities for all product lines on one single platform, and a lot of our customers service capabilities are then web-enabled for our customers, so you get some level of customers self-service kicking in there as well. And I think also, as our business mix moves to the small case marketplace and we continue to be effective in our target markets, you are going to also have more of your sales in lower incident segments, which I think will also help us on the claims management expenses as well.

Susan, if I could just ask you to speak to the U.K. experience on the sales fronts, especially on case counts for the quarter.

Yes. Absolutely. Hi, Colin. With regard to our case count, and that is up overall by 5% and over last year, and up 11% in our core markets. As far as the underlying trends regarding sales are concerned, and they are looking quite healthy, across our product lines, significantly ahead of plan, they are up 24 to 30%. And close rates in our core market is significantly up from 2007, and -- protection -- long-term disability was 13% -- half last year. So the key issue really is large case sales and maybe -- bringing our average premiums down, and that's really due to extreme pricing pressure that we are seeing in the market, where they are finding that competitors are being prepared to write business below the cost of claims. The second part of this impact to our sales results is group life, where concentration of risk issues and whether the level, especially that we hold --- business in certain hot spots areas and we haven't been able to write the volumes -- price that we would have expected.

And other competitors side, they don't hold the same amount of business as we have, or -- more cavalier approach to their concentration of risk issues than we tend to take. Really, those are the two factors that are impacting our sales. But core sales really remain healthy. Does that answer the question, Colin?

Perfect. Yes.

Thanks, Susan. Then Tom if you could address Collin's question about the more sustainable run rate for earnings in the closed block.

The way to look at the close block is probably earnings in the low to mid $20 million of dollars per quarter. If you looked at this quarter's results, if we had had a normal quarter for bond calls, prepayment income, that would have added about 9 to $10 million to net investment income, and that would get us to kind of 23, $24 million. We didn't have that this quarter. It's a very unusual one for that, on that regard. And also keep in mind, with the securitization we moved out about $400 million of capital, so the net investment income from that capital is no longer reported in that line.

Thank you.

We'll take our next question with Bob Glasspiegel Langen McAlenney. Please go ahead.

Good morning. I am going to stay on with Colin on the group question, and actually just ask what is going on as we look at page 7 on commissions going up and amortization of -- less deferrals are going up. What sort of pressure -- is that going to offset as we go over the year with the benefit ratio coming down?

Bob, you're looking at page 7 of the statistical supplement? In the U.S.?

U.S.

Tom, do you want to start?

Certainly, commissions are going to move up a little bit as sales move up. That is a direct correlation there. On the amortization issue, with the change in the amortization rules, going back a year ago with SOP 05-1, if I have all my numbers right, it did cause some changes in that. And what we had for Unum U.S. this quarter, particularly in the group disability line, a little bit more of the internal replacements where there was enough of a change in the renewal of the contract that causes us, under the new accounting rules, to go in and write off the DAC and put a new DAC in. There is a little bit of that expense, maybe $2 million that is impacting that. There will be a little a noise from that going forward, but it's fairly minor relative to the overall earnings of the business.

All right. The message I think I'm hearing is, our earnings growth in U.S. group is going to be less than the benefit ratio improvement held back by discretionary spending on the expense ratio, and a higher drag for commissions.

I don't think so. We'd love to have higher sales. We'll deal with higher commissions as the business comes on and the profitability flows through on it, but I wouldn't want you to think we are going to feel any margin pressure from that.

I didn't say margin pressure, I'm saying the margin improvement won't be as much as the benefit ratio would suggest by itself, because we have a couple of drags that would offset it.

I'm not sure, Bob. I don't think it's quite that extreme actually. Because the other thing is we have expenses, that Kevin a little bit higher than expected, but I think we're going to grow our way back into that and that should come back in line. There are a couple of dynamics, Bob, that are going on there. I know, Kevin, if you want to add to that.

I think there is temporary operating expenses, by our expansion of core -- distribution and our refocusing of our distribution channel to the core marketplace, also increasing voluntary sales, driving expenses up a little bit in the short-term, and -- simply -- as we roll that out and all the promotion and training that goes along with that. But then, as I said earlier, as Simply Unum sales kick in, we'll start to get expense ratio efficiencies that will start to flow through from that offering. A I think that hat will bring the expense ratio back down, and Simply Unum in all of our strategies, has been focused on the small to mid-size marketplace, so as I said, those tend to be lower incidence marketplaces. Our claim expenses should start to come down as a result of that, and I think also, we'll get generally better claim operating performance results in those marketplaces, more package sales. Everything that we are doing is geared towards gearing up growth where we think we can improve profit margins and generate earnings growth.

Thank you. I appreciate it.

We'll take our next question with Tom Gallagher with Credit Suisse. Please go ahead.

Good morning. A few specific questions, and then one macro question. I guess starting with Susan on the U.K., I was curious in your comments about the level of competition, which sounds like it's getting a bit more intense. Can you comment on what you think that means for your sales outlook and also persistency? Are you also seeing aggressiveness? Are competitors trying to take away business from you? And then also, what do you think that means to your overall growth rate to your business over the next couple of years? I'll start with that, then I have a few follow ups.

Sure. Thanks Tom. You're absolutely right, the competition is very intense and really with regard to our key competitors, and as I've said, they're being extremely aggressive as far as pricing is concern. That is starting to put pressure on us, particularly at the large end of the market, and what we're doing is we are making sure we are maintaining pricing discipline. It's not just putting pressure on sales, but they're also putting pressure on consistency. But we do have very rigorous and retention program in place in all side sectors, the business that we hold, and obviously most particularly on the large case which is where we are tending to be more aggressively attacked. But also really right through, including the small and medium cases as well. We do have a very good track record of making sure that we hold on to the business that we've got, and making sure that customers appreciate the value proposition.

If we do lose cases, then we keep track of them and we obviously still maintain a relationship, because we are still paying existing claim systems. We do go back for that business and we have again, a very good record of regaining customers if we are unfortunate enough to lose them. I would say that we have got an aggressive retention program in place to make sure that we keep hold of the business we want, and we do have good results in our core market from the sales point of view. We are maintaining our pricing discipline and we are selling very much on the value of the customer proposition that we have to offer and our service proposition, and that is very well appreciated by clients, by brokers. To the extent that we do find that we are able to keep business at a price premium, and we are also able to close new business at a price premium as well.

So in terms of growth outlook, we are obviously staying extremely focused to make sure we gain and keep what we are aiming for, but having said that, we all maintaining pricing discipline and we are not going to write business at a loss. So a long-winded answer, but I hope that covers some of the key points that you are wanting me to make.

And Susan, if I could add to that to. I think what you just described is a very similar set of circumstances we face in Unum U.S. at points in time. Where you have competitors come in and doing predatory pricing things, and just maintaining that discipline. At the same time, continuing to be sure we put pressure on our own product development and sales organization to be sure that we are aggressively doing the right thing, but doing it with cases that we can write profitably. There's great parallel between the market dynamics that we see at times between the U.S. market and the U.K. market. I think people see in the U.S. market how that is translating ultimately into profitable growth.

Absolutely, Tom, and the new product that you mentioned that we have launched -- that's a real innovation within the U.K. market. It is something nobody else has to offer. Obviously, we are expecting that will deliver sales, and that other competitors haven't quite replicated that. We definitely have a first new advantage from that point of view.

Tom, I guess to your point about the price discipline, is it fair to say that if competitor pressures continue to be intense, it's a business that you'd be willing to shrink to really hold on to your underwriting discipline if it comes to that? I don't know if it will come to that or not, but would you say that that would be your posture?

I think very much, Tom. Again, the parallels are very strong between what we were just discussing in the U.K. right now versus the things that Kevin had had to work through in Unum U.S. We have to be sure we stay disciplined, be innovative, focused on service, focus on training of our people, and the relationships we have in the marketplace, then just to know when to walk away from business that need to be walked away from. And again, as you point out, it's not clear to me that we are going to see the business shrink in the U.K., but on the other hand, the mindset is wanting to be sure that if we grow, be sure we grow profitably and in a sustainable basis. Susan and her team have done that as you can see from the results. Actually not just this past quarter, but looking back several quarters, things are on large case and group life have been out there for awhile, and the team in the U.K. has been very good about staying disciplined on profit.

Okay. And then, one other I guess more macro question. The comment on claims frequency still being I think pretty stable or at least claim incidence being stable. I'm just curious in past recessionary cycles, has it been on the incident side that you've seen it? Or is it really on claims to ratio? As I think about it, it would seem that it would be harder to get people to return to work when there are fewer jobs as opposed to seeing a big flood of new claims coming in. Just curious what you're seeing on that.

A good question. Kevin, may I ask you to speak to that just operationally, in terms of what we are seeing? And I look back to the last cycle in terms why there's actually some key differences, even in term of the profile of our business right now.

Good morning, Tom. In terms of our current business situation, as we said, LTD is flat. STD Incidence was slightly improved in the quarter. IDI incidence was solid, you know flat. Waiver of premium incidence was flat. Voluntary disability (inaudible) were favorable. So we didn't see any pressure at all from the incidence side.

Looking back at prior recessions, I think the impact was more from the incidence side of the equation than the recovery side of the equation, although you do see some pressure on the recovery side, but more from the incidence side. In the 2001, '02, '03 recessionary period, incidence fell, went up one, but it was primarily driven by large case. As you know, we've significantly shrunk our large case presence over the last several years. Back then, our large case business was I think 33% of our business. Now in terms of LTD now down to 26% of our business. Considerably different mix of business today, than we had back then. We also have much more diversified earnings. And our claims performance is clearly reflective over the last eight quarters that we are much tighter on claim management. And our renewal machine has been just terrific over the last four years. In a lot of ways, the pressure that we experienced in '01, '02 are going to be mitigated and softened I think, as a result of our diversified business base and our approach to the business.

And Kevin, so you are not seeing any on the incidence side. Sorry on the recovery side right now?

No. Recovery is slightly improved in the quarter.

On admission too, a big difference too is the change in process and leadership we put in that part of our business, and actually invested in that part of our business, which gives us somewhat more comfort that in good and bad times, there's more consistency in terms of how that performs in the -- big difference also.

Absolutely.

We'll take our next question with Eric Berg with Lehman Brothers. Please go ahead, sir.

Thanks very much. Good morning to everyone. So I have two questions. One that is, let's say a follow-up to Tom. It's really directed to Kevin and it's a general question. So as everyone knows, we have this situation where millions of people are facing housing pressure, price of the house is going down. Resets on their mortgages and in some cases, unable to refinance. I certainly -- your message is coming loudly and clearly that you have not seen an increase in incidence so far. But how should we think -- what is on your mind, Kevin, in terms of this housing crisis? And I'm just wondering is there -- could there be a link between the housing crisis and the disability insurance business?

Wow. Good morning, Eric. It would be a stretch. One of the thing to think about with incidence and recover patterns is the degree to which people under financial pressure think that living on a fixed disability income, which is a lower percentage of earnings that their current salary level, would be an effective economic solution for them. I really sort of couldn't go there, in the sense that housing pressure would generate higher levels of incidence as well as recovery, because I think everyone is going to be better off working and earning an income, than they are receiving a partial replacement of earnings from disability.

So you are saying it would be a stretch, but if there were a link if I understand and I understand that you are saying it's a tenuous link. But you're saying that if there were a link, it might take the form of an individual's feeling overwhelmed by his housing situation, negative equity for example, just sort of becomes depressed and seeks to go out on disability? Is that how in theory it might work?

I'm sure there are people that will be depressed by their economic situation, and they might try to file disability. But in general, we've got the entire book of business there, I just don't see a link between what you are describing. If anything, people under income pressures or ability to pay their bills pressures, disability is not a good place to go to resolve that problem. It's a worse place than working.

What you are saying too though, is if someone is going to disability, they are not recovering a 100% of their income. If they have their own personal financial pressures, whether it because of housing, fuel costs, or whatever may be the cause of it, this is not a way to win, to gain the system frankly, not just for our company, but for our industry. There were times past where people were -- over insurance in decades past, but I think frankly, that's not as much the issue with our industry or our company. Therefore again, if people are feeling those financial pressures, frankly, they are better off working than taking the policy out. The issue should be more, Eric, the affect of disposable income, and the desire to buy voluntary product, so it's a little more -- not the claim incidence side, Kevin, but maybe for you and Randy, the issue of do you find some persistence in your lack of sales because of that, the challenges that people are facing individually. And even there, we don't see that because of the small nature of the size of this premium relative to other things that they do.

Very clear. That set me straight. My second question relates to a very favorable claim experience in group life, and my question is a simple one. There was a dramatic reduction year-over-year in the group life benefit ratio. It's now much lower than it was on a full-year basis in each of the last three years. Should we view this benefit ration, 68.2% in the quarter as a new standard or was it anomaly? Thank you.

Eric, Tom White. I wouldn't think as an ongoing run rate. I think it was generally a bit more favorable than normal. It could move up a little bit. However, the overall profitability and margin on the business, we would expect to stay relatively flat with where it is. If you look at the underlying issues there, the incidence was a touch better. The average claim size was pretty flat with what it was before. The waiver of premium which is another risk driver in there was favorable. I think the mix of business is probably helping us, certainly getting out of these larger cases over the last couple of years, has improved the profitability. Bottom line is, profitability should stay very strong, but you may see the benefit ratio kick up a little bit.

Eric, this is Bob Greving. We also see a seasonal pattern in our group life claims. The first quarter of the year is always the most favorable quarter. You probably see something go back into the low 70% range, like we experienced for the full-year last year overall.

Thanks to everyone.

Thanks Eric.

We'll take our next question with Tamara Kravec with Banc of America Securities. Please go ahead.

Thank you. Good morning.

Good morning.

I wanted to delve a little bit more into the voluntary and supplemental business. You had pretty solid earnings and sales were up 34%, and you've obviously had your roll out of Simply Unum. If you can just talk about your expectations there for sales and profitability as we go forward.

Good. Kevin, do you want to pick up on that?

We did have an excellent quarter and we had a terrific momentum entering the year in our voluntary benefits business. In addition to that, not so much as a result of the Simply Unum content. As much as the overall attitude that we have in the marketplace in our distribution system around commitment to voluntary product and our longer term strategy around Simply Unum, I think we have an increased core market focus on voluntary benefits. We are expanding our rep distribution channel in the core market, and that of course, I think will drive additional voluntary benefits down the road. So we are very optimistic about the sales growth. We are also introducing new products and we have good diversity in our voluntary benefits lines of business. We'll continue to introduce additional voluntary lines in 2009. So overall, I see that as being an increasing percentage over the course of time of our Unum U.S. book of business. Of course, we have terrific investments in our enrollment capabilities there as well, which will drive increased participation in our voluntary lines and we have persistency there, too. So overall, it's a really good story.

In your mind, do you have a target business mix. Given that your profitability and your group protection business is improving, and the earnings there are more robust, how would you envision the mix in the U.S. changing over the next couple of years?

I don't have a target. I would think that our business would tend to be above -- about third of our business voluntary, about a third of it group disability, and about a third of it life and ABB kind of business. I think as we get our Simply Unum strategy launched over the next several years, the lines are going to blur between what I'll call traditional group lines and voluntary lines. In fact, I think our overall target is to be a benefits company to provide as many benefits as we can through that one Simply Unum platform to employers, and to provide as much funding flexibility as we can to employers and employees. I think the lines between how much of it is voluntary, how much of it is employer-paid, will begin to blur over time. The real question is how many clients can we acquire, and how many lines of business can we place to satisfy the needs of those clients.

Okay. I'm sorry if I missed this earlier, but I think the amortization in your U.K. segment was sequentially down a lot. Was there a reason for that?

I think it goes back to that change in the DAC accounting last year, the SOP 05-1 and how those internal replacements are handled. Actually the patterns of renewals is a little different in our U.K. business relative to our U.S. business. In the U.S., it's more of a heavy January 1, and in the U.K. it's a little more heavily focused on April 1. There is a little noise as we get a year passed that, and you'll see a more normal pattern emerge.

Okay. Thank you.

Thank you Tamara.

(OPERATOR INSTRUCTIONS) We'll take our next question from Mark Finkelstein with FPK. Please go ahead.

Good morning.

Good morning, Mark.

I wanted to go back to a point that you touched on in a brief comment. At Colonial, do you believe you are seeing any impact from the economy on either sales or account penetration on those cases you currently have? And if so, how does that factor into your sales expectations for the year? One of your competitors said they may be seeing some impact so I'm curious in what you are seeing in your experience.

Great question. Randy, do you want to take that one?

You bet. Tom. Good morning, Mark. We are watching that very, very closely, as you can imagine. In the first quarter, we are not really seeing much impact quite honestly, from the economy. Our account penetration is very stable. The number of pairs overall, in terms of those purchasing new policies from us, is actually up about 3.5% or so. And our persistency is very stable, actually increasing somewhat. At this point in time, we are just not seeing much of an impact. As we look out to the future, we are cautiously optimistic that we'll be able to get our sales targets for the year.

Okay. Great. And then just really quick on the yield in the quarter on new money, are you incorporating that into pricing and does that have any impact in your view on the solid sales in the U.S.?

It is not being incorporated into pricing right now, no.

Okay. So in the first quarter, there were no material pricing adjustments outside of the -- you disclosed the --

Certainly not related to any change in investment yields.

Okay. Great. Thank you.

Thanks, Mark.

At this point in time, just one more question.

Yes.

Great.

We'll take our last question with Jeff Schuman with KBW. Please go ahead.

Good morning.

Good morning.

Questions for maybe Bob Greving. I was just wondering, when you wrapped up the claims reassessment process, what was the level of remaining claim or benefit reserve at that point? Was that released this quarter or redirected somewhere? How did that work its way through the financials?

Jeff, basically the reserve had pretty much has been exhausted during the quarter. We had a little bit over that that actually flowed through earnings, but for the most part, it was pretty much a break even. It's pretty much dovetailed in to finish everything up.

Do you know what the amount was?

It was just a couple million dollars, I think.

Jeff, if you go back to I think it was the third quarter last year, there were some adjustments that we made. There was some IDR reserves that were released and in the quarter, we put up a little bit of extra for the LTD reserves. We also trued up the expense reserves. I think we brought down a little bit on the IDI side and bumped it up a little bit on the LTD. The big adjustments were made in that quarter, so the fourth quarter and first quarter impacts were very, very small.

If anything Jeff, we've had a little bit of expense pressure in the quarter as some of those resources we had devoted to the RSA actually got moved back into the general operations. But that's really the only pressures that we had.

Thanks a lot.

Thanks, Jeff, and actually thank you all again for taking the time to join us on the call. That completes the first quarter 2008 earnings call.

Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.