普登 (UNM) 2008 Q2 法說會逐字稿

Good day and welcome to the Unum Group second quarter 2008 earnings results conference call. Today's call is being recorded.

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

Thanks, Tom. Good morning everyone and welcome to the second quarter 2008 analysts 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 entitled Cautionary Statements Regarding Forward-looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2007. And also in our subsequently filed 10-Q. Our SEC filings including our forms 10-K and forms 10-Q can be found in the investors sections of our website at www.unum.com.

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

Yesterday afternoon Unum Group reported earnings for the second quarter 2008. Net income in the quarter was $240.3 million or $0.69 per diluted common share compared to net income of $153.5 million or $0.43 per diluted common share in the second quarter of 2007.

Included in the results for the second quarter 2008 are net realized after tax investment gains of $17.1 million or $0.04 per diluted common share and $6.5 million or $0.02 per diluted common share in the second quarter 2007. These gains included the impact of the provisions at DIG B36 accounting which require changes in fair values of embedded derivatives in certain modified coinsurance contracts to be reported as realized investment gains and losses. This accounting policy resulted in a second quarter 2008 after tax investment gain of $16.2 million compared to $6.3 million after tax gain in the second quarter of 2007.

Excluding the DIG B36 accounting impact, net realized after tax investment gains related to sales and writedowns of investments were $900,000 in the second quarter of 2008 and $200,000 in the second quarter of 2007. So excluding the realized after tax investment gains and also the second quarter after tax cost of $34.5 million related to the increase in a provision for claim reassessment process, our after tax operating income was 223, excuse me, $223.2 million for this quarter or $0.65 per diluted common share compared to $181.5 million or $0.51 per diluted common share in the year-ago 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 as the heads of our three major operating segments, Kevin McCarthy, Susan Ring and Kevin Horn.

With that, I would like to turn the call over to Tom Watjen.

Thank you, Tom. Good morning. The second quarter was another good quarter for our company. I want to take a few moments to touch on a few areas before I pass things back to Tom White for a more detailed review of the quarter.

As Tom mentioned in his opening remarks, excluding net realized after-tax investment gains, and last year's reassessment reserve addition, we reported $0.65 per share in operating income for the second quarter, 27% higher than the $0.51 per share reported in the second quarter of 2007.

Our pretax operating earnings, excluding last year's reserve addition, improved 24% compared to the year ago second quarter, with core operations pretax earnings growth of 13%. This is again driven primarily by strong risk trends across all of our business lines.

Similar to the first quarter, each of our primary business lines recorded lower benefit ratios in the second quarter of 2008 compared to the second quarter of 2007, which again to us reflects the strong discipline we've built into our business plans.

Also our investment portfolio credit quality continues to hold up well in this environment, and our strong net investment income results reflected a more normal level of bond calls and miscellaneous investment income in the second quarter following some pressure on these items in the first quarter. While our overall miscellaneous net investment income returned to a more normalized level, the impact varied widely by reporting segment, and Tom White will touch on these in his comments in a few minutes.

Looking ahead, I expect we will continue to see some volatility in the miscellaneous income component of our investment results as long as the credit markets remain challenging and new issuance remains low. To that point, indications are that our third quarter miscellaneous net investment income will be below our historic trend line of $10 million to $15 million per quarter, though, again, I don't want to overstate the point because, again, we feel very good about the quality of the investment portfolio and the results we've been able to generate.

Now, shifting to sales, despite slower consolidated sales growth in the second quarter compared to what we reported in the first quarter, we are generally encouraged by the underlying sales trends in our business. Our focus across all of our operating businesses is to grow our core market business. That is sales to our small and mid size employers, and each of our businesses accomplished that this quarter.

Variations in our reported sales from quarter to quarter, frankly, are largely due to the level of large case business rewrite, and again, we want to continue to write large case business but are, again, going to be very disciplined and be certain we don't write business that does not meet our pricing and our risk management criteria. Again, you can continue to expect some level of volatility in large case sales because, again, we are not going pursue that business at the cost of profitability. And I'll have more on the sales results in just a few moments.

In the second quarter, we continued to introduce new product and service offerings in all of our markets. Unum US rolled out to an additional 35 states our Simply Unum offering, a group in voluntary offering on a single platform, which has been well received and we believe will help us grow our small and mid size market business.

Unum U.K. continues to invest in development of a voluntary benefits offering to meet the changing needs of the UK marketplace. It will be a couple of years before any meaningful new sales volume can be expected, but we believe this is a unique opportunity for us in the UK market.

Additionally, Colonial Life is preparing to roll out an updated release of Harmony, our new benefits enrollment system that will provide enhanced selectability and multiple enrollment options.

Now let me offer a few comments on each of the businesses before I again pass things back to Tom White.

Let start with Unum US . Excluding last year's second quarter revision to the claims reassessment reserves, pretax operating earnings for Unum US increased by 11% with generally favorable performance in each of the three reporting lines. Earnings in our group disability line were slightly lower than last year's results when adjusted for last year's claim reassessment reserve addition, but we saw strong risk results which were partially offset by higher expenses, some of which, I should add, were one-time items, and lower net investment income.

Importantly, though, the group disability benefit ratio for the second quarter was 90.5% a 50 basis point decline from the first quarter of 2008, and 220 basis points lower than the second quarter of 2007. Incidence trends remain generally stable in the second quarter for both our LTD and STD lines of business, and we saw no evidence that the weaker economy was adversely affecting our benefit results.

With that we continue to remain confident that we can reduce the benefit ratio to between 88% and 89% by the end of 2008 or early 2009.

We saw solid results across the other Unum US business lines. Group life and accidental death and dismemberment pretax earnings increased 5%. And supplemental and voluntary earnings grew 36% with very strong performance in the individual disability recent issued line of business.

Unum US sales declined 4% in aggregate in the second quarter, but core group sales actually increased 3.4%, and the greatest change was, again, in our large case business where we saw that declining 13% which, again, reflects our commitment to continue to grow on a relatively consistent basis our sales to small and mid size employers, but again be very disciplined about our sales to large case employers.

I should add too, that following a strong 34% growth of voluntary benefit sales in the first quarter, sales in this declined to 3% which is generally below our expectations. But I am pleased with the 14% growth in voluntary benefit case counts this quarter which, again, indicates our growing success in serving the smaller case marketplace. Kevin McCarthy is available with us this morning to certainly provide some further insight into the business or marketplace for Unum US.

Now shifting to Unum UK. Unum UK had a very strong earnings quarter, with pretax operating earnings of $96 million in the second quarter, which is a 24% increase over the second quarter of 2007. Risk results remain excellent with the benefit ratio at 58.3% for the second quarter which reflects favorable mortality and morbidity experience in the quarter.

Sales increased 11% in dollar terms, or 12% in local currency. Last year's results included sales increases which resulted from a legislative change, and excluding that impact, sales actually increased 29%.

We continue, though, to feel the pressure on sales and persistency in this market due to the extreme competition we see both in group life and in the large case segments of the market, but just generally a very competitive market in the UK in general. As a result, we will continue to see pressure on our premium growth in Unum UK which certainly affects our outlook for this particular business. Susan Ring is here with us today, again, to be able to take any questions you may have about the UK or the UK marketplace.

Now shifting to Colonial Life, Colonial Life had pretax operating earnings which increased 5% in the quarter to $68.2 million, again a continued very strong level of profitability in our Colonial Life operation. These results reflect continued favorable benefit experience for the accident, sickness, and disability product lines.

While consolidated sales increased only 3.3% for the second quarter, which, again, is below our long-term expectations, our core market sales grew over 7%, and our other operating trends, such as new rep recruiting and new account growth were very encouraging. Sales in the large case markets were down 14% from last year's level, which, again, is indicative of the things we've talked about across all of our businesses where the primary focus is on the small and mid size market and we'll be opportunistic in terms of growing the large case market.

Randy Horn is here with us here this morning for any questions you may have about the Colonial Life business or any of the developments in the Colonial marketplace.

As I mentioned earlier our investment portfolio and credit quality continues to be very strong, and Tom White will certainly provide further detail in his comments, but I didn't want to miss the chance to talk about how pleased I am with the performance in general. We didn't see any material changes in credit quality, and writedowns and gross realized losses for the quarter were quite manageable. In fact, excluding the DIG B36 accounting impact, we reported a small net realized investment gain for the quarter.

The widening of corporate bond spreads on A and BBB issues enabled us to more than meet our desired yield targets. Therefore, our portfolio yields are remaining stable and the net interest margins have actually been enhanced over the past several quarters.

Now moving just briefly to the capital position, you will recall our capital strategy we announced last year is centered on maintaining sufficient financial flexibility to support our operations across various economic cycles, while also positioning us for improvements to our current ratings, and, of course, responding to opportunities in the marketplace. We continue to believe that we are presently in a very strong capital position with a great deal of financial flexibility, and I feel the Standard and Poor's recent upgrade is certainly a further validation of our position and the strength of our capital position.

Now let me touch on a few of the capital highlights for the quarter. Our second quarter estimate of risk-based capital for our traditional US life insurance companies remains well above our long term target of 300% and is at the high end of the year-end 2008 target of 315% to 325%.

Leverage, excluding the nonrecourse debt and capital of Tailwind and Northwind Holdings finished the second quarter at 20.1%, reflecting the retirement of $175 million of short term debt in May. These, along with the additional ratings improvements we've seen, certainly provide us a great deal of flexibility as we think about our capital structure and our capital strategy. And we will certainly be evaluating some of those options and choices over the balance of this year.

Lastly, let me just talk to liquidity. Liquidity at the holding company remains very strong with $681 million, comfortably above our target to cover one year of fixed charges plus maintain a capital cushion for business and economic volatility.

As you know, we completed the first half of our authorized $700 million share repurchase program through a $350 million accelerated share repurchase, ultimately reducing our share count by 15.4 million shares or approximately 4.3% of the year end 2000 outstanding shares. Given our strong capital position and positive results thus far in 2008, we intend to complete the second half of our previously announced repurchase authorization through a second accelerated share repurchase agreement which we intend to execute this week.

In the second half of 2008, we expect to continue to generate excess capital, and will develop a strategy for its deployment consistent with our capital management philosophy.

A couple closing comments on the quarter. Obviously, we are very pleased with the overall results. We saw continued strong operating performance in our core operating segments driven by excellent risk results across all of our major businesses. We had generally good sales growth in the markets we have targeted for growth. We have continued to maintain a very strong quality of our investment portfolio despite, again, these relatively challenging financial times we are operating in today.

We continue to have significant financial flexibility driven by our strong balance sheet and capital position and our healthy statutory earnings and cash flow. All of which position us well as we look to execute the second half of our share repurchase program, and we continue to, most importantly, continue to innovate. There's a lot of opportunities for us in the marketplace to leverage our leadership positions in the benefits business, and, again, we're spending a lot of time with the products, services and people to be sure we are in a position to benefit from that.

Now I will turn the call over to Tom White who will provide more detail on the second quarter results.

Thanks, Tom. I want to take a few minutes to provide some operating highlights on the quarter and provide an updated on the investment portfolio.

First we'll start with the Unum US group disability line. As Tom indicated, we continued to see improvements in the group disability benefit ratio which declined to 90.5% for the second quarter. New claim incidents was generally stable in the second quarter with the levels we experienced over the past several quarters. Our analysis of incidents trends suggests no significant variation either in any occupation categories, case size or type of impairment. We have cautioned that if recessionary pressures show up in our claims incidents trends, it would more likely occur with a lag. However we see no current signs of economic pressure on this part of our business.

Additionally, the short term disability line, which can be a leading indicator to LTD claim activity, also continues to perform well with stable claim incidents trends throughout the second quarter.

Net investment income in the second quarter returned to more normal levels following the lower level of bond call activity that was evident in the first quarter. However, miscellaneous net investment income was approximately $5 million lower in the second quarter of 2008 relative to the second quarter of 2007. The year ago second quarter benefited from an elevated level of bond call premiums.

Expense ratio was slightly higher in the second quarter of 2008, with the marginal increase primarily resulting from the fine related to a broker compensation settlement. $4.4 million of the total is included in the group disability expense line, and the balance of $1.2 million is included in the group life line.

In general, we had strong performance in group disability this quarter, with solid risk results offset by lower miscellaneous net investment income, and also the impact of the settlement expenses.

Moving to the Unum US group life and AD&D line, we continue to see strong levels of profitability with BTOE increasing 5.4% to $54.3 million. The benefit ratio was lower than a year ago second quarter at 69.5% compared to 74.3%. Submitted incidents was relatively stable, and we benefited from a lower average claim size.

The expense ratio for this line was higher this quarter, primarily reflecting higher sales volume and quote activity, as well as the broker compensation settlement fine I referenced earlier.

Finally the Unum US supplemental and voluntary line produced record quarterly income in this line with BTOE of $76.2 million, an increase of 36%. All three primary lines, that being the recently issued disability, voluntary benefit, and long-term care, produced year-over-year improvement in before tax operating earnings. Premium income grew 7.3% and risk results remain favorable.

The benefit ratios for each major business line improved relative to the year ago results, and in aggregate, the benefit ratio for the line declined to 74.8% in the second quarter compared to 77.1% in the year ago quarter.

As Tom indicated, while reported sales for Unum US declined by 4% in aggregate, there were a number of bright spots to highlight. Our core market sales for our group lines, that being LTD, STD, and group life combined, were positive, increasing 3.4% for the second quarter and 15.7% for the first half of 2008. LTD core market sales by itself grew 5.3% in the second quarter, and 16.4% for the first half of the year.

We remain disciplined and opportunistic in the large case market, and sales declined 13.2% in the second quarter, and have declined 3.8% for the first half of the year.

Our mix of sales was in line with our long term objectives, with a 60% core and 40% large case split.

Voluntary benefit sales declined by 3.1% in the second quarter, case count growth was a respectable 14%. However, the average case size declined as our sales activity was more focused in the small case market, which in turn pulled down the overall premium volume.

Premium persistency in our group lines improved for each of our LTD, STD, and group life lines in the first half of 2008 compared to last year, with terminations, again, focused primarily in the large case settlements.

To summarize the results for the Unum US operations as a segment, we had continued excellent risk management results across the board, a more typical level of net investment income, though miscellaneous net investment income was below the elevated levels from last year. Just slightly higher expenses which were largely driven by the $5.6 million fine related to the broker compensation settlement.

These trends overall produced growth in BTOE of 11% for the second quarter excluding the second quarter of 2007 claim reassessment reserve revision.

Moving to Unum UK, we continued to see very strong results from Unum UK, with a 24% increase in BTOE to $96 million for the second quarter. Risk results remained excellent with a benefit ratio of 58.3% for the quarter, compared to 62.2% in the year ago quarter, and 57.3% in the first quarter of 2008. This performance was driven by lower pay claims due to strong recovery experience in the group disability line as well as lower new group life claims.

Unum UK's results also benefited in the second quarter by approximately $5.6 million from a nonrecurring reinsurance premium on a previously acquired block.

Second quarter expense ratio for Unum UK was slightly elevated, reflecting some additional head count costs and other costs associated with investments in process and organizational changes, as well as the decline in premium income. Second quarter sales increased 12% in local currency and 11% in dollars. However, underlying sales trends, excluding the impact of the age equality legislation, grew by 29% in the second quarter.

Group markets in the UK remained very competitive, especially in group life, and the pressure we are seeing in our persistency trends are negatively impacting it for its premium levels. Our persistency for group disability has declined from 88.3% in the first half of 2007, to 86% in the first half of 2008. And for group life, persistency was 78.1% for the first half of 2008 compared to 71.1% in the first half of 2007. Top line growth will be difficult to achieve in this competitive pricing environment, though we do expect the profitability of Unum UK to remain at strong levels.

Moving to Colonial Life, continued favorable financial results with $68.2 million in BTOE for the second quarter, which is 5% higher than the strong year ago quarter we produced. The benefit ratio was generally stable with last year, 46.9% for the second quarter of '08 compared to 47.2% in the second quarter of 2007, primarily due to favorable performance in the accident, sickness and disability line. 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 historic levels.

Expense ratio for Colonial Life was higher at 20.5% compared to 19.2% last year, driven by higher branding and advertising expenses, and also investments in our enrollment services, underwriting and sales training areas. As Tom indicated, sales at Colonial Life increased 3.3% In total, but the underlying trends remain encouraging. We saw solid growth in our core market with sales in the under 100 employee commercial market increasing 10.8%, and also in the public sector market where sales increased 6.1%. However, sales declined by 13.9% in the large case commercial market, relative to the strong sales result in the year ago quarter. So generally speaking it is the uneven nature of the large case sales activity that is driving quarter to quarter volatility in sales.

We were also very encouraged by activity in the market. New account growth was up 12.6% for the second quarter. However average case size declined by approximately 9%. This is an issue more of smaller case size sold and not lower penetration within a case.

New sales recruiting and productivity showed positive trends with new contracts increasing by 62% in the second quarter, and 51% for the first half of the year, and our key new rep production milestones continue to improve.

Finally, persistency at Colonial Life was slightly higher for its major product line relative to year ago results.

In the Closed Block segment, BTOE was $27.9 million in the second quarter compared to $29.4 million in the year ago quarter. Again, this is adjusting for the claim reassessment reserve revision last year. Risk results remain stable with the interest adjusted benefit ratio at 90.1% compared to 92.4% a year ago. Again excluding the claim reassessment reserve revision. And 90.1% in the first quarter of 2008.

Submitted incidents remains relatively stable. You will notice that relative to the first quarter, net investment income returned to more typical levels, with higher bond call premiums and consent fees relative to the first quarter of the year. However, reiterating Tom's comments, I would caution that the outlook for miscellaneous net investment income for the third quarter is below its historic trend line and could negatively impact third quarter results.

Finally, our weighted average share count, assuming dilution, for the second quarter of 2008 was 346 million shares compared to 354.8 million in the second quarter of '07, and share count at the end of the second quarter of 2008 was 345.5 million shares. Our consolidated return on equity for the second quarter was 12.1%, and 11.5% for the first half of 2008. Also book value per share increased by 8.6% to $22.19 at the end of the second quarter compared to $20.43 at the end of the second quarter 2007. Excluding the net unrealized gains and losses on securities, and the net gain on cash flow hedges, our book value per share increased by 9.7% to $21.77 at the end of the second quarter compared to $19.84 at the end of the second quarter 2007.

Earnings on a statutory accounting basis remains very healthy with the second quarter 2008 net gain from operations after tax of $151.6 million, this is for our traditional US insurance subsidiaries. That compares to $182.4 million in the year ago quarter, which excludes the second quarter claim reassessment revision.

Now I'd like to close with a few comments on the investment environment and the investment portfolio. The current market volatility, particularly the widening of corporate spreads on investment grade issues, continues to present opportunities for us. Despite the market volatility, we achieved a new money yield -- this is on a hedge adjusted basis -- for the second quarter of 6.44%. This compares to 6.58% in the first quarter and 6.18% in the fourth quarter of '07.

The portfolio yield continues to hold steady at 6.69% compared to 6.70% in the last quarter and 6.69% in the end of last year's second quarter. Our net interest reserve margins for our core business lines continued to expand over the past year and are comfortably above our 50 to 60 basis point target margin. We made no changes to our claim discount rates in the second quarter.

From a portfolio quality perspective, we are happy, again, to report that we have no material changes in the quarter. We have outlined our exposure to assets and mortgage-backed securities in our statistical supplement. And I will take just a minute to highlight a few things we are frequently asked, those being that we continue to have no sub prime mortgage exposure, we have no CDOs related to asset-backed or residential mortgage-backed securities. The Alt-A exposure is only $4.8 million and is rated AAA. The book value of private equity partnership exposure is $51.6 million. We have not direct investments in any of the financial guarantors, and our exposure to investments with wraps by financial guarantors is $144.9 million, and the average underlying rating on those, absent the guarantee, is A1.

Overall, we feel very good about the investment portfolio. It remains in excellent shape and well positioned for what is likely to continue to be a challenging environment. Our high yield exposure remains at approximately 5.3% of invested assets, and the level of noncurrent investments is only $9.2 million.

We will address any specific questions you may have regarding investment holdings in the Q&A session. And with that I'll turn it back to Tom.

Thank you, Tom. Before we move to your questions, let me wrap up our prepared comments by reiterating again just how pleased I am with the second quarter results. But perhaps even more importantly, how pleased I am with the current position of our company from both an operational and financial perspective as we move into the second half of the year.

Certainly the second half of the year we anticipate continued challenging general environments. And, again, we think we're in a very good position to be responsive to that. I will say, we're not totally immune to the effects of a softening economy or the aggressive actions that competitors can take. But, again we are very pleased with where our position is today relative to where it was in the past. I think we've shared that with you before.

We are a very different company today. I just remind you, we sit here today with a much stronger balance sheet and a lot more financial flexibility. Our investment portfolio, as Tom just reiterated, is in a very good position relative to the economy today, and we have very manageable levels of high yield and minimal exposure to the asset classes affecting the financial system today.

We have a more diversified business base which certainly creates more opportunities for growth and more diversity to the earnings streams.

Lastly, we have developed cultures across the Company and more discipline. So, in fact, we want to grow our businesses but we want to also be sure we're growing our businesses in a disciplined fashion. So, again, a very different company than the one that perhaps was last experiencing a soft economic cycle. And, again, we shared that with you in the past.

Looking out at the longer term, we believe we are well positioned to benefit from the trends that are impacting our business over the longer term. I personally believe that the benefits business, including voluntary benefits, is a good business. The products and services we sell play a vital role in serving working citizens and provide a safety net that's even more important today than ever before. While the way the business is done and expectations of our customers are changing, we are investing heavily in our products, services and people to insure that we are responsive to those changes, and capitalize on these opportunities in a way that creates value for our shareholders.

Finally, with respect to guidance we are increasing our 2008 guidance by $0.09 per share to reflect the strong second quarter results and our outlook for the balance of the year. Our new guidance is for operating earnings per diluted common share within a range of $2.46 per share to $2.51 per share. Within this guidance, third quarter 2008 operating results can be expected to be slightly less than the $0.65 per share reported in the second quarter of 2008 though we expect to at least match the operating earnings per share from the third quarter of 2007.

As both Tom and I indicated earlier, we expect lower miscellaneous net investment income, particularly in the individual disability Closed Block, very similar to what we saw in the first quarter of this year, and it will be a challenge also to replicate the exceptional results in the Unum UK segments in the third quarter of last year. With that, having said again, as you can sense, we're cautiously optimistic for the rest of this year and feel good about where the Company's positioned as we enter the second half of the year. So, Operator, at this time we're ready to begin the question and answer session.

Thank you, sir. (OPERATOR INSTRUCTIONS). We will go first to Darin Arita with Deutsche Bank.

Good morning. Looking at the premium income trends and Unum is getting good growth out of Colonial, Unum UK and the supplementary voluntary line, but was wondering when is it reasonable to expect premium income to grow in the group disability and group life and AD&D segments?

That's a great question. You are right. We are going through really some change actually as we said many times in terms of the markets we are focused on and some of the dynamics that'll have some impact in terms of the different premium composition. Maybe I will ask Kevin to speak because certainly it's most prominent in our Unum US business.

Good morning. The short answer is that I would expect to see some of that premium trend turnaround in the middle of 2009. The reason that premium is basically flat on those lines today is, although we have growth in our core disability and group life markets, that's offset by terminations and disciplined underwriting actions in our large case marketplace. So we have got steady and improving growth in core, as you mentioned, strong growth in supplemental and voluntary, but a continued decline, until it flattens out, in the middle of 2009 in large case.

Great, that's helpful. In terms of Unum UK, how is the business there prepared for a slowing economy?

Maybe Susan I will ask you to respond to the question.

Yes, thanks. I think we're very well prepared in view of the mix and make up of the book of business that we have got, and where we have primarily the senior executives are covered within UK contracts over here. And that does tend to make it more resilient in terms of the potential for lapses or downsizing with regard to coverage that we have. And so I would also say with regard to the benefits performance and the potential impact that a downturn could have on recoveries we do have some very strong management disciplines in place and we achieved strong recoveries. So I think with the discipline we have, I don't tend to think that we would see an impact there either.

So I think we are well placed. If there is anywhere where we are starting to see the potential for an impact, it would be on cost sell and up sell activity to existing business. So that may be where we will see some continued softening of our results, but other than that I think we're reasonably resilient and well set.

Thank you.

Thanks, Darin.

We will take our next question from Colin Devine from Citi.

Good morning. A couple of questions. First, if you can give us an update on where you feel your excess capital position is. You talked about stock buy backs for the second half of the year but also perhaps looking ahead at what might be sustainable.

Second, for Randy, it seems to me Colonial is growing somewhat slower than I think you anticipated at the analysts meeting last fall and perhaps you can just give us an update as to why that is.

And then, Susan, if you can talk a little bit about your strategies for next year and taking advantage of some of the regulatory changes. And finally, for Kevin, if you can give us some sort of sense as to what kind of rate increases you are looking for as you begin the new pricing season for next year.

Okay. Let's start actually with your first question, Colin, in terms of capital plans and the use of capital, and maybe I'll ask Bob Greving to speak to that. Bob?

Sure. Hi Colin. Actually, we are in pretty good shape with regard to our excess capital. As you can see, we are very confident in where we are positioned right now with the execution -- the imminent execution of the second half of our $700 million share repurchase that we anticipate to be executed on, hopefully this week.

We have very strong risk-based capital, well above our targets in each of our standard US insurance companies, and our solvency ratio in the UK is also very strong and well above the target levels in our UK company as well.

Our leverage as you can see is at 20.1%. So well below our 25% leverage ratio, so a lot of capacity there as well. And our liquidity running at over $680 million for the quarter with additional capital being generated virtually every quarter gives us pretty good confidence that even with the execution of the $350 million that we will be in good condition. So we feel very, very comfortable with where we are right now.

Can you give us a number as to what you think your excess capital position is today?

Well, obviously, some of access to the excess capital is a little limited. We take ordinary dividends from our insurance companies. Let just take that one example. Trying to bring us down to our target risk-based capital would require additional dividends from the insurance companies. So accessing that for corporate purposes for share repurchases, for example, it would not necessarily be something we would ordinarily do, but I would say our excess capital is overall well in excess of $500 million.

That's net of the pending repurchase program.

That's net of the pending repurchase, that's correct.

If you can kind of do the math and look at leverage relative to the 25% target. We want to hold $270 million of holding company liquidity, and that's 681 right now. RBC, we are at the upper end of our range. You run the math on it and you can get several hundred million dollars of excess capital, but as Bob says, we are really not looking to bring all of those down in order to generate a whole bunch of excess capital.

We have the $350 million in the share repurchase authorization that we will execute on, we have a nice cushion above that. We will be generating some additional excess capital, and as we get to the end of the year and we sit down and meet with you folks sometime in November, we will start to spell out capital management thoughts for 2009.

And maybe just one last point I would add, given where we have come from, what we are trying to do is look at this as a series of stages, and I think even the decision to proceed with the second half of the previously authorized share repurchase we wanted to see what the results were at mid year and see what the balance of this year looked like. I will say we are certainly being cautious, but, again, as both Tom and Bob said, Colin, we do see ourselves as having excess capital both either from operations or even looking at our capital structure, the fact that we are well below the leverage target that we set for ourselves along with the fact that we now have two rating agencies that have given us investment grade ratings. That opened up a number of possibilities for the second half of this year. And I think, Tom, you are right, we will use the investor meeting a target to begin to share that in a little more depth. Your second question with respect to Colonial and growth, maybe Randy I could ask you to pick up on that one.

You bet. Good morning, Colin. In our meeting last fall, we talked about a 10% targeted growth rate. We're certainly below that here in the first half of 2008, but if you peel back that onion -- and both Tom White and Tom Watjen spoke to this earlier -- you'll see that the activity levels of our distribution force are extremely strong, great recruiting, production from new people, strong double digit growth in the second quarter in new accounts. It really is that large case situation that Tom talked about that and we are maintaining a very disciplined approach to that. Again there are good opportunities for us out there in the large case market. And I think some of those are going to come here in the second half of the year.

So assuming that that comes through as anticipated, we are still optimistic about the sales outlook for the balance of 2008. The softening economy presents some challenges but so far we are not seeing any pronounced impacts from that. And again we are optimistic about the second half.

Thank you.

Susan, if I could ask you to pick up on the question around next year in terms of strategically where we are taking the UK business.

Yes. I think Colin particularly wanted me to comment on the legislative changes and the regulatory changes that are coming through within the UK market. The primary one I would reference really is welfare reform which is top of the agenda really for all of the political parties over here. So those changes actually start to roll out at the tail end of this year in October and will obviously continue into next.

But I would see those as being very much positive and favorable for our business because all of them are very much promoting the benefits of rehab, which is a primary core competence for us that differentiates us from our competitors. They're also placing more emphasis on the role of the employers rather than the Government and also recommending a (inaudible) from the fit note culture that we've had over here to more of a fit-to-work culture. All of those changes and key themes that are being launched by the Government speak very much to our agenda and very much to where we have real strength. So we see that as being advantageous.

There are a couple of other things. There's a retail distribution review which is a review of the distribution and infrastructure within the UK which we have been keeping a watchful eye on. We don't feel it has any impact on us. And then there are some other changes, including pension changes, which again we see as being positive and supportive of the shift that we are making with regards to placing emphasis on employee purchase through the voluntary work site initiative that we have.

So, at the moment, we don't see anything that's going to be particularly posing a threat to our business but we see a number of things within the regulatory changes that we can take advantage of. So I hope that answered your question, Colin.

I think you just told me your growth rate may start to accelerate a bit.

Well, yeah, to the strategy for next year because now you got, in part, why there's such a thrust around the voluntary offering.

Yes, in deed. We will be focusing on voluntary but not to the exclusion of obviously wanting to grow our group business, and also the individual business that we don't tend to mention but we do have a thriving individual business that's growing well over last year.

Lastly, Kevin on the rate environment,.

Good morning, Colin. As you know, in 2008, the average rate increase that we were looking for was about 6%. Although in terminations, it is interesting to note, the average we were looking for is 23%, so you can see that we still continue to be executing on our plan to clean up the underperforming part of the business. In 2009, unless we see some recessionary incidents pressure, I would expect the average rate increase to be in the same ball park, may 5% to 7%.

Thank you.

(OPERATOR INSTRUCTIONS). We will go next to Mark Finkelstein with FPK.

Good morning. Question for Kevin. We've heard from a couple companies just about the large case market and the increasing competitiveness in that. Can you just talk about exactly what you are seeing and how competitive it is going, and maybe just thinking about when you are losing some business, what rate is that going on by a competitor against expiring premium?

Good morning, Mark. Large case markets I think have been largely consistent for the last couple of years. I don't think it's, in my opinion at least, much more competitive maybe now than it was last year. I think one of the things we have seen is that level of competitiveness move down market a little bit. It was significantly competitive in the plus-10,000 life category. That's worked its way down to the 2,000 to 3,000 life category forcing us to maintain a level of discipline there as well.

In terms of the business that we lose, we don't obviously always know what rate a competitor takes of that, but typically it'ss been a rate at or below our renewal offering. So, as I mentioned to Colin, in the disability, our terminated business, I think we terminated about $100 million with the large case disability this year. If you look at that, the average rate increase we asked for was 23%, driven, of course, by the lack of profitability. Our competitors are taking it at something less than.

Great. And then on that $500 million number, was that against a 300% RBC, or was that against a 320% RBC? I hate to drill into this, I know you're going to talk about this later.

That's against about a 325% RBC.

So the 500 is above the 325?

Right.

Okay. Thank you.

Thanks, Mark.

And we have no further questions in our queue at this time. Mr. Watjen, I will turn the call back to you for any closing comments.

I would just say thank you all on the call for taking the time to join us and again certainly we are all available to answer questions over the course of the day but I think this completes our second quarter 2008 earnings conference call.

Ladies and gentlemen, this does conclude today's conference call. We appreciate your participation. You may disconnect at this time.