普登 (UNM) 2008 Q4 法說會逐字稿

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

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

Great, thank you and good morning to everyone and welcome to the fourth quarter 2008 analyst and investor conference call for Unum Group.

As we get started, I want to remind you that our remarks this morning will include forward-looking statements which are statements that are not of current or historical fact. As a result actual results might differ materially from results suggested by these forward-looking statements.

Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the sections titled cautionary statement regarding forward-looking statements and reserve factors in our annual report on Form 10-K for the fiscal year ended December 31, 2007 and also in our subsequently filed Form 10-Q. Our SEC filings, including our Form 10-K and 10-Q, can be found in the Investor section of our website at Unum.com.

Please also 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. As usual a presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on our website also in the Investor section.

Yesterday afternoon Unum Group reported earnings for the fourth quarter 2008. Net income in the quarter was $41.8 million or $0.13 per diluted common share compared to net income of $160.5 million or $0.44 per diluted common share in the fourth quarter of 2007.

Included in these results for the fourth quarter of '08 are net realized after tax investment losses of $167.6 million or $0.50 per diluted common share and $16.5 million or $0.05 per diluted common share in the fourth quarter 2007. These losses include the impact of the provisions of DIG B36 accounting which require changes in fair value of an embedded derivative in a modified coinsurance contract to be reported as realized investment gains and losses.

This accounting requirement resulted in a fourth quarter 2008 realized after tax investment loss of $120.1 million compared to a -- excuse me, compared to a $23.3 million after tax loss in the fourth quarter of '07. Net realized after tax investment losses related to sales and write-downs of investments were $47.5 million in the fourth quarter of '08 compared to net realized after tax investment gains of $6.8 million in the fourth quarter of 2007. Results for the fourth quarter of 2007 also included after tax debt extinguishment cost of $36.1 million which is $0.10 per diluted common share.

So excluding these items after tax operating income was $209.4 million or $0.63 per diluted common share compared to $213.1 million or $0.59 per diluted common share in the fourth quarter 2007.

On the call this morning are President and CEO Tom Watjen, also Bob Greving who is Executive Vice President and 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.

Thank you, good morning. The fourth quarter was a good quarter for Unum which closes out a pretty good year for us in 2008 and let me touch on a few of the highlights. First as Tom mentioned in his opening remarks, excluding net realized after tax investment losses we reported $0.63 per share in operating income for the fourth quarter which was 7% higher than the $0.59 we reported in the fourth quarter of 2007. This brings our full year 2008 operating income to $2.51 per share a 14% increase over 2007.

Second, operating results in the quarter remain strong. Risk results were generally in line with our expectations across all our core businesses. This was tempered somewhat by lower miscellaneous net investment income, the weakness of the British pound which impacted the translation of our UK earnings and expenses primarily related to employee termination costs associated with cost management actions taken in Unum UK.

Third, we saw continued positive momentum in our sales results. The focus across all of our operating businesses remains to profitably grow our core market businesses for the sales to small and mid-sized employer market place. And we saw good success again this quarter.

Fourth, reflecting the challenging investment environment realized investment losses remain higher than normal this quarter; however, the fourth quarter losses excluding DIG B36 were somewhat lower than in the third quarter of 2008.

While we expect to continue so see a higher than normal level of realized investment losses until the general economic and financial market environment improves, we remain confident that our portfolio is well-positioned to do weather this difficult business environment. And we have the financial flexibility to absorb the investment losses which might occur in this more challenging period.

Also the net unrealized loss position in our fixed maturities portfolio widened somewhat in the fourth quarter, which again reflects the widening of spreads, particularly this past quarter in the below investment grade sector of the market. And Tom White will have more on this in a moment.

As we have discussed with you in the past, we have very predictable cash needs and virtually no disintermediation risk in our insurance liabilities, and therefore we are under no pressure to sell investments at a loss to meet policyholder obligations.

As we have stated before these wider spreads also present favorable opportunities for new investment. The fourth quarter provided an excellent environment to put new money to work at very attractive yields, and therefore enhance our portfolio yield, and I might add, without adding any additional risk to the portfolio.

Lastly, we continue to comfortably exceed our targets for capital and liquidity, leverage and risk-based capital. This financial flexibility positions us well for the continuing challenging environment we find ourselves in.

Now before I make a few additional comments on our fourth quarter operating results, I wanted to spend a moment on the change in 2009 guidance we announced with operating earnings release yesterday. We provided our initial guidance for 2009 at our investor day meeting back on November 11 based on business indicators as of the end of October. Over the last -- over the past three months we have seen continued poor financial market performance, a dramatic weakening of the British pound to levels not seen in over 20 years, and certainly further signs that the economic and employment picture will worsen in 2009.

In light of these factors we felt it was prudent to adjust our guidance downward, as others have, to in our case a range of $2.45 per share to $2.55 per share in operating earnings. Again this revised guidance reflects three things.

First, a move from an exchange rate of $1.65 to $1.50. Second, our higher expected pretax pension cost of approximately $42.5 million which reflects the lower rate of return on plan assets during 2008 and the lower discount rate assumptions for our pension liabilities.

Thirdly, while we have not yet seen any meaningful changes in our paid incidence claims as the employment picture has deteriorated, since most economists have assumed further pressure on employment and consumer confidence we felt that it was prudent to incorporate some further deterioration in our outlook for 2009.

We are now projecting operating earnings in 2009 to be slightly below that of 2008 down from our earlier guidance of growth of 4% to 6%. I think it's important to note again that at this time we have not seen any material impact on our operating results from the weak economy. But again given the general view things may worsen we felt it was appropriate to assume so in our guidance as well.

Our 2009 capital guidance we presented in November is largely unchanged with risk-based capital for our US insurance subsidiaries still expected in the range of 330% to 335%, holding company liquidity to exceed $750 million. We are making a slight revision to our leverage expectation from our earlier projection of 18% to 19% to a range of 20% to 21%.

As you can see, even with this revised operating earnings guidance for 2009, we believe Unum will maintain excellent financial flexibility, a necessity in these extraordinarily turbulent times. Now let me come back to our fourth quarter results and provide a few comments on the performance of each of our businesses.

First with Unum US, our pretax operating earnings for Unum US increased 13.5% to $182.6 million in the fourth quarter with favorable performance in the group disability and supplemental and voluntary lines of business, which offset lower earnings in the group life line.

Group disability earnings were 38% higher, with solid risk results offset by somewhat by lower net investment income related to lower bond call premiums. Importantly the group disability benefit ratio for the fourth quarter improved to 88.7%, a decline of 60 basis points from the third quarter of 2008 and a decline of 280 basis points from the fourth quarter of 2007.

Seasonally adjusted submitted incidence trend showed a slight rise in the fourth quarter for our LTD line of business, but remained within the range of incidence levels we have experienced over the past several quarters. I might add that this result is within our range of 88% to 89% that we had projected for the end of 2008 or early 2009.

We saw very strong results from the supplemental and voluntary line with earnings growth of 26%, while group life and AD&D results were down about 16% driven primarily by lower group life premium income and slightly higher claim experience.

Total Unum US sales increased 13% in the fourth quarter with strong results in the core market where sales grew almost 30%. Our voluntary benefit sales were flat this quarter, but full year 2008 grew at almost 15% and the pipeline for 2009 sales activity is encouraging. Kevin McCarthy is available with us today obviously to answer some questions you may have about the business and the marketplace.

Now turning to Unum UK, our pretax earnings in Unum UK were $54.6 million for the fourth quarter. These results were lower relative to the fourth quarter of 2007 in large part due to the significant decline in the value of the British pound. Risk results remain in-line with our longer term expectations, though driven primarily by a decline in premium income were somewhat higher than recent quarterly experience.

Unum UK's fourth quarter results were also impacted by $6.2 million of employee termination costs in the quarter as they implemented a number of cost-reduction actions. These actions are intended to bring our expense base better in line with our premium expectations as well as improve our operating effectiveness. Susan Ring is available with us here this morning to answer any questions you may have again about our UK business or the UK marketplace.

And finally in our Colonial operation our pretax earnings increased 13% to $66.3 million in the fourth quarter as we continue to enjoy solid margins in this business. While total sales increased only 1% for the fourth quarter, below our long-term expectations, our recruiting results and productivity measures are encouraging, and we believe will help grow this business in the future. And again Randy Horn is with us here this morning to answer any questions you may have about Colonial or the Colonial marketplace. Now let me come back to investments.

I mentioned it earlier but let me say it again that our investment portfolio continues to perform well with a low manageable level of default experience. We are seeing good opportunities to put new money to work at attractive yields while maintaining our investment quality objectives.

As for the increase in our net unrealized investment losses we attribute the majority of the growth to wider corporate bond spreads. While we certainly monitor these changes in our portfolio values it's not something we feel is a concern since we are not in a business which will lead to the need to sell investments prior to maturity.

Lastly with regard to our capital position, we closed 2008 in what we believe to be a solid financial position. One that positions us well for this challenging environment. Our risk-based capital ratio for our traditional US life insurance companies is 327% above our long-term target of 300%. Leverage, excluding the nonrecourse debt and capital of Tailwind and Northwind Holdings, finished the year at 21.5%, again below our long-term target of 25%.

Our holding company liquidity was $526 million, also comfortably above our $270 million target which allows coverage for one year fixed charges plus the maintenance of the capital cushion for business and economic volatility.

In summary I feel good about the fourth quarter results and our position as we head into a challenging 2009. Our core operating segments continue to meet expectations with steady risk results across our major businesses. We have good sales momentum in our targeted core markets. Our investment portfolio continues to perform well despite the very difficult environment. We continue to maintain solid financial flexibility. And finally our people are focused on executing our plans and not letting the external environment become a distraction.

Looking ahead 2009 is certainly shaping up to be another challenging year. We are benefiting from the steps we took over the past few years to strengthen our operating and financial performance. Our primary focus is to continue to execute our plans and being alert for opportunities this environment may create. Now I'll turn the call back over to Tom White who will provide more detail on the fourth quarter results.

Thanks Tom. I want to take a few minutes to supplement Tom's comments. and provide some operating highlights on the quarter. And I'll also provide an update on the investment portfolio.

First looking at operating results for the Unum US group disability line, we continue to see improvement in the group disability benefit ratio which declined to 88.7% for the fourth quarter. New submitted claim incidents on a seasonally adjusted basis was slightly higher in the fourth quarter than the third quarter of 2008, but remained within the range of incidence levels we have experienced over the past several quarters.

Additionally, the short-term disability line, which often can be a leading indicator of LTD claim incidence, continues to perform well with a low level of claim incidence in the fourth quarter. The discount rate on new claim incurrals was raised in the fourth quarter which produced a slight benefit to our fourth quarter results. I will note, however, that the beneficial impact of the discount rate adjustment was less than the 60 basis point improvement in the overall benefit ratio from the third to the fourth quarter.

Net investment income in the fourth quarter declined by slightly more than 1% from year ago levels primarily due to lower -- a lower level of bond call activity which is a trend we have seen -- we do see continuing into 2009.

The Unum US group life and AD&D line results here declined to $50.3 million in the fourth quarter compared to $60.1 million in the year ago quarter, but were in line with the $50.9 million that we reported in the third quarter of 2008. The benefit ratio was fractionally higher than a year ago at 70% primarily reflecting a higher average claim size.

Margins in this line were also impacted by a higher expense ratio which is due to the mix of business shift to more smaller core market cases, and also a 3% decline in premium income.

Moving to the Unum US supplemental and voluntary line we continue to see very strong results here with record quarterly before tax operating earnings of $72.6 million, an increase of 26%. All three primary lines which are the recently issued individual disability, the voluntary benefits and long-term care produced year-over-year improvement in operating earnings.

Premium income grew by 7.7% and risk results were stable to slightly improved across each product line. As Tom indicated earlier, we reported sales for Unum US -- or reported sales for Unum Us increased by 12.7% in aggregate and there were several bright spots to highlight.

Our core market sales for our group lines, which are LTD, STD and the group life and AD&D combined, showed continued strong momentum, increasing 29.6% for the fourth quarter and 23.7% for full year 2008. Sales in the large case market remained flat in the fourth quarter as we remain disciplined and opportunistic in that market.

Voluntary benefit sales increased less than 1% in the fourth quarter but increased 14.6% for full year 2008. Our activity in the core market remains strong with high activity levels for quotes and new coverage sales. Finally persistency levels for our primary lines within Unum US improved over 2007 levels most significantly in the STD and group life lines.

So to summarize the results for Unum U.S. as a segment, continued strong risk management results across the board, some pressure on net investment income due to lower levels of miscellaneous net investment income, but continued positive sales momentum particularly in our targeted core markets.

For Unum UK, the decline in the value of the British pound relative to the dollar negatively impacted the translated fourth quarter results for the Unum UK segment, but the underlying operating results were generally strong.

The benefit ratio rose to 63% in the fourth quarter driven primarily by the decline in premium income. We experienced an uptick in new claim incidence in the fourth quarter primarily from our banking sector exposure, however this increase was largely offset by strong claims management and higher claim recoveries.

As mentioned previously, we recorded GBP3.9 million or $6.2 million of expenses in the fourth quarter related to our disciplined cost management program which is intended to bring the expense base of Unum UK more in line with the lower level of premium income, and to improve operating efficiencies going forward. These incremental expenses totaled GBP4.4 million in 2008 and are expected to be more than offset by cost savings and improvements in operating efficiencies in 2009.

Fourth quarter sales declined 22% in dollar terms but in local currency increased 2.4% in the fourth quarter and 3.6% for the full year. The group risk markets in the Unum UK remain very competitive especially in group life and the large case segments. The competitive dynamics of the UK market are also impacting our persistency results with persistency for group disability at 87.4% which is below our long-term expectations. 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 strong levels.

Moving to Colonial Life, we had continued favorable performance with $66.3 million in before tax earnings for the fourth quarter, 13% higher than year ago levels. The benefit ratio was fractionally higher than last year, 48.3% compared to 48% last year, reflecting slightly higher claims activity in the older cancer blocks, but generally stable performance across the other product lines. We are in the process of taking pricing actions on the underperforming older cancer product lines and no longer actively market these specific policies.

Sales at Colonial Life increased by 1.1% for the fourth quarter and 1.6% for the full year, below our long-term growth objectives and certainly impacted by the weak economy. We remain encouraged however by activity levels in the market. New account growth was up approximately 6% in the fourth quarter. We're seeing pressure on rework sales which are the follow up sales to existing customers. This is historically an important source of sales growth at Colonial Life.

New sales rep recruiting continues to show positive trends with new contracts increasing by 4% in the fourth quarter and 28% for the full year. Finally persistency at Colonial Life remains stable in the major product lines relative to year ago results.

The Individual Disability - Closed Block segment pretax earnings here was $7.1 million in the fourth quarter of 2008 compared to $15 million in the year ago quarter. Risk results were steady with the interest adjusted benefit ratio at 82.6% this quarter compared to 83.8% last year.

Net investment income continues to be volatile, and again this quarter was significantly lower than the year ago quarter primarily due to the lower level of asset supporting this runoff block of business, as well as the ongoing impact of fewer bond call premiums this quarter which negatively impact net investment income by $5 million compared to the year ago quarter.

The Corporate and Other segment recorded an operating loss of $400,000 compared to a loss of $65.2 million in the year ago quarter. Excluding the debt extinguishment cost of $55.6 million, the fourth quarter of 2007 loss was $9.6 million. This segment did benefit from $7.6 million of other income received in the fourth quarter related to a refund of interest primarily attributable to prior tax years. I will also point out that interest expense was reduced to $26.9 million in the fourth quarter of '08 compared to $38.7 million in the year ago quarter.

Finally our weighted average share count assuming dilution for the fourth quarter was 331 million shares compared to 360.7 million shares in the fourth quarter of '07, and the actual number of shares outstanding at year-end 2008 was 331.1 million.

Book value per share declined to $19.32 per share as of December 31, 2008. This compares to $22.28 at December 31, 2007. When you exclude the net unrealized gains and losses on security and the net gain on cash flow hedges, book value per common share was $20.45 at the end of 2008 compared to $20.79 at the end of 2007.

Earnings on a statutory accounting basis remained very healthy with fourth quarter 2008 net gains from operations after tax of $227.4 million for our traditional US insurance subsidiaries. Net income was $143.9 million. For full year 2008, the net gain from operations again after tax was $682 million for our traditional US insurance subsidiaries and net income was $540.8 million.

Now I'd like to spend a few minutes on the investment environment and our investment portfolio and also the capital and liquidity positions of the Company. On our third quarter conference call and at our November analyst meeting, we discussed with you our liquidity position.

To summarize, Unum is primarily an employee benefits and individual disability company. 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 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 the historically wide credit spreads, to meet policyholder obligations.

In addition we have very little refinancing risk. At year end we had short-term debt of $190.5 million, $58.3 million of that amount were reverse repurchase agreements which will be paid off with operating cash flows. And then $132.2 million is short-term debt that is due in May of 2009. We have the cash on hand to retire that debt when it comes due or we will look to refinance if market conditions improve.

During the fourth quarter, the level of unrealized losses in our fixed maturity bond portfolio increased as corporate bond spreads widened further. The net unrealized loss position was $2.1 billion at December 31, 2008, compared to $1.7 billion at September 30th, 2008.

When you look back at the third quarter of '08, we commented on our call and at our investor meeting that we had experienced basically a parallel shift in the value of our fixed maturity holdings. That is basically all securities regardless of ratings declined in value by roughly 4.5%. Let me contrast that to what we experienced in the fourth quarter in that our more highly rated securities tended to improve in value while the lower rated securities declined in value.

You will see this in the various bench marks. For example, the ten year treasury bond declined in yield by approximately 160 basis points during the fourth quarter, while most benchmark corporate bond spread indices widened. The single A index widened by about 36 basis points and the triple B index widened by 284 basis points and the below investment grade index widened by over 600 basis points.

So when you examine page 13.1 of our fourth quarter statistical supplement you will see that at year end we held $13.5 billion of fixed maturity bonds that had a gross unrealized gain of $1.3 billion. This will compare to third quarter of '08 holdings of $12.7 billion of fixed maturity bonds with gross unrealized gains of $911 million.

Looking again at the fourth quarter of '08 you will see that we had $18.4 billion of fixed maturity bonds with a gross unrealized loss of $3.4 billion. This compares to the third quarter when we had $20.2 billion of fixed maturity bonds with gross unrealized losses of $2.6 billion. A couple of points to make on those securities in a gross unrealized loss position.

First, 81% of our unrealized losses were related to bonds that carry an investment grade rating, so we would expect the default risk to be relatively low on those. Second when we examine the bonds trading at less than 80% of book value, 86% of these have been in a market-to-book value ratio of less than 80% for less than 180 days, which to us indicates that the price decline has been recent and a result of the significant widening of spreads in the second half of 2008.

Now as Tom said there's also a positive side to the widening of corporate bond spreads in that the very attractive yields we're seeing on new money purchases. Our new money yields in the fourth quarter were 8.47% on a hedge adjusted basis, and this compares to 6.77% on a hedge adjusted basis in the third quarter. The average credit rating on these purchases in the fourth quarter was an A2 so we were able to achieve these yields without sacrificing quality. This has the benefit of stabilizing our duration weighted book yield at 6.72% compared to 6.70% at the end of the third quarter.

There have been some additional investment classes that have been receiving a lot of attention lately so I'd like to spend a minute discussing our exposures to CMBS and commercial mortgage loans as well as our exposure to hybrid securities.

First our CMBS exposure is nominal at $4.2 million of book value. And just as with sub-prime mortgages we were never a significant investor in these types of securities.

Our commercial mortgage loan exposure was $1.27 billion at the end of 2008 or 3.4% of total invested assets. We currently only have one mortgage loan of $5.2 million that is delinquent. And we have another four loans which total $30 million that are on our watch list, which is a list of investments that are presently current but are subject to enhanced monitoring and more intensive review.

We believe our overall commercial mortgage loan portfolio is of high quality with a loan to value ratio of approximately 67%. And this is with the value based on our internal underwriting and not the appraised value which is generally higher. We're typically -- or we are underweight in retail loans and on a geographic basis we are underweight in the California market.

Moving to hybrid securities at year end 2008 we had holdings of approximately $496 million on a book value basis. Approximately 64% are tier one securities with the balance in the upper tier two securities. We have three positions in -- we have positions in three securities which currently carry one or more below investment grade ratings. These are Royal Bank of Scotland, Northern Rock and Anglo Irish Bank. And our combined holdings of these three is $129 million on a book value basis. The balance of our hybrid holdings are investment grade and all of our hybrid holdings are current on their interest payments.

I'll close my remarks with a summary of realized investment losses for the fourth quarter. Again our reported net realized investment losses excluding the loss of $120.1 million after tax or $184.7 million before tax on DIG B36 this totaled $47.5 million after tax or $73 million before tax.

On a before tax basis the realized losses from write-downs totaled $83.5 million while realized investment gains from sales totaled $10.5 million. The primary sources of the realized investment losses from write-downs were Ford Motor at $32 million. There were two media companies Idearc at $21.6 million and McClatchy at $12.1 million, then Lyondell Petrol Chemical at $12.9 million. We will be pleased to address any specific questions you may have regarding our investment holdings in the Q&A session. With that let me turn it back to Tom for some final closing comments.

Thanks Tom. Before we move to your questions let me conclude with a couple of final comments. As you saw yesterday, we announced that our CFO, Bob Greving, has announced his intention to retire later this year, and we have be initiated a search process for his successor.

As you know, Bob has been an integral part of our senior leadership team for more than a decade, and has been instrumental in helping us build the strong financial foundation we enjoy today. Bob has been kind enough to provide us with plenty of advance notice to ensure an orderly transition, and will certainly be very involved in the process, including to help to assure a transition, so Bob isn't going anywhere soon.

In closing, I would like to reiterate how pleased I am, but not complacent, with the current position of the Company. We're not immune to feeling the effects of the economy but I believe we have the management and resources in place to assure we can successfully overcome the challenges that lie ahead.

Our strategy today is founded on discipline, profitable growth with a sharp focus on risk management throughout the organization. This strategy has served us well as we are a more diversified company better positioned for today's 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 causing significant losses in the financial system today. While unrealized losses in the portfolio remain higher due primarily to wider corporate bond spreads, our liquidity position is strong, and the nature of our liabilities means that we do not need to sell investments to meet policyholder obligations.

Our balance sheet is strong and our financial flexibility is as well, with risk based capital, leverage holding company liquidity comfortably ahead of our target. At this time Operator we're ready to begin the Q&A session.

Thank you. (Operator Instructions) We will go first to Darin Arita at Deutsche Bank

Hi, good morning.

Morning Darin.

A couple questions here. The first one is on US group long-term disability. I was just wondering if you could talk about any changes in claims trends that you're seeing across industries as you look at the spectrum of lower risk to higher risk sectors.

Sure. Maybe I'll ask Kevin to address that one.

Morning Darin. As Tom mentioned we saw a slight uptick in incidence during the fourth quarter, but most of that was what I will call normal noise. We didn't see any uptick for example in education or finance. We saw mild uptick in manufacturing, transportation, utilities which we normally see. But then we look at instances in SDT or IDI or waiver premium and life and in fact, if anything, we saw slight improvements in incidents there. So overall I view it as a pretty normal and stable quarter in terms of incidence, no particular trend to point to.

Okay, great. Turning to the UK, the competitive environment still seems difficult there. I was just wondering how quickly do you think claims trends could increase as unemployment rises so some of your more aggressive competitors feel some pain?

That's a good question. Susie, do you want to take that one?

Yeah sure thanks Darin. As you say it is quite (inaudible) for our competitive environment in the UK at the moment and it has been pretty much throughout 2008.

In terms of claims trends, we have seen an increase in incidence during the fourth quarter so that was primarily from our banking sector, and primarily for psychological claims reasons. And we have already seen that come through. Having said that, we have had an increase in recoveries which should more than offset that. So our claims runoff experience has been continually very strong. And so that has already come through.

We also have a very strong investment in our return to work efforts. So we have seen consistent favorable performance on that front. So I think that provides us some additional resilience in terms of the operating environment that we're operating in.

And maybe Susan too, I think Darin was trying to get also to the competitive environment too. And I think for the most part, although you see some competition in group disability, probably the greatest competition is in group life. Even though we're seeing maybe a softer economic environment we may not see any let down in the competitive dynamics in the group marketplace.

I agree. As I was saying earlier, it's very hostile from a competitive point of view. We are seeing that really right across all products, but it is even more aggressive in the group life sector which has had some impact on our persistency results during 2008. We do expect that to continue during 2009, particularly because we know we have new competitor entering the market and we expect them to make a low-price play. So we don't really see that's going to change in 2009.

All right, thank you.

Thank you Darin.

Next we will go to Jeff Schuman at KBW.

A fairly narrow question here. The pension -- the increase in pension cost, how will that emerge? It sits $42.5 million in '09, should I just think of that as just a $10 million a quarter load that goes forward or is there a one-time element as a part of that?

This is Bob Greving. Basically it will be assessed on a quarterly basis, so it will emerge on a fairly level basis each quarter.

Also I would add it will show up in the corporate and other line.

Okay.

Expense line there.

Right.

But absent a change in market conditions it would go on beyond '09. It's just a new level, is that how we should think of it?

Yes, as you know the accounting for pensions is kind of strange and the losses that were incurred in the year in the investment portfolio get amortized over a number of years. So we will still see elevated expenses for several years, but it will ultimately settle back into I will call it the normal cost range.

Bob, I'd say at the end of the year there's another assessment of both the costs of the assets and liabilities and what's changed in both of those, that's an annual process every company goes through.

That's correct.

That's helpful. Then one other question. You did take a serious look at costs in the UK and took some actions this quarter. Should we anticipate that you might take a sharper look at some other operations or not?

I think just generally Jeff, I think everyone on an everyday basis consistently looking at costs and productivity at the same time looking for ways to improve operational efficiencies and effectiveness. I think there was certainly some more visible things that were done in the UK. But I'd say Kevin and Randy in those two businesses you're continually looking at things. But more just on a -- not on project basis but just on an everyday basis. I don't know if, Kevin or Randy, if you want to add anything to that?

Tom that's right on. Things are coming up all the time and we're just trying to take advantage of opportunities as they arise. But no special project type focus.

Okay, thanks a lot guys.

Thanks Jeff.

Next we will go to Colin Devine at Citigroup.

Good morning.

Good morning Colin.

A couple questions. First, there was an DAC adjustment at Colonial if you could comment on what that was.

Second, if you can just clarify on the hybrids if they're tier one or tier two and what type of tier two, and expand that perhaps on the UK.

Then the final question which we talked about coming into this, I am certainly very happy to see the benefit ratio in group income protection improve. But I'm also beginning to question how real this is in the wake of two recent Second Circuit Court of Appeals decisions. When you read language from the court about Unum's behavior as arbitrary, capricious -- a comment, in the absence of any argument by First Unum showing that it has changed its internal policies, is this becoming an obsession to get this benefit ratio down and we're going back to where we were pre the multi state settlement?

Yes, let me, I'll take the last one. But let's go back to your first one, and just the DAC questions on Colonial and --

The DAC and the hybrids, just a clarification.

Yes, that hybrid, exactly. We will take all three of these, and I'll certainly take the last one. But, Bob Greving, anything you want to add to the question about the Colonial DAC?

There's an annual review of the DAC factors for unlocking in the Colonial book of business every year, and this was just a normal review and adjustment as a result of that unlocking.

How much (inaudible)?

I believe it was less than $3 million.

Okay, thanks.

I think it was $2 million.

Yeah, about a $28 million adjustment so I just wanted to --.

On the -- this is Tom White -- on the hybrids, 64% are tier one securities and the balance of those are upper tier two securities. And again the book value exposure is $496 million.

Of the UK how much is tier one? Those are really the ones that have everybody excited.

Yeah, give me just a minute, I'll come back

Okay. Let's talk about the claims procedures in the US.

Yes, and I think let me start by saying as you know we went through a challenging period of time to say the least. And to say we learned something from that experience is a dramatic understatement. I think we learned a lot about things we need to do differently. We made those changes (inaudible), not just the ones we did for the purposes of satisfying the regulators, but these were just important changes in business that carry on way beyond just the regulatory process we went through.

As you know, some of us stay very close to watching, including the Board, how we're doing in terms of being sure that those cultural and process changes that we made were, again, ones that lived way, way, way beyond the regulatory process we went through.

So as I look at things like the quality measures, the performance, I am incredibly encouraged when I look at the activity in terms of complaint rates or appeals we are seeing in our business right now. They are actually at very, very low levels which gives me great comfort the process changes we made and the mentality shift that we had truly is sustainable and is continuing in the business.

Now we still do have some claim litigation. When you look back to time. I will say though when you look at the inventory of claim litigation today, it's significantly below where it was even a few years ago. When I say significantly, in some cases, it's one-third or one-quarter of what it was just as recently as a few years ago.

So that deals with the issues of the past, where again to the extent there's litigation outstanding we have been very systematic about the process of putting those pieces of litigation behind us in a a very effective way. Now occasionally things come up like the things you're referring to. And again, that's important we keep an eye on that.

Because again we don't want to see anything pop up like that which hinders our reputation. We worked so hard to restore that reputation. And again I think that's why all of our people are very intent on being sure we take the actions to be sure we don't let those issues of the past drift back into business. I feel very good about that.

The last point I would make on that too, is there's probably about, you know, 40 odd appeals we have right now outstanding. The vast majority of appeals are even ones that actually are being brought by the other side so to speak, because -- so, you know, there's still activity here, but we feel good about that level of claim activity going on. I don't know if (multiple speakers).

Tom are you saying, to interrupt, are you then saying the court's mistaken, because they're saying nothing's changed? I mean you've had five years to fix this.

Colin these (multiple speakers).

This isn't a small minor court.

They're claim decisions that were made going back to 1995.

This is December 24th of last year.

These are claims that go back to 1995. So the court is referencing claims activity that pre-date all the changes that we made in our claims management process. These are claims that have gone through the court system, they're still out there. And we have had a couple here that have been negative. But again, what the court is referring to are claims practices that go back to before 2000, and certainly before the changes that we made in our (multiple speakers).

Perhaps then I misread it because that's not the way it reads to me, gentlemen.

That's the fact.

Well that's not the way it reads, but thank you.

Again Collin, we truly do recognize that we had to make some cultural and permanent shifts in our business. And again I can assure you those have been made and we keep a very close eye on being sure we don't have any drifting back to practices we really fundamentally shifted on. I can assure you that's not the case. And every measure I look at gives me great confidence that the quality and things being done today are of the highest quality. As Tom said, really we still have to deal with issues of the past. Again, that inventory of issues of the past, as I mentioned in my comments earlier, is down dramatically. But I think that's (multiple speakers).

Okay, thank you. I appreciate the response.

I would just reiterate 80% of the cases under appeal right now are ones that the claimant is appealing where the court has ruled in our favor. You don't get publicity on those. You don't get blogs on those. Those are decisions that are going (multiple speakers).

These aren't blogs, these are from referenced court decisions, Tom, please.

Let me go back to your question about the hybrids. The three that I referenced, Northern Rock is $19 million and all of that is upper tier two. Angle Irish Bank is $14 million, all of that is upper tier two. Then Royal Bank of Scotland the exposure is $96 million, and that's pretty much evenly split between tier one and upper tier two.

Perfect, thank you.

Thank you.

Next we will move to Marks Hughes with SunTrust

Thank you. Can you talk about policy renewals, what is sort of the pricing trends were in the fourth quarter? And then any change in your pricing strategy to help drive sales growth?

Maybe I'll ask Kevin I think to speak to those two points.

Good morning Mark.

Morning.

Our renewal program that we initiated in the middle part of 2008, and that continues into our 2009 renewal program, is a smaller renewal program that we had in previous years, reflecting the improvements we have already made in the block of business, both in terms of mix of business and in terms of pricing.

The average rate increase for 2008 as you know was in the 5% to 6% range. Average price increase on renewals for 2009 is in the 2% to 3% range, although we're prepared to increase that level of pricing and the volume of renewal activity if the deterioration in the economy rolls over and starts to affect our claim incidence, which to date it has not. But we have not made any changes in pricing policy either with respect to disciplined renewal program or with respect to new business pricing.

Did that 2% to 3% make you a little bit more price competitive?

Well, it probably doesn't move our price up at the same rate that it did in the past, but to the extent that competitors are going through renewal programs, I can't really tell whether that keeps us more competitive or less competitive or on average consistent with the marketplace.

I think every company to the extent they're paying attention to both the economy and to the aging of their business ought to be in that 2% to 3% range, but I can't tell you whether they all are or not. I think in general over the past several years, we've moved our rates up at a slightly steeper slope than the rest of the industry, although that gap sort of has stayed fairly stable in the last 12 to 24 months.

Thank you.

Thanks Mark.

Next we will move to Randy Binner at FBR Capital Markets.

Hi, thanks. I just wanted to review the change in guidance. It is about $0.20 down. The way I'm reading it is about $0.08 from the higher pension cost. I'm still unclear if the remainder all has to do with British pound translation or you're also transposing some broader economic weakness into that change.

The three components are basically the pension cost at $42.5 million. The second, with the UK we are projecting -- we haven't changed our operating projection for Unum UK earnings in pounds, we still expect that to be basically flat in 2009 here with 2008. We had earlier used an assumption of $1.65 on the exchange rate, and now we're assuming about $1.50 on the exchange rate.

So there's still a couple of cents a share of guidance that is economic related. It would be primarily within group disability. I think we're essentially assuming about an 8% unemployment rate here in the US as opposed to 7.5%, which we were using before. And I think the last December report was like a 7.2% unemployment rate. So the unemployment picture kind of deteriorated a little faster than we had projected. So there's a couple of cents per share that is economically driven.

Now Randy we also widened out the range. We had been using $0.05 range we went to $0.10, basically because of the uncertainty over the economy and also the uncertainty over the value of the British pound.

Okay. And so I guess for those of us who think unemployment may go higher, is there any way to think about what sensitivity the benefit ratio or guidance would have if we were talking about 9% or 10% unemployment?

It's tough to say, maybe Kevin you want to address that.

A couple points there. As the unemployment rate goes up although we monitor it [in quarterly], we pay attention to the unemployment rate as it applies to the mix of business we actually manage, both in terms of industry and size. The unemployment rate in those industries is lower than that rate.

In addition to that, while incidents driven by an unemployment rate correlation may move up, simultaneously we're maintaining stability and consistency in our benefits operations particularly with respect to claims management and recoveries. And we continue to move the mix of business from large to small. And that sort of drives the overall average weighted incidence rate down. I think, while we're cognizant of it, I don't think we would expect a really significant effect.

Okay. So if we went from 8% to 10% it would still wash out per those reasons, we wouldn't necessarily expect a big step down with earnings?

I mean I think it's awfully hard to predict the exact degree of incidence correlation related to gross unemployment rates. But obviously if unemployment rates change by a factor of 25% or 40% or something like that, obviously it has the potential to affect it to a greater degree, but we're not seeing it at the moment.

Just real quick, Kevin, as long as I have you, could you give a little more color. I think a previous analyst asked about where the business is coming from. Maybe more kind of qualitatively where are you winning the small case business and getting better sales there? If you could give any color around where you're winning in the market there that would be great.

I think we continue to execute on our strategy, as you know, that we try to sell multiple lines of business and cross sell as much as we can. We our Simply Unum strategy has begun to take hold, although we don't report any specific metrics yet on Simply Unum because it's too early. We are making better than expected progress there which means we're getting stronger mix of business in terms of package sales.

65% of our disability business was in our target markets which tend to be the lower incidence markets in the smaller case marketplace. More on the white collar professional services side of the business health care as opposed to manufacturing and retail, those kind of things.

I think our service story, the consistency of our pricing and discipline and the consistency of our marketplace execution over the past couple of years I think is a level of momentum that we had throughout the year. And that's what's continuing and I think helping us to win in the market.

Thank you very much.

Thank you Randy.

Next we will move to Bob Glasspiegel with Langen McAlenney

Morning Bob.

Just to follow up on Jeff's pension question, you said $42 million extra from prior guidance. What's the overall pension cost in '09? And if the market stays down 7.2% is that sort of a moving target if you don't earn your 7.5% in '09?

Bob this is Bob Greving. The overall cost for the plan is $73 million for 2009. And I haven't gone through the math of the sensitivity of actual performance, but what we have assumed for 2010 is that we actually earn our 7.5%. You actually see that $73 million actually drop off about $10 million between '09 and '10 if we actually achieve our 7.5% return. Obviously we're hoping for a little bit of a bounce back in the market, but you never know what's going to happen.

Okay. You contributed some money to sort of close the balance. I know achieving your capital plan is probably your primary objective versus closing the pension liability, but is there an economic argument to maybe being a little bit more aggressive on closing the liability and leaving a little less capital at the holding company?

Well, we always take a look at contributions into the plan. For example this year we made $130 million of contributions into our pension plan. So we are committed to moving it.

As you know, the Pension Protection Act also has some pressure on companies to fully fund those plans over the next three years. So we're looking at it. We do have about $70 million in our plan right now for contributions to the pension plan in the current year. And that's all built into our current capital projections that we have given to you.

And Bob, actually you're getting to it, Bob, it's an economic decision actually. So I think we have certainly the excess capital to use, but I think at this point we feel the way we sort of laid out the plan is the right sort of balance between capital and cost.

I think the other thing is we want to see how the year starts merging before we make contribution commitments. As you know, Bob, you basically get credit on contributions of the plan that goes back to kind of beginning of the year. So we do want to kind of wait and see how the year actually emerges before we make those kind of commitments.

I mean this point a dollar of capital is worth more than $0.07 of earnings, I suspect.

That's kind of the way we're looking at it.

But at some point there's a trade off and the economics become more compelling. Just One last question. The tax rate benny in the quarter was what? It looks like it came down a couple percent from run rate.

Yes, I think the tax rate was 32.5% and we have been in the 33.5% to close to 34% range for the prior three quarters. Kind of just normal year-end tax adjustments that were made that helped that. I think for your modeling purposes somewhere in the 33.5%, 34% range is what we should see.

You know me too well, you know that was my next question, thank you.

(Laughter) Thanks Bob.

We will go next to Tom Gallagher at Credit Suisse.

Morning Tom.

Morning. A few questions, first just one on the reserves. You had a 5% reduction in IBNR this quarter. And if I think about sort of the parallel to that I would think about risk in force just being measured as premiums were down about 2% sequentially versus 3Q. Just based on your comments earlier that you're expecting I guess the overall claims environment to get a bit worse from an incidence standpoint, why would you be releasing IBNR and not building it right now?

I think you used the term releasing IBNR is not accurate. I mean IBNR changed from the third to fourth quarter -- and this is for LTD -- is reflective of the fact the volume of business is slightly lower. It reflects the fact -- we commented we did make an upward adjustment in the discount rate assumption, so that -- the way that gets accounted for is there is about $3 million of IBNR release due to that.

There are some changes that we have made in our claims management processing as we move STD claims to an LTD basis, and they're actually reported a little sooner, and that has the impact probably $3 million or $4 million of movement in IBNR. But what happens on the other side is that $3 million or $4 million is added to other parts of the reserve. So it's not a reserve release into earnings. So there are a lot of moving parts, as we have described in the past, but to describe it as a reserve release I think is inaccurate.

Well, Tom, if I just look at the disclosure on page 12, you went from essentially a $1.9 billion of IBNR to a little over $1.8 billion this quarter. So there's $80 some odd million dollars of reduction. And I understand (multiple speakers).

What time period are you looking at Tom?

Just sequentially looking.

Okay. Keep in mind we made a change in the -- and there's a foot note in the statistical supplement. I'll get Bob Greving to describe it. But a lot of that is in the closed disability block where there's a change in the reserve evaluation system. Actually, why don't I get Bob to talk about what we did there?

We actually implemented a new system that basically redistributed the reserves on that line of business, the IBNR policy reserves and claim reserves. That implementation did actually move a lot of the numbers around. It didn't move the overall net reserve for the block as a whole. It's running off, so it did have an effect on that.

On a restated basis, Tom, maybe to help you out, the impact of that, the IBNR on the old basis, on a reported basis, was $387.2 million in the third quarter. On a restated basis it would have been $353.2 million in the third quarter, and that drops to $350.3 million in the fourth quarter. So there's only about a $3 million movement on an apples-to-apples comparison for that line of business. But there is a lot going on behind the scenes I guess if you want to think about it as far as implementing that force system, what we call a force system.

(inaudible) because we just obviously had completed our year-end reserve studies and all the cash flow testing studies, but there's a high level of comfort in all the work that's been done at year-end.

That's a good point. Actually we look at everything on a quarterly basis, but on an annual basis we actually execute a much tighter and more thorough review of all of the reserve basis. And we do that internally as well as with our Board and our external auditors. So that has been completed, and actually we're in a stronger position reserve-wise this year than where we were last year. And our assumptions that were used in that analysis are a bit more conservative even than what they were last year. We're feeling pretty good with where we are on our reserve adequacy.

Okay. Thanks, that's helpful. Just as I think about the IBNR, and not to obsess on that one item, because I realize there's a lot of moving pieces here, should we expect that to build over time? If in fact claims incidence is expected to even pick up moderately, should I expect to see that grow relative to earned premium?

Tom, you will see two moving parts. Obviously if incidence increases you will see an increase in the applied factors that will increase the IBNR. That will be offset by any decrease in the actual in force itself. So if there's a runoff of the premium -- for example, the old closed block of IDI is running off at about 5% per year you will see that kind of run off as the business runs off. If there's a growing block of business you will see the IBNR increase.

We have not changed our practice in applying IBNR factors whatsoever. At least in the last two years we have not changed our practice whatsoever. So what you're seeing is actually the movement in the book of business.

Okay. Then just one last follow up. Tom White you had mentioned the new discount rate went up, but the benefit for the quarter was less than 60 basis points. Can you give some quantification ex the increase in the discount rate what the benefit ratio improvement would have been?

We don't like to quantify it just because it starts to speak to too much around pricing assumptions and so we tend not to do that. I will say that the if we had not done the discount rate adjustment that the benefit ratio would still have improved from the third to the fourth quarter.

Okay. Is guidance that we should still see an improving trend in the benefit ratio still in place or maybe you could just comment prospectively what you're looking at?

I think our guidance would assume a pretty flat benefit ratio throughout 2009.

Thanks a lot.

Yeah, thanks Tom.

Our next question comes from Eric Berg at Barclays Capital.

Good morning Eric.

Morning to everyone. Two questions. First with respect to the UK, it's obvious why a reduction in premium in and of itself would send the benefit ratio higher as you reference. Hello.

Yeah , we

Thanks very much. I'm on a cell, I thought we cut out. If I do obviously go on to the next question. Let's try to carry on here. My question with respect to the UK benefit ratio is this, I would think the way it works is if you lose some business and therefore show lower premium you would also show lower benefit as well. I would think that a loss of business would lead to no change in the current ratio because both the numerator and the denominator would be going down. How does the math of that benefit ratio work when you have lower than expected premiums?

Bob, I think we can address that because it's not just the way it works in the UK it's universal in the group business I would say.

As you know there's a fairly long waiting period on these claims particularly in our group income protection business. And so an immediate change which you have to reflect in earned premium in the period is not necessarily immediately transferable into a change in the claim incidence that actually is being reported because those claims are claims that actually have occurred prior-- in prior periods as they kind of work their way through the system. So there's a delayed effect. So in the period that we actually are reporting a decrease in premium you won't see an immediate decrease in the claim number, but there will be a lag effect.

That answers it. My second of three questions relates to OTTI. What is the effect, if any, of rating agency down grades on your determination of OTTI? In other words my question is a rating agency upgrade, downgrade is it's opinion, not Unum's opinion about securities, so one would think in the first instance that what the rating agencies are doing shouldn't effect your determination of OTTI, but I wanted to ask the question.

Sure, good question. I guess you need to think about at what level of rating--rating downgrade is occurring. Something moving from a triple B to a double B that still the upper end of below investment grade--still current and it would be unusual for us to impair something at that level. Now if something down in, you know, the triple C, double C, D land, if those are being downgraded those are the securities we're going to take a much closer look at and we're going to make a determination whether or not we think the interest payments will be made and whether or not the value of that security can recover over, you know, our holding period time. So I think you really have to kind of think in those terms. We did not, you know, we did impair the four securities that I mentioned, those were, Idearc, McClatchy , Liondell and Ford and those were determinations that we made that we didn't think that those bonds would return in value over the holding period that we expect to have

Last question maybe to Kevin is a general one about the dynamics of the business. My understanding is the way the business works is that as the economy sinks into a recession and this unemployment rises all companies get reported to them an increasing number of subjective claims, I don't know whether they're fainted claims or legitimate or not, but you tend to get an increase as I understand things in more subjective claims. My question is while I understand that you are expecting some increase in incidence from here, you're not expecting as much incidence as would have been the case if you had not changed the way you do business. So my question to Kevin is what are you doing differently in the current recession that will sort of blunt the impact that will allow you to end up with a lower rate of increase in incidence given these subjective claims than would have been the case if you hadn't changed the way you did business?

Thanks, good morning. I'm not sure I can exactly relate one to the other. I think one would anticipate in a tight economy an uptick in submitted incidence, one might expect that would be on the softer decisions as to whether a person considers themselves to be disabled or not. They're probably making that decision in the light of their own employment environment whether they are trying to hold on to their job or think they might lose their job all of those subjective factors enter into how they submit a claim. It's probably not possible for us in a general sense to know what any one person is thinking. In a marketing sense though we try to target markets to those industries that have lower overall expected incidence rates. We also on an underwriting basis to the extent we're talking about mid-size companies or larger we're underwriting the economic environment for that particular industry and that particular company because to the extent that we look at any underwriting risk and think there's a potential for downsizing or bankruptcy, that wouldn't be a positive indicator from an underwriting perspective. So you try to avoid that affect of subjective claims by avoiding the overall risk of unemployment if you will.

And Kevin, it's probably worth reiterating, our experience has been small mid-size employer incidence levels in soft economic conditions is nowhere near as volatile as the incidence rate among large employers. As everyone knows we made a fairly substantial change in strategic direction several years ago. So our book of business entering this period of time today is very different than it was back in 2001, 2002.

Absolutely and if you look at our fourth quarter sales our 2008 sales only 36% of our business was large business. 64% was small or medium-size core market business.

This will be my final follow up. In terms of judicating subjective claims, things that cannot be easily diagnosed on a physician's X-ray, how are you doing it differently today than would have been the case in the last or is it different.

I think it's somewhat different in the sense that, you know, we engage discussions in a positive way with the employer and with the claimant's physician earlier in the game. We actively used independent medical valuations maybe to a greater degree and also earlier in the game and we're very engaged in trying to work with the claimant and the claimant's physician to the extent that's possible and the claimant's employer to try to find a way to accommodate and get that person back to work.

Thank you all very helpful.

Thank you.

Our next question comes from Mark Finkelstein at FPK.

Good morning.

Morning mark.

I actually wanted to go back to the UK if we could. I mean obviously incidence did pick up, I think you attributed a little bit to the economy, premium levels are kind of continuing to decline. I guess what I'm asking is what should we expect in terms of that disability benefit ratio and why should web comfortable that kind of earnings on a sterling basis should be flat'ish with last year.? I understand the expense saves if you could put that in context that would be helpful.

Susan, I'll ask you to pick up on that question.

Yeah sure. With regard to incidence it did pick up in the fourth quarter. We haven't actually seen that continue so far in the first quarter but we do expect increases to come through waves as different industries are subject to issues with regard to the current economy. Offsetting that though we do have very strong recovery performance and those increases in claims do tend to be of a short duration. As far as the benefit ratio is concerned going forward, I would say that we would probably see it trending very similarly perhaps up a (inaudible) versus all of 2008. We expect it to be fairly consistent performance as far as benefit ratio is concerned going forward.

With regard to we are delivering strong margins in the UK so, obviously we're expect thank to be sustained with just a slight drop in the margin performance going forward. So with regard to 2008 we saw that come through at 36% overall and from a group long-term disability perspective it was up at 39%. With regard to the competitive environment which is particularly hostile and aggressive we don't see that changing going forward. So I would expect margin to drop slightly and as a result earnings will be fairly flat for 2008. I hope that answers your question Mark.

Sure. Okay. Then Kevin , I guess we have talked a lot about claim incidence, can you just talk about claim duration I guess historically how has that trended with changes in unemployment and I guess what are you thinking about in terms of expectations on the unemployment rate moving from 7.5% to 8% and I guess risks, you know, of an even higher

Morning Mark. Well, as I commented earlier to the extend that unemployment correlates with incidence not a completely direct correlation we watch the unemployment rate, we watch the way we underwrite, we pay attention to unemployment rate by industry, we also, as Tom mentioned, target sort of the smaller size market place, slower uptick incidence in claims as a result of the economy, so we have a lot of things in place to try and watch where incidence is coming from. We watch STD block in particular because so much of the block is marketed and packaged with LTD. In fact incidence in prevalence rates in STD are actually slightly down compared to the third quarter. So right now as I said we're not really seeing much.

In terms of recovery rates, I think Susan's point to the extent you get an uptick in claims driven by more subjective type of claim you would expect those durations to be shorter. Currently within our STD block our average duration days are slightly down so the duration in claim are shorter. From a long-term disability standpoint it's a little bit harder to say much about that. You maybe see a slight uptick in recovery in first duration after end of elimination period. After that once somebody makes it through that first duration they are legitimately disabled and you're managing them just like any other claim.

Okay. Then I guess just a follow up on Tom's question on IB and R, I guess I'm just looking at the numbers Bob that you gave, I think you said $387.2 million down to $353.2 million, that $35 million did that essentially get moved into other reserves out of IB and R so there is really no net impact?

That basically gets into other reserves, policy reserves and claim reserves. The overall impact of the implementation was very nominal as far as total reserve for that block of business.

All right, thank you.

Thank you Mark and I think at this point we have gone a little long, but I think we probably need to close the call. To the extent anybody has questions we didn't have a chance to get through funnel those through Tom White. Thank you for taking the time for joining us for this quarterly call. I think operator this will conclude the call.

Thank you. Again that does conclude today's conference call. Thank you for your participation, you may now disconnect.