普登 (UNM) 2008 Q3 法說會逐字稿

Good day and welcome to the Unum Group third quarter 2008 earnings result conference call. This call is being recorded.

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

Thank you, good morning everyone and welcome to the third 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 area also located in the sections titled, cautionary statement regarding forward-looking statements and risk factors and our annual report on Form 10-K for the fiscal year ended December 31, 2007 and also in our subsequently filed Forms 10-Q. Our SEC filings including our forms 10-K and 10-Q can be found in the investor section of our web site.

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. Presentation of the most directly comparable GAAP measures in reconciliations of any non-GAAP financial measures included in today's presentation can be found on our web site in the investor section.

Yesterday afternoon Unum Group report earnings for the third quarter of 2008. Net income in the quarter was 108 million or $0.32 per diluted common share compared to net income of $187 million or $0.52 per diluted common share in the third quarter of 2007. Including in the results for the third quarter of '08 are net realized after tax investment losses of $108.9 million or $0.32 per diluted common share and $30 million or $0.08 per diluted share in the third quarter of 2007.

The losses include the impact of the provisions of [Digby] 36 accounting which require changes in fair values of embedded derivatives in certain modified coinsurance contracts to be reported as realized investment gains and losses. The accounting policy resulted in a third quarter 2008 after tax investment loss of $44.1 million compared to $18 million after tax loss in the third quarter of '07. So excluding the [Digby] 36 accounting impact, net realized after tax investment losses related to sales and write downs of investments were $64.8 million in the third quarter of 2008 and $12 million in the third quarter of '07. So excluding realized after tax investment losses our after taxes operating income was $216.9 million for this quarter or $0.64 per diluted common share compared to $217 million or $0.60 per diluted common share in the year ago quarter.

On the call this morning are President and CEO Tom Watjen, Bob Greving who is 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 Randy Horn. At this time I would like to turn the call over to Tom Watjen.

Thank you Tom and good morning. The third quarter was another good quarter for Unum and let me touch on a few highlights, as I see them.

As Tom mentioned in his opening remarks excluding net realized after tax investment losses we reported $0.64 per share in operating income for the third quarter. 7% higher than the $0.60 reported in the third quarter of 2007 and at the high end of the range estimated in our pre announcement. Operating results in the quarter were solid, with good risk experience again across all of our core operating segments. These results were tempered somewhat by lower miscellaneous net investment income the weakness of the British pound and higher than normal expenses related to litigation costs in the closed block. These kinds of issues are also likely to affect our fourth quarter results which I'll discuss in just a moment.

Our sales results were also encouraging. As we have discussed in the past our focus across all our operating business is to grow core market business that is sales to small and mid-size employers and we had good success this past quarter. Certainly today's financial and credit markets present challenges for us as they do for others. Our realized investment losses increased from prior quarters as we had some exposed to some of the distressed financial names in the news and the equity market through a relatively small equity index note. Until we see some improvement in the general environment we expect to continue to realize some level of investment losses, but we remain confident tat our portfolio is well positioned and our capital position is strong enough to weather the storm.

Also the widening of corporate bond spreads by 150 basis points to over 300 basis points depending on the asset class in the quarter, pushed a larger position of our fixed income holdings into unrealized loss position. I must admit that I have been somewhat surprised by the focus on our unrealized loss position, as we have very predictable cash needs and virtually no [disernimediation] in our insurance liabilities. So we are truly a buy and hold investor. We are under no pressure to sell investments at a loss to meet policyholder needs and expect the value of our portfolio to rise as fixed income markets stabilize.

Now, while widening spreads have temporarily caused the value of our holdings to temporarily decline, it also created excellent opportunities to put new money to work at very attractive yields without compromising the A2 quality of the overall portfolio. Lastly we continue to operate well within our capital targets for liquidity, leverage and risk based capital.

Now let me offer a few comments on the performance of each of our business starting first with Unum US. Before tax operating earnings for Unum US increase by 7% with generally favorable performance in the group disability and supplemental and voluntary lines which offset slightly lower earnings in group lifeline. Since a lot of the focus certainly as a group is group disability line let me spend a moment just talking about that. Group disability earnings were 6% higher with solid risk results offset somewhat by lower net investment income related to lower bond costs. Importantly though the group disability benefit ratio for the third quarter improved to 89.3%, a decline of 120 basis points from the second quarter of 2008 and 280 basis points decline from the third quarter of 2007.

Seasonally adjusted incidence trends remain generally stable in the third quarter for both our LTD and STD lines of business, and we saw no evidence the weaker economy was adversely affecting benefit results. 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. Unum US sales increased 7% in the third quarter with core group sales increasing 28% and voluntary benefit sales increasing 13%. And as you know these are two areas we have targeted for growth. We remain cautious and discipline in the large case market where sales declined by 1% in the quarter and are 3% lower for the first nine months of 2008. Kevin McCarthy is here with us today to answer any questions you may have about our business or the marketplace.

Now shifting to Unum UK. Before tax operating earnings were $96.1 million for the third quarter an outstanding performance for UK operation. These results are lower relative to the third quarter of 2007 due to decline in the value of the pound. On a local currency basis Unum UK's earnings increased by 2%. Risk results remained excellent with the benefit ratio at52.4% third quarter of 2008 compared to 53.3% in the third quarter of 2007. Results from both quarters included an adjustment to our long-term assumptions for claim reserves that resulted in a reserve releases. However the underlying morbidity and mortality experience in the quarter remained favorable. Tom White will provide more details in his comments about this.

Sales increased 3% in dollar terms or around 9% local currency. Premium income for this segment remains under pressure through as market conditions in the group life and large case market remain very competitive in the UK. Now, looking ahead we continue to believe earnings growth over the near term will be a challenge even on local currency basis, but I can assure you we are taking steps in our UK business to be sure that we're positioned well for 2009. These steps including improving expenses for 2009 and we expect to incur additional expenses in the fourth quarter as we implement this expense and productivity improvement set of programs. But again this will have a favorable impact on our 2009 result. Susan ring is with us here to address any questions about UK business or the UK marketplace.

Now lastly, let me shift to Colonial Life where our pretax operating earnings increased 6% to $66.2 million in the third quarter, continuing the strong level of profitability generated at Colonial Life. These results reflect continued favorable benefit experience for the accident, sickness and disability product lines, which offset somewhat higher benefit ratios for the life, cancer, and critical illness lines. While total sales increased only 2% for third quarter below our long-term expectation our core market sales in the less than hundred lives segment grew 7%. Sales in the large case market were 8% below last year. So again, very consistent with overall them to focus on growing in small mid-size marketplace. Randy Horn is with us on the call to address any further questions you have on Colonial or the Colonial marketplace.

Now since again it is so topical, let me move to offer a few comments on capital. Again we continue to be very comfortable with our capital position and believe we have tremendous financial flexibility as we look to the balance of this year and into 2009. Our third quarter estimate of our risk base capital ratio for our traditional US life insurance companies remain above long-term target of 300% and we are positioned to finish 2008 within our year-end target of 315 to 325%. Leverage excluding a nonrecourse debt and capital north wind holdings finished the quarter at 21.4%, again well below our long-term target of 25%. Approximately a point of this leverage is short-term borrowing to enable us to prefund future investment purchases and take advantage of the attractive yield I mentioned earlier in the marketplace which exists for us today.

Holding company liquidity was $406 million also comfortably above target to cover one year fix charges plus maintain capital cushion for business and economic volatility. We currently project our year-end 2008 holding company liquidity position to be in excess of $500 million. As you know we have completed the $700 million share repurchase approved in the fourth quarter of 2007 and for the year we repurchased 29.9 million shares reducing our share count by over 8% over the year ends 2007 outstanding shares. We expect to continue to generate excess capital, and we will discuss thoughts for this redeployment at the November 11th investor day meeting.

Let me summarize just by saying again we're pleased with the third quarter results. Our core operating segments continue to meet expectations driven by steady consistent risk results across all of our major businesses. Our sales results in our core markets continue to be strong. In what's obviously a very difficult environment we continue to be very satisfied with our investment results and certainly very importantly we're very satisfied too with the financial flexibility we have been able to retain over this period of time.

Now this is certainly a challenging environment and we will continue to take the steps necessary to position ourselves for what is shaping up to be another challenging year in 2009. There are opportunities though in this environment both in putting new cash flow to work at attractive yield, but also in continuing to build off the three strong operating businesses in our portfolio. In this uncertain environment we expect to see business opportunities because of who we are, a company unquestionably committed to the benefits market, both in the US and the UK. And now I'll turn the call over to Tom White who will provide more detail on the third quarter results.

Great. Thanks Tom. I want to take a few minutes to supplement Tom's comment and provide some operating highlights on the quarter.

First within Unum US Group disability. As Tom indicated we continued to see improvement in the group disability benefit ratio which declined to 89.3% for the third quarter. New claim incidence on a seasonally adjusted basis was generally stable in the third quarter with the levels we have experienced in the past several quarters. Our analysis of incidence trends continues to suggest no significant variations either in any occupational categories, case size or type of impairment. Additionally the short-term disability line which often can be a leading indicator of LTD claim incidence, also continues to perform well with stable claim incidence trends throughout the third quarter. Net investment income in the third quarter declined by approximately 3% from a year ago due primarily to a lower level of bond call activity, again a trend that we expect to see continuing into the fourth quarter.

Moving to the group life and AD&D line, results in this line were somewhat lower this quarter than in the year ago quarter at $50.9 million compared to $56.2 million. The benefit ratio was lower than a year ago at 70.4%, this reflects lower incidence rates, but a slightly higher average claim size. The expense ratio again in group life and AD&D was higher this quarter reflecting the mix shift to more core market sales in cases, as well as higher core market sales and quote activities. Also net investment income was lightly lower than the year ago quarter.

Finally within Unum US the supplemental and voluntary line we continue to see very strong results with pretax operating earnings of $71.5 million an increase of 24%. All three primary lines, the recently issued individual disability, the voluntary benefits and long-term care, produced year over year improvement in pretax earnings. Premium growth grew 7% and risk results were stable to improved across each product line.

As Tom indicated earlier, reported sales for Unum US increased by 8% in aggregate and there were several bright spots to highlight. Core market sales for our group lines meaning LTD, STD and group life combined were quite strong increasing 28% for the third quarter and 19% for the first nine months of 2008. LTD core market sales by itself grew 24% in the third quarter and 18% for the first nine months. Sales in the large case market were flat in the third quarter and again we remain disciplined and opportunistic in that market segment.

Finally, voluntary benefit sales were also strong. Sales increased 13% in the third quarter and 18% for the first nine months. Actually case count growth was a strong 24% indicating good activity in the core market segment of voluntary benefits. So to summarize the results for Unum US, continued excellent arriving management results across the board. Some pressure on net investment income due to lower levels of miscellaneous net investment income, but excellent sales trends in our targeted core markets.

Moving to the UK we continue to see strong results for Unum UK, although the rate of growth is slowing and the weaker pound is beginning to unfavorably impact the foreign exchange translation. In dollar terms we saw a 5% decline to $96.1 million in pretax earnings in the third quarter and in local currency before tax earnings increased slightly to 50.9 million pounds from 50 million pounds a year ago. Results for both quarters include an adjustment to our long-term adjustments for claim reserves that resulted in reserve releases of 5.5 million pounds in this third quarter and 8.2 million pounds in last year's third quarter. Excluding the impact to these reserve releases the underlying risk performance remained favorable with an adjusted benefit ratio of 57.1% the third quarter of '08 compared to 60% in last year's third quarter.

Third quarter sales increased 9% in local currency and 3% in dollars with underlying sales trends, and this is excluding the impact of the age equality legislation, actually increased by 19% in the third quarter. The group risk markets in the UK remain very competitive, especially in group life and in the large case segments. We did see an improvement in group life persistency to 74.8% compared to 71% a year ago. However, premium persistency in the group long-term disability line of business declined slightly to 87% for the first nine months of '08 compared to 88% for the comparable period in '07. This level of persistency combined with the current level of new sales activity will make top line growth difficult to achieve, though we do expect the profitability of Unum UK to remain at very robust levels.

Colonial Life continued to have favorable results with $66.2 million in pretax earnings, that's 6% higher than year ago quarter. The benefit ratio was generally stable, 47.5% in the third quarter of '08 compared to 48.6% last year primarily due to favorable performance in the accident, sickness and disability product line. Sales at Colonial increased -- Colonial Life increased by 2% in total, but the underlying trends indicate a continuation of some positive trends that we're seeing in the core market. Continue to see good momentum in our core market with sales in the under 100 employee commercial market increasing by 7.1%, however sales declined by about 8% in the large case commercial market.

We're also encouraged by activity in the market. New account growth at Colonial Life was up approximately 17% for the third quarter, however the average new case size declined by approximately 5%. New sales req recruiting and productivity showed good positive trends with new contracts increasing by 15% in the third quarter and 37% for the first nine months of this year. Finally persistency at Colonial Life remains stable in the major product lines relative to year ago results.

Moving to the individual disability close block segment pretax earnings were $14.2 million, that's down from $29.4 million in the year ago quarter. Risk results were favorable with the interest adjusted benefit ratio at 89.2% this quarter compared to 92.4% last year, due primarily to lower claim reopens and an improvement in mortality experience. Net investment income was significantly lower this quarter due primarily to the lower level of assets supporting this runoff block of business. As you recall in the fourth quarter of last year in conjunction with our securitization transaction, we released excess statutory capital with a resulting decrease in net investment income due to lower asset levels needed to support the allocated capital.

We also received fewer bond call premiums this quarter, and I would caution again that the outlook for miscellaneous net investment income is below its historic trend line and is likely to remain at these lower levels until more normal corporate refinancing and financing activities resume. The closed block segment also was negatively impacted by $4.7 million due to litigation costs in the quarter. Finally our weighted average share count, this is assuming dilution for the third quarter of '08 was 337.9 million shares. This compares to 360.9 million in the third quarter of a year ago and share count as of the end of the third quarter stood at 333.1 million shares.

Book value per share declined to $20.22 at the end of the third quarter compared to $21.70 at the end of the third quarter year ago. When you exclude the net unrealized gains and losses on securities and the net gain on cash flow hedges book value per common share was $21.46 compared to $20.36 a year ago. Earnings on a statutory accounting basis remain very healthy with third quarter of 2008 net gain from operation this is after tax was $154.6 million for our traditional US insurance subsidiaries and net in being on that basis was also $119.4 million.

Now I'd like to spend a few minutes on the investment environment, in our investment portfolio and the capital and liquidity positions of the company. We think a key factor to keep in mind when you annualize the company's financial position is the nature of our liabilities. Since Unum is primarily an employee benefits and individual disability company we have very little [disinnermediation] risk. For the vast majority of our in force block if a policyholder lapses a policy they will stop paying us premiums, but we do not owe them any cash value on the policy. Simply stated. We have very minimal run on the bank risk.

It is because of this liability structure which is different from any other insurance companies you follow, that we have the ability to hold our investments to maturity. Therefore, we are not in a position to have to liquidate investments at an inopportune time such as today with these historically wide credit spreads in order to meet policyholder obligations. Now, from an accounting perspective we classify all of our fixed maturity securities as available for sale instead of held to maturity. This means they are mark to market at each quarter end with the change in fair value reported in other comprehensive income or loss. This subjects the reported fair value of our investments and our accumulated other comprehensive income or loss to volatility from interest rates and corporate spreads at each quarter end.

The bottom line is that liquidity is not an issue for us. And there is virtually no pressure on us to sell securities at a loss to meet cash needs. At the end of the quarter we had short-term debt of $275 million. $125 million of that amount was reverse repurchase agreements which is a form of short-term borrowing. In addition, we had $150 million of short-term debt and we have the cash on hand to retire the remaining portion of that debt when it comes due in May, 2009. As we reported, the level of unrealized losses in our fixed maturity securities portfolio increased in the third quarter as corporate bond spreads widen significantly.

Just to give you a benchmark, the Lehman investment grade index widened by 146 basis points from June 30 to September 30. And the high yield index widened by 312 basis points driving much of the rise in unrealized losses. At quarter end $12.7 billion of our fixed maturity bonds were in a gross unrealized gain position of almost $1 billion. Here are a few facts concerning the $20.2 billion of fixed maturity bonds that had an unrealized, a gross unrealized loss of $2.6 billion.

First of all, 86% of our unrealized losses were related to investment grade bonds with the unrealized loss position driven primarily by wider spreads. 54% of these bonds have been in an unrealized loss position for less than 12 months indicating again that the decline in the market value is due to the recent spread widening. Finally, the increase in spreads was consistent across rating categories, maturities and industries. We basically had a 5% decline in price, which was generally consistent across rating categories. Again this indicates that the primary driver of the increase in unrealized losses was spread driven and not a result of deterioration in credit quality.

Also a positive side to the widening of corporate bond spreads we are witnessing, that is the very attractive yields we're seeing on new money purchases. Our new money yields in the third quarter were 6.77% on a hedge adjusted basis compared to 6.44% in the third quarter and 6.58% in the first quarter. In early October the investment yields we're realizing exceed 7.25%. The average credit rating on these purchase chases in the third quarter was an A2, so you can see we have not sacrificed credit quality in order to achieve these higher yields. This has the benefit of stabilizing our portfolio yield which was a 670, and also improving the net interest margins in our primary product lines which are already substantially higher than target margins.

So let me summarize by comparing current position to the one we were in during 2002 when the last negative credit cycle occurred. Number one, our below investment grade holdings relative to invested assets are 5.1%, so they're basically half the level today than then, giving us flexibility to absorb some down grades of securities without overly impacting the quality of the portfolio. Number two our net interest reserve margins are much wider today, in most product lines they're substantially wider than 50 to 60 basis point margin, and this provides cushion to our reserve if default should rise substantially and negatively impact our portfolio yields.

Number three, statutory earnings power is considerably stronger today at over $600 million on an annual run rate basis, and this enables us is replenish capital should it be impacted by rising investment losses. Number four, we are not owners of sub prime mortgages, and therefore have not experienced realized investment losses from those investments. And five, our capital management metrics are significantly improved. Risk based capital ratios are over 100 points higher, leverage ratio about six points lower and holding company liquidity has swung by over a billion dollars giving us substantial strength and flexibility as we face the challenges of the current market.

Let me conclude with a few comments on the realized investment losses that we recorded in the quarter. As I indicate earlier, our reported net realized investment losses, this excludes the impact of [Digby] 36, totaled $64.8 million after tax or $97.9 million before tax. So on a before tax basis write downs comprised $71.2 million of the total with $27 million of that due to our Lehman holdings and $39.3 million due to an equity link note which was purchased in 2000 and tied to the S&P 500.

Also on a before tax basis net realized investment losses from sales totaled $26.7 million in the third quarter with the primary impact from Lehman at $16.2 million and AIG at $7.8 million. Our remaining exposures to these credits at September 30th on book value basis was Lehman at $3.8 million, AIG at $58.9 million in the equity link note was $43.6 million. Just to update you in October, we further reduced our exposure to AIG by selling $23.5 million of book value of bonds and we redeemed the equity link note into the S&P underlying fund.

We will be pleased to address any specific question that you have regarding our investment holdings in the Q&A session and with that I'll turn the call back to Tom.

Thank you Tom. Before we go to your questions let me just make a few concluding comments. Certainly -- we certainly are not immune to the economy or the swings in the financial market. But I have to say I feel very good about where we stand operationally and financially.

Our strategy today is founded on disciplined profitable growth with greater diversification and a sharp focus on risk management throughout the organization which has served us well these past few years and enables us to operate more effectively in the current challenging environment. Our investment portfolio is well positioned with historically low levels of high yield bonds and minimal exposure to the asset classes that are impacting the financial system today. While unrealized losses in the portfolio are higher due to primarily to widening spreads we do not need to sell investments to meet policyholder obligations and we're using this environment to enhance our portfolio yields and interest reserve margins. Balance sheet is solid, financial flexibility is strong -- with strong RBC leverage and holding company liquidity comfortably ahead of targets. ANd so again we feel very good about the financial foundation right now.

Finally with respect to guidance, we indicated in our prerelease that we are comfortable towards the upper end of our previous guidance of $2.46 per share to $2.51 per share in operating earnings. In the fourth quarter we expect to see a continuation of the generally strong risk results we have seen in the past quarters, but also lower miscellaneous net investment income similar to our experience in the first quarter of this year and the third quarter as we reported. And certainly also further pressure from the decline in the value of the British pound. We also expect somewhat elevated costs particularly within our UK business as we seek to position our business to maintain strong profitability in 2009. And we will update you further on our outlook including our 2009 outlook at the investor day meeting on November 11th.

At this time operator we're ready to begin the question and answer session.

Thank you. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We will take our first question from Colin Devine with Citigroup.

Good morning gentlemen.

Good morning Collin.

Two questions. One if you can comment or perhaps Kevin is available to comment on renewal and pricing trends for the US business. Then secondly perhaps for Randy, it seems to me that Colonial is doing okay, it seems to be I think a little bit behind plans from perhaps where we expected last year at the investor meeting and I don't think that's just the economy. Is it more the strategy struggling a little bit or is it overall economic trends?

Kevin why don't you take the first one in terms of renewal and pricing.

Good morning Colin.

Hi, Kevin.

New business pricing is basically pretty stable. We're prepared to adjust rates going forward if we see an uptick in incidence in claim activity, but we haven't seen that yet. Most of our first quarter of 2009 renewals are out. Rate increases relatively modest, more modest than in prior years, around 3% or so in comparison to as you know in prior years we had more significant rate increases. And our renewal program itself is also a bit smaller in 2009 because we have gone through as you know most of that work during 2005,'06 and '07 and 2008. So unless we see an economic shift I expect pretty stable pricing.

Is rising investment rates give you some room with pricing is that also what we're seeing, it's you don't have to put rates up as much?

We haven't made any shift in sort of interest rate assumption and our pricing. Certainly at higher yields you have that flexibility to consider, but that's not what we're doing at the moment.

Okay, thanks.

Good Randy if I can ask you to address Colin's question about the strategies. But I would say again I think as we have tried to position all the businesses, try to get the focus primarily on the small and mid-size marketplace, I think Randy there's been good successes with that. Probably the places where certainly the comparisons are a little more challenging as when you look at the large cases as part of the business. But let me ask you to sort of speak to strategy, but also what you're seeing in the current environment right now.

And Randy if you could also add on recruiting trends.

I'm comment on that as well. As Tom said strategically we remained focus on target markets which is really that core commercial account below 500 employees with specific focus on less than 100 employee cases and on the public sector market.

From an economic standpoint we don't see anything overly concerning right now, Colin, In September we saw a little pressure on new business and existing cases and this is especially so on the public sector side of it. But as we look at the general metrics of penetration in new accounts, number of policies prepare, premium prepare, that type of thing, those metrics all continue to be very stable.

As Tom pointed out earlier we had very strong growth in the quarter and our new agent recruiting. Those trends continue to look very good for the year, strong new account growth and new account premium was very strong in the quarter. Key metric we follow was average weekly producers and that was up over 6% for the quarter.

But as Tom White mentioned this all tends to be on smaller size cases on average than we have seen in the past. So overall strategically we're going to stay focused on those key target markets. The economic environment does create some head winds for sales, but we're getting through it with high activity levels again in those target markets. But the basics of foundation building, recruiting, productivity of new agents, all of that continues to look very strong Colin.

Great, thank you very much.

You bet.

We will go next to Mark Hughes with SunTrust.

Thank you very much. It sounds like you're doing quite well on claims trends. Have you heard any uptick in incidence levels at perhaps other insurers who have not been as careful in terms of the underwriting or focusing on small case or is there something different about this downturn?

Kevin, do you want to take that one for Mark.

Good morning, Mark. To tell you the truth I haven't heard much from other carriers either. I think we have seen some mild increase in renewal activity from other carriers in comparison to prior years, but not much yet in terms of incidence impact. Sometimes incidence lags though in economic downturn, so we're still being pretty cautious, watching it, monitoring it in every industry sector, size section and being prepared as I said to Colin to act increasing our renewals if we have to.

In terms of new sales is it -- have any of your competitors backed away from the market perhaps, is that been a benefit for you or is your greater activity what's driving the new sales?

Yes, I haven't seen really too much of a significant shift in the marketplace. We're pretty happy with where we are. As I said, our pricing stayed stable, our building ratios are stable, activity is up 13% and I think that's primarily what's driving our sales volumes.

Thank you.

Thanks, Mark.

We will go next to Darren Arita with Deutsche Bank.

Good morning.

Good morning, Darren.

I was wondering Kevin if you could provide a little more color on the competitive trends in the US. I know you touched a little bit on it, but also how do you expect those trends to change as the economy weakens?

Good morning Darren. At least strategically for us, I mean we have ramped up our sales activity, we'veramped up focus on voluntary sales and package sales, we have rolled out our simple unit platform now pretty much everywhere in the United States. And although it's early with our simply Unum initiatives, trends there, early trends look pretty strong for us.

And I think over the course of the next year if we continue to see economic pressure you might see companies that are well positioned in the smaller and mid-size markets having maybe a little bit easier time of it than companies that are in the large case marketplace. And I'd expect to see a lot of packaging of products for efficiency, so maybe more packaging of life, STD, LTD and voluntary benefits together and that's what we have been positioning to do anyway with buildout of Simply Unum platform and enrollment capabilities.

Okay. And what are your thoughts about additional price increases and changes in risk appetite with the backdrop of a riskier credit and economic environment?

With respect to Unum US our renewal program as I said to Colin is pretty modest so far. We are tracking incidence, and recovery patterns, and job loss patterns, and those kind of things in every industry sector and size sector. We're prepared to shift business mix as we have to and we continually do that anyway, about 70% of our business is sold in our target markets. We continually adjust those target markets based on economic analysis. I think in general we're prepared to sort of make necessary adjustments in pricing and target market focus and even line of business focus in order to mitigate any uptick in incidence which primarily affect the long-term disability line.

Okay. Thank you.

Thank you Darren.

(OPERATOR INSTRUCTIONS) We will take our next question from Mark Finkelstein with FPK.

Good morning.

Good, morning, Mark.

You talked about taking advantage of the market and wider spreads, can you just talk about where exactly you're focusing new money and maybe just a comparison of kind of credit quality of what you're buying now versus the overall portfolio?

Yes. Tom, why don't you expand on that.

Sure, Mark. I know the general trend has been actually a little bit of an upgrade in the quality of what we're buying. The average quality in the bond portfolio is an A2. And I would say that over the last couple of months and certainly in October it's a touch higher than that. There are lots of examples where we purchased some high single A and even low double A credits at very attractive spreads. We participated in an IBM bond offering at close to an 8% yield, I think that's A plus credit, A 1 credit,. Pepsi Co at 400 basis point spread, Honda credit, a double A credit at 380 off.

So we haven't -- we haven't had to stretch to pick up any yield, it's just the extraordinarily wide spreads that we're seeing. So it's, no give up in quality in improvement in yield we will actually -- at the investor day we will give you the statistics on what we saw in October, but it was clearly a wider spread on the purchases we were making in the month of October.

Okay. The litigation costs in the closed lock are those costs done or will we see more in the fourth quarter, maybe just a little bit about the nature of that claim?

There's nothing that we're seeing in the fourth quarter at this point. And the costs that we saw in the third quarter related to a claim case, an older individual disability case where there was a damage award against the company. We do hold a litigation reserve, but this was expensed in the quarter again it was $4.7 million.

I'd say that underlying that, if you looked at the kind of the general trend of litigation, claim related litigation, it is down, it has been down for the last handful of years. It's probably running somewhere between a quarter and a third of what we were seeing back in kind of the 2001, 2002 timeframe. So these things will hit every once in a while, every four, five quarters there seems to be one that occurs. I'd sai they're much, much less frequent today because of the claims process as opposed to several years ago. But again this one kind of dates back to earlier in the decade.

Okay. Then I guess this is a question for Kevin. Persistency is obviously much higher in the core than it is the larger cases and that trend obviously continued in the third quarter. I'm just curious if -- what is the actual kind of trend in the large cases that you're losing? If there is one. Is it occupation based, is it renewal price increased based, is there any kind of overall trend you're seeing that can kind of characterize the lapsed large cases?

Yes. Maybe two. In life it tend to be renewal price based, that's not too different than it's ever been. In long-term disability I think also to some extent although much less now that we've sort of gone through that block aggressively over the several years, the lapse rates are considerably down in LTD versus where they were a few years ago.

In STD, that line of business has some sensitivity to companies going back and forth between whether they want to be fully insured or self insured and sometimes that drives effect. So it varies but I don't see any significant change in trend.

Okay, great, thank you.

Thank you, Mark.

We will go next to Jeff Schuman with KBW.

Good morning.

Good morning Jeff.

Hi. How are you?

Fine thanks. How are you?

Okay. I wanted to ask about a couple things that are maybe related, or maybe they're not related. But I'm thinking about your renewal pricing and what you have said is that you're seeking pretty modest increases at this point based on the fact that claims incidence trends have not yet increased. But I'm just kind of thinking about the time that's required I guess to achieve pricing. If you do see softness in the economy and different results in '09 then I guess 2010 renewals then look a ways off, particularly if you consider multi year rate guarantees in some cases.

I guess I'm wondering whether it might be an option to consider more conservative approaches towards new businesses, but then maybe source growth and allocate capital in different directions? I mean I would think at this point market there are market participants that are really desperate for capital solutions. I mean is this kind of an extraordinary opportunity maybe to source growth through reinsurance or other transactions as opposed to just writing new business at kind of current market returns?

Well, jeff, let me set the tone and maybe ask Kevin to state to the pricing side, because you're right there are sort of a couple things embedded in your question. Certainly one aspect is -- I think we don't want to bank on it but we probably are going to see some instability in the marketplace for the products and services we sell, that was to my point earlier about the fact we are committed to the businesses that we're in. Therefore with that commitment we're going to see opportunities in this environment we may not otherwise see.

That's opportunities in the market to do business, on a case, but that's also potentially maybe even acquisitions or blocks of business that may come along. So we want to be prepared to look at those, but we don't certainly have to do anything. We can continue to very much follow the path that we're following. So I want to assure the group there's a high discipline factor if we see things that come our way -- that come because of the environment we're in. We're going to continue to be in the flow there, to look at things like what you're referring to. My guess is we're going to say no many more times than we say yes as we see those kinds of opportunities. The other part of it it, Kevin, is in the pricing of business today. And I think to a degree there is a caution that's embedded in how people are thinking of underwriting and pricing even though we haven't necessarily seen any tangible evidence of any incidence changes per se.

Right. Good morning, Jeff. Well new business pricing is up modestly and we continue as I said earlier to look at that sort of not just in the aggregate but by industry by industry. And will continue to be pretty I think pretty conservative on our pricing. If you look at comparisons to JAJ Media data for example our premium for life is significantly higher than the market and in fact our new business premium for life was up 5% whereas the market was down 6%. I think we have that spread about as wide as we can make it relative to competitors and still stay on track with growth goals.

In terms of other areas of focus though, we tend to think about price increases primarily related to the disability line. If you think about our sales mix we're considerably different now and continue to move in that direction. Much more core sales versus large case sales, of course. But also, supplemental benefits are 50% of sales now. And that's not really sort of in that same ballpark of economically sensitive at least on the risk side.

That's great. Can you remind me what is the typical duration of the rate guarantee in your core market for disability today?

Tends to be two to three years. So i'd say on a weighted average probably two and a half.

Thanks a lot Kevin.

Good. Thanks, Jeff.

We will go next to Randy Binner with FBR Capital Markets.

Hi, thank you. I think this question is more for Kevin. You kind of covered it before, but there's been a lot of talk about not seeing higher incidents yet, but I think one of your large competitors did see more issues with recoveries this quarter. I wanted to get more clarity on, if you've seen that in the market more difficulty getting folks back to work?

Not yet we haven't. In fact we had pretty strong recoveries and have had consistently strong recoveries over the last seven, eight quarters. And we didn't really see any shift in the third quarter either. Recoveries remain rock solid. I think if we get a prolonged period of high unemployment rates and job loss, it does sometimes get harder to get people back to work. In a sustained difficult employment environment you might see a flattening of recoveries, and maybe a reversal and not able to get as many of them. But we haven't seen that yet.

Okay. From your experience will it ever happen that recoveries would just jump to the forefront in the loss process and you wouldn't see the incidence rise first? Or is that just an inevitable relationship, incidence first and then slower recoveries later?

I think generally speaking we see incidence changes before we saw recovery changes.

Okay, fair enough. On the litigation front just a question about obviously the litigation trend has been down in the last few years and that could be because of favorable economy and various reforms in the legal system. I'd just be interested to get a little more color on if you think there's increased litigation risk in a softer economic environment or if that would be overcome by reforms that the system is seeing just in general across the United States? Thanks.

I don't know that we have seen a relationship between economic trends and litigation trends. Our claim related litigation as I said is down very significantly from where it was. And it really tracks the changes and improvements in the quality of the claims management process that we put in place.

Now, we're subject to decisions like what we had this quarter. I'd say one of the benefits that we have seen is with some of the Supreme Court rulings on limiting the punitive damage awards to a single multiple of the actual damages in the case certainly protects us against some of these wild jury decisions that you can see in certain situations. We don't see those.

But, we're going to have as I said one of these every handful of quarters, that's kind of the nature of the business. But again the underlying trends are down significantly and that reflects more the claims management process having come out of the regulatory reviews and made changes to our process. We can say without hesitation that our claims management process has been scrubbed and reviewed and blessed by the 50 state insurance departments. So we manage claims exactly the way they expect them to be managed.

Great, thank you.

Good. Thanks, Randy.

And with no further questions in the cue I'd like to turn the conference back to Mr. Tom Watjen.

Thank you operator. And thank you all again for taking the time to join us on the call. We look forward to seeing many of you at our investor day meeting on November 11th in New York. Again, this will complete our third quarter 2008 earnings call.

Again, that does conclude today's presentation. We thank you for your participation and you may now disconnect.