普登 (UNM) 2009 Q1 法說會逐字稿

Good day, and welcome to the Unum Group first-quarter 2009 earnings results conference call. This call may be 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.

Thank you, Leo. Good morning, everyone, and welcome to the first-quarter 2009 analyst and investor call for Unum. 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 SEC, and are located in the sections titled "Cautionary Statement Regarding Forward-looking Statements and Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2008, and our SEC filings can be found in the investor section of our website at www.unum.com.

Please take note that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliation 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 first quarter of 2009. Net income in the quarter was $164.9 million or $.50 per diluted common share compared to net income of $163.1 million or $0.46 per diluted common share last year.

Included in the results for the first quarter of 2009 are net realized after-tax investment losses of $41.8 million or $0.12 per diluted common share, and $44.7 million or $0.13 per diluted common share in the first quarter 2008. These losses include the impact of the provisions of DIG B36 accounting, which requires changes in the 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 first quarter '09 realized after-tax investment gain of $15.4 million compared to a $41.6 million after-tax loss in the year-ago quarter.

Net realized after-tax investment losses related to sales and write-downs of investments were $57.2 million in the first quarter of '09 compared to $3.1 million in the year-ago quarter. So excluding these items, after-tax operating income was $206.7 million for this quarter or $0.62 per diluted common share compared to $207.8 million or $0.59 per diluted common share in the year-ago first quarter.

On the call this morning are President and CEO Tom Watjen, and Bob Greving, Executive Vice President, CFO and Chief Actuary, as well as the heads of our three major operating segments, Kevin McCarthy, Susan Ring, and Randy Horn. And at this time, I would like to turn the call over to Tom Watjen.

Thank you, Tom, and good morning. With our first-quarter results, we're obviously off to a fast start for 2009. I want to touch on certainly a few of the highlights I take away from the quarter, and I will spend a few moments later going into more detail.

First, excluding net realized after-tax investment losses, we reported $0.62 per share in operating income for the first quarter, 5% higher than the $0.59 we reported in the first quarter of 2008. In addition, each of our businesses continues to perform well, with lower benefit ratios on a year-over-year basis for each of our specific businesses.

Our overall level of profitability, however, was impacted somewhat by the challenging environment for net investment income, particularly miscellaneous net investment income. And the weakness of the British pound impacted the translation of our UK earnings. And I would point out that if you look at the pretax operating earnings growth, as reported, that was up 0.6% -- (technical difficulty) actually have a constant currency -- in other words, apply the same currency evaluation we had in the first quarter of 2008 -- operating income actually grew 8.5%. On an earnings per share basis, we reported a 5.1% growth in earnings per share year-over-year, but again, on a constant currency basis, that would have been 13.6%. So can you see the magnitude of what the impact of translation changes have meant in terms of our reported results?

Third, we continue to see solid momentum in our sales results. As we've discussed, our strategy is to focus on maintaining underwriting and pricing discipline, and have a particular emphasis on core market and voluntary market growth, and we again saw positive momentum in these areas. Companywide case count grew 21%, which tells me our value proposition is a strong one.

Fourth, while realized investment losses remain somewhat higher than our long-term trends, excluding DIG B36 our losses were in line with the experience of the two previous quarters. We expect to continue to experience somewhat higher realized investment losses until the (technical difficulty) financial markets improve. However, we remain confident that our portfolio is well-positioned to weather this difficult credit, and credit cycle.

The net realized -- the net unrealized loss position in our fixed-maturity portfolio widened slightly in the first quarter from the first -- from year-end 2008 levels. And Tom White will provide further detail on the performance of the investment portfolio in his remarks. I will say that the environment for new investments remains positive in the first quarter which is reflected in the attractive yields on new money we experienced in the quarter.

And finally, we continue to maintain the financial flexibility to support the business and to absorb any further investment losses which might occur. You'll see that we comfortably exceeded our targets for capital and liquidity, leverage and risk-based capital, and are on track to meet our year-end 2009 capital metrics guidance.

Now let me come back again and spend a few moments just talking about a few of these elements in a little more detail, starting with our Unum US business.

Pretax operating earnings per Unum US increased 16% to $183.8 -- $183.6 million in the first quarter, with strong earnings growth in the group disability and supplemental and voluntary lines of business offsetting lower earnings in the group life business. Group disability earnings were 8 -- were 44% higher driven by strong risk results. The group disability benefit ratio for the first quarter improved to 88%, a decline of 70 basis points from the fourth quarter and 300 basis points from the year-ago first quarter.

Seasonally adjusted submitted incidence trends and claim recovery results actually showed a slight improvement relative to the fourth quarter and were generally in line with our first quarter of 2008. Again, this quarter we saw no risk pressure from the weak economy.

We also had very strong results from the supplemental and voluntary line, with earnings growth of 24%. Results in the group life and AD&D line were down 13%, driven primarily by lower premium income and slightly higher claims experience.

Total Unum US sales increased 3.5% in the quarter. We saw good growth, though, in several areas, including a 16% increase in core market sales and an 11.5% increase in voluntary benefit sales. And as you know, these are two areas we have targeted for growth this year, and believe there's good long-term potential there as well.

These positive results were offset somewhat by reduced sales in the large case market, an area where we are maintaining our underwriting and pricing discipline. Our pipeline for large case sales is building, however, and we expect to show a strong second-quarter large case sales growth. As we've said in the past, this is an opportunistic market, and where we want to continue to be very selective. And we actually are seeing some very good opportunities in this environment. And Kevin McCarthy is here, obviously, to answer any questions you may have on this segment or the outlook for this particular business.

Now turning to Unum UK, our pretax operating earnings were $62.3 million for the first quarter. While on dollar terms, these results were below year-ago results, due to the decline of the value of the British pound, in local currency the first quarter operating earnings actually increased by 1.6%. Our strong UK results were also driven by favorable risk results, specifically favorable claim incidents in the LTD line of business. We also saw some benefits from the [expense initiatives] we discussed on the fourth-quarter call, and Susan Ring is available here this morning with us to address any questions you may have about the UK business or marketplace.

Colonial (technical difficulty) actually saw pretax earnings increase 5% to $70.9 million for the first quarter -- again, also driven by favorable risk results. While total sales were generally flat with year-ago results, we continue to see growth in our core market sales, which increased 1.8% in the quarter, with new account activity increasing actually 10.8%. We also saw solid growth in recruiting, and in our new rep contracts, and both of these indicators should lead to further core market growth in the future. So again those are very good leading indicators, and Randy Horn is on the call here this morning to address any questions you have around Colonial's results or the Colonial marketplace.

Now shifting to investments, our investment portfolio continues to perform well, with a manageable level of default and impairment experience. We are seeing good opportunities to invest money at attractive yields while intending our investment quality objectives. Although we monitor changes in our portfolio of values closely, today's unrealized investment losses are not a significant concern to us, since our liabilities generally would not cause us to need to sell investments prior to maturity.

And certainly, last but not least in this environment is our capital position, which again, we continue to feel very good about -- and actually very comfortable with the position, as well as the financial flexibility that's implied by the current capital ratios. Our first-quarter 2009 estimate for risk-based capital ratio for our traditional US life insurance companies exceeds 330%, above our long-term target of 300% and in line with our year-end 2009 target of 330% to 335%.

Leverage, excluding the nonrecourse debt and capital of Tailwind and Northwind Holdings is 21.2% as of the end of the first quarter, below our long-term target of 25%. And holding company liquidity was $473 million, also comfortably above our $270 million target which allows for coverage of one-year fixed charges, plus the maintenance of a capital cushion for business and economic volatility. And again, we are on track to meet our year-end target -- year-end 2009 target -- of holding company liquidity of in excess of $0.75 billion.

In summary, I feel good about our first-quarter results and our position as we move ahead. Our core operating segments continue to meet our expectations, with strong risk results across our major businesses which reflect the disciplined strategies we put in place, a commitment to maintain pricing, and the strong underwriting and risk management disciplines that we built in our business. We are seeing strong sales momentum in our targeted markets. We have a strong value proposition for our customers, and we can offer them a wide selection of benefit choices supported by a focused and engaged group of professionals. Our commitment to this business and stability as a provider is also working in our favor in this environment. We are growing our customer relationships, indicated by the case count growth I mentioned earlier, and we believe we are going to be in an excellent position when the economy eventually recovers.

Our investment portfolio continues to perform well in a tough environment and we continue to maintain strong financial flexibility to protect us in these uncertain times, and importantly to position us to continue to invest in the business and seize on opportunities created in this challenging environment.

Now I'll turn the call over to Tom White, who will provide more detail on the first-quarter results. Tom?

Great. Thanks, Tom.

First, I want to take a few minutes to supplement Tom's comments and provide some operating highlights on the quarter. Within Unum US, we will start with group disability. And as Tom indicated, the group disability line reported a [strong quarter] as we continued to see improvement in the benefit ratio which declined to 88% in the first quarter compared to 88.7% for the fourth quarter and 91% in the year-ago first quarter. There are a number of factors that are driving this continued improvement and I will point to four.

First is the ongoing shift in our block of business to more core market business and less large case business, as well as the shift to more stable industries such as healthcare and education, and away from traditionally economic-sensitive industries such as retail, construction and manufacturing.

Second, we saw favorable claim recovery trends. Third, ongoing adherence to pricing discipline, particularly in the large case business. And fourth is a continued stable level of new claim incidence. New submitted claim incidence on a seasonally adjusted basis was slightly lower in the first quarter than the fourth quarter 2008, and essentially in line with the first quarter of 2008. This marks the fifth consecutive quarter since the peak in US employment levels that our new claim incidence has remained stable, which we think is a strong signal to us that the strategic changes we have made within this business are paying off in lower volatility and greater consistency.

Additionally the short-term disability line, which can often be a leading indicator of LTD claim incident, continues to perform well, with a low stable level of claim incidence in the first quarter.

Lastly, the discount rate on new claim [incurrals] which was raised in the fourth quarter last year was maintained at that level here in the first quarter. And our interest reserve margin for this line of business continued to widen.

Moving to the group life and AD&D line, operating income here decline to $48.3 million compared to $55.4 million a year ago, primarily driven by lower premium income, which declined by 2%, and a higher benefit ratio of 69.8% this year compared to 68.2% in the year-ago first quarter, resulting from higher average paid claim size.

The supplemental and voluntary line had a strong quarter, with operating income of $77.6 million, which is 24% higher than last year. And all three primary lines here -- recently issued individual disability, voluntary benefits and long-term care -- each produced year-over-year improvement in before-tax earnings.

Reported sales for Unum US increased by 3.5% in aggregate. And there were several bright spots to highlight. Our core market sales for our group lines, which would be LTD, STD and group life and AD&D combined -- but our core market sales showed continued strong momentum, increasing 16.1% for the first quarter. And this is the sixth consecutive quarter of sales growth for these lines in the core end of the market.

Sales in the large case market for these lines declined by 16% in the first quarter. However, as Tom suggested in his comments, we expect large case activity to accelerate in the second quarter.

And finally voluntary benefit sales increased by 11.5% in the first quarter as our activity in the core market segment remained strong with high levels of quotes and new coverage sales.

So to summarize the results for Unum US as a segment -- continued favorable risk management results, some ongoing pressure on net investment income with considerably lower-than-normal levels of miscellaneous net investment income, but continued positive sales results, particularly in our targeted core and voluntary markets.

Moving to Unum UK, Tom mentioned decline in the value of the British pound relative to the dollar, which moved from $[1.98] in the first quarter of '08 to $1.44 here in the first quarter of '09 -- continues to negatively impact translated results for the Unum UK segment. But the underlying operating performance remains generally strong. While operating income in dollars declined 26% in local currency, operating income increased by just under 2% as a result of by favorable claim experience, particularly in the LTD line. And the overall benefit ratio declined to 53.3% for the quarter compared to 57.3% a year ago.

First-quarter sales were quite strong, increasing 45% in local currency, largely driven by higher large case activity, but we did see case count growth of 12% within Unum UK.

Colonial Life -- the operating result remained strong here as well, with income of $70.9 million, a 5% increase over year-ago results. Risk results remained favorable, particularly in the life and cancer and critical illness lines, which offset somewhat higher benefit ratio within the accident, sickness and disability line, but in aggregate produced an improvement in the benefit ratio to 46.3% compared to 47.2% last year.

Sales at Colonial Life declined by 0.1% in the first quarter, with [increases in the core] market and public sector segments being offset by a decline in the large case segment. We see evidence of the weak economy negatively impacting sales activity on our existing cases. However, we are pleased to see solid growth in new accounts which were up 10.8%, as well as new rep contracts which were up 24%. We believe these trends are positive signs for future sales activity once the economy and employment levels rebound. I'll also add that at Colonial Life, persistency was generally stable with year-ago results and do include a couple of large case lapses that we experienced.

The Individual Disability Closed Block segment -- earnings were $11.3 million in the first quarter compared to $2.9 million a year ago. The interest-adjusted loss ratio improved to 81.2% from 82.4% last year due to lower average new claim size and fewer reopened claims. And the other income line in this segment improved as well, due to favorable results on the assumed blocks of business.

Finally the corporate and other segment recorded an operating loss of $12.9 million. This compares to income of $300,000 in the year-ago quarter. Expenses are higher in this segment, reflecting approximately $10 million of incremental quarterly pensions costs which will continue throughout 2009. Interest expense was reduced to $26 million in the first quarter compared to $31.7 million in the year-ago quarter.

Finally, our average -- excuse me, our weighted average share count, assuming dilution, for the first quarter was 331 million shares. This compares to 351.5 million shares in the first quarter of 2008, with the decline reflecting the share repurchase activity that was initiated and completed in 2008.

Book value per share was $19.39 as of the end of the first quarter. This is an increase of 0.4% compared to the December 31, 2008, and a decline of 12.1% on a year-over-year basis. Excluding net unrealized gains and losses on securities and the net gain on cash flow hedges, book value per share was $20.86, an increase of 2% compared to December 31, 2008, and a decline of 0.9% percent compared to a year ago.

Earnings on a statutory accounting basis remain quite strong, with first-quarter 2009 net gain from operations after-tax of $207.8 million for our traditional US insurance subsidiaries. Net income was $142.8 million in the first quarter of '09 compared to $125.6 million in the year-ago quarter.

Now I would like to spend a few minutes on the capital and liquidity positions of the company as well as the investment portfolio.

Tom outlined our capital management positions at quarter end. And to briefly summarize, we favorably exceed our targets for risk-based capital and holding company liquidity and remained below our leverage target. Additionally, we are on target to meet our year-end 2009 objectives. At quarter end, we had short-term debt of $206.9 million. $98.7 million of that amount was reverse repurchase agreements which matured and were paid off with operating cash flows in early April.

We also have $108.2 million of short-term debt that is due in May of 2009 -- I believe May 15 -- and this is our 5.859% senior notes due May of '09. Our plans are to retire that debt out of holding company cash. We have ample cash on hand to do so, and feel it is a better alternative than refinancing in today's market.

Moving to the investment portfolio, during the first quarter, the level of unrealized losses in our fixed maturity bond portfolio increased slightly. The net unrealized loss position was $2.48 billion at March 31, 2009 compared to $2.1 billion at December 31, 2008. This change was in part due to a regulatory reporting change that was dictated by the NAIC which reclassified certain hybrid securities -- for us, totaled $279 million book value and had an unrealized loss of $164 million -- but reclassified these from being fixed maturity redeemable preferred stocks to fixed maturity bonds. Since they are now considered fixed maturity bonds in our statistical supplement, we include them on page 13.1 which details our holdings. Therefore, $164 million of the $382 million total change in the net unrealized loss position when you look from fourth quarter of '08 to first quarter of '09 was basically due to this reclassification.

The change in unrealized losses not related to the reclassification was largely driven by the increase in treasury rates in the quarter which offset a slight tightening of credit spreads. While credit spreads tightened in the first quarter, current spreads in the market continue to present great opportunities for very attractive yields on our new money purchases.

Our new money yield in the first quarter was 7.46% on a hedge-adjusted basis on slightly over $1 billion of new money invested. This compares to fourth quarter at 8.47% and 6.77% in the third quarter. The higher -- the [average] credit rating on these first-quarter purchases was an A1 which is higher than our overall portfolio rating.

Next updating you on commercial mortgage loans, our exposure was $1.31 billion at quarter end, which is 3.5% of total invested assets. We had one new delinquency in the first quarter, bringing the number of delinquent mortgages to two, and this totals $26 million. We have another three loans which total $9 million 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%.

Moving to an update on our hybrid holdings, at the end of the first quarter we had holdings of approximately $487 million; that is on a book value basis. And they had a fair value of $205 million. There were no impairments taken or defaults in the first quarter, and all of these holdings remain current on their interest payments. There were some downgrades that increased the level of below-investment grade hybrids. That number is now $159 million on a book value basis compared to $129 million at year end. And the fair value of those holdings is $56 million.

I will close my remarks with a brief summary of realized investment losses for the first quarter. Our reported net realized investment losses, excluding the gain of $15.4 million or $23.6 million before tax from DIG B36, totaled $57.2 million after-tax or $88.2 million on a before-tax basis. So on a before-tax basis, the realized investment losses from write-downs totaled $76.6 million, while the net realized investment losses from sales totaled $11.6 million. The primary sources of the write-downs were [WITCO] at $20.1 million, American Axle and Manufacturing at $19.5 million and Clear Channel at $33.3 million. And the primary source of the realized investment loss from sales was our holdings of R.H. Donnelly with losses of $14.2 million.

And certainly we will be pleased to address any specific questions you have regarding our investment holdings in the Q&A, but with that I will turn the call back to Tom.

Thanks, Tom, and before I make a closing comment and we entertain your questions, I thought we would anticipate one of the questions and I would make a few statements about that. And that has to do with the impact the recession is having on our business.

And first and most importantly, the economy is not impacting our risk results as evidenced by our improved benefit results this quarter. I think for much of the attention -- certainly around the recession and the focus of what that may mean for our business -- as you know has been around our Unum US group disability business. And while this line is certainly important to our overall operations, it represents only approximately 18% of our current pretax operating earnings, and compared to a contribution of over 30% in prior years -- and so again is a less significant part of the overall picture of the company.

I would also add that when you look at the Unum US group disability business, there's a number of things that have actually changed there. I'm sorry -- the mix of business we've talked to you about in the past is very important, where the mix has shifted in terms of case size. The mix has shifted in terms of industry focus. And so for even that part of the business that we have, which again is very very important to us, you will see the risk characteristics of that part of the business again are very very different.

I guess the other thing I would leave you with is -- the place where you would expect to see some higher level of claims in a weaker economic environment is probably in the more subjective claims such as muscular-skeletal and mental disorders. And these types of claims only represent around 25% of our overall claims. So again it is not the entire disability business, in effect, that potentially is vulnerable to soft economic conditions. It is a much smaller part of the claim activity that would be vulnerable both to that.

And I guess because of this I think we feel pretty good that we are well-positioned. Because these risks are much smaller at the company today and much more manageable. But again, I want to come back to what I started with, which is -- the economy is not impacting our risk results. And in fact, again, you saw that through the improved benefit results that we actually had for the quarter.

We are, though, in this environment, seeing some pressure on our topline. In all of our businesses we are seeing slight pressure on new sales to existing customers, an indication that current customers are slower to add new lines of coverage reflecting the pressures they are feeling on their budgets. This is true both with employers in the US and the UK.

As I mentioned earlier, though, case count growth has been strong, indicating to us a continued strong connection with our markets, and again, validation for our value proposition in the marketplace.

We are also seeing some slight pressure on what I would call natural growth of our in-force block. That is, the lower levels of employment and reduced rate of salary growth have a dampening impact on the growth of existing business. And certainly that is something we have got to keep an eye on. While these factors have a slight impact on topline growth, we do not expect them to impact our profit margin. And we have embedded this into our guidance for the year.

In short, we are certainly not immune to the effects of the recession, but believe that we are very well-positioned to effectively manage through that.

Now as you can see, the quarter certainly again continued some themes that we started several years ago. And we want to continue to focus on disciplined risk management; continue to focus on profitability and margin expansion over topline growth. And as you can imagine, as an organization the focus is very much on continued, consistent execution. So that is certainly priority number one.

But at the same time, we want to continue to invest in our businesses, despite the weakness in the overall economy. And we are making investments across the entire enterprise. And these investments range from expansion of our Simply Unum platform and build out of our voluntary benefits enrollment capabilities in Unum US, to Colonial Life's development of a new enrollment system and expansion of their sales force to work within -- to include work in the Unum UK operation, to revamp our group life product offering and develop new products that expand the market for group risk in that particular market.

We have the resources to support our business during these challenging times and to make these kinds of investments in new products and services which we know will enhance further our competitive position in the marketplace. While we are not immune to external forces, we are much better positioned today than at any time in our past, and certainly believe that we are positioned to take advantage of the opportunities which may emerge in today's very difficult and challenging environment.

Finally I will conclude with my prepared comments by reaffirming our previous 2009 operating earnings per share guidance of $2.45 to $2.55 per share, as well as our capital management targets as well.

At this time, Leo, we are ready to begin the question and answer session.

(operating instructions) Darin Arita, Deutsche Bank.

Thank you. Can you talk about, with the US disability, the difference in claims incidence and recovery rates that you are seeing between the core market and the large case market?

Thanks, Darin, and good morning. I will just maybe ask Kevin to speak to that.

Good morning, Darin. In general, we typically see lower levels of incidence rates in disability in the core market versus the larger case market. And we do see some better recovery rates in the small case marketplace primarily, I think, driven by industry mix. Whereas in the large case market you've got industries like manufacturing, wholesale, retail, transportation, utilities, those kind of companies. Whereas in the small, medium-sized marketplace it is more professional services, financial services, education and healthcare. So, in general, as we move our mix shift from large case to core market, we get the effect -- that's a positive effect -- of that in the loss ratio.

Has the difference, though, in experience, changed at all in the past few quarters?

We continue to -- I think we continue to get improvement in our claim recovery performance across all size segments. This particular quarter, we had an improvement in particular in shorter duration recoveries as well. And also we had lower average-size new claims in terms of indemnity levels. We had lower paid incidence, and we had higher average-sized recoveries. So all of those contributed to the improvement in our loss ratio in the quarter.

Thank you. And just turning to capital, looking at it building up, you've got a lot more holding company liquidity -- the RBC ratios there in excess of 330%. In your discussion with the rating agencies, what is it going to take -- what do you think it takes to get your ratings to move higher from here?

Let me start, but ask maybe Tom White to supplement that. But certainly I think this is -- I would start by the fact, this is [certainly the] environment for us to continue to build capital. I think I will always feel very good about the -- obviously about the capital business we have right now, and the economic and financial environment we have right now. Sort of warehousing capital is very important. So I think that's -- you're going to continue to see us continue to do so and obviously continue to -- hopefully continue to generate the solid operating performance we have right now. And Tom, I think hopefully over the long-term, that continues to enhance the rating picture for the company. But maybe you want to add to that.

Yes, Darin, if you know -- I guess from our perspective we feel like we've delivered on -- certainly our plans and everything we laid out with the rating agencies, both from a capital perspective in terms of risk-based capital and holding company liquidity leverage, our use of excess capital, but also on an operating earnings side of things. Because one of the -- I think one of the challenges that we've kind of had with ratings agencies has not so much been on showing capital numbers, but showing consistency in results.

And as we've said in our prepared comments, we are five or size quarters into a recession. We've had about a 300 basis point improvement in our group disability benefit ratio in what has been a very difficult environment. So we think that speaks to the changes that we've made, the better operating performance. And we ultimately -- we feel like that will turn into better ratings for us. As Tom said, it's a very difficult market and a tough ask in this kind of market. But we think the results speak for themselves and will ultimately result in better ratings for the company.

And I would add to -- and in the meantime we continue to perform well in the business. The ratings we have today are certainly allowing us to write new business, continue to be very effective in growing our franchise. And so whereas we would like to see a ratings improvement, it is not exactly something that is holding us back from doing some of the things that we like to do, Darin.

Randy Binner of FBR Capital.

Thank you. For Tom White, I guess I'm not clear on the comment about how the unrealized loss position benefited from the NAIC classification of hybrids to bonds instead of preferreds. Maybe I heard that wrong, but did you imply that that $164 million helped [how unrealized] or something?

No, it actually went against us. It's all geography. It means -- on that page 13.1 that I know a lot of you -- in our statistical supplement that I know a lot of you focus on -- in the past, anything that was considered to be a fixed maturity redeemable preferred stock was not included. OK? The NAIC during the quarter basically reclassified those, and those particular specific securities, as fixed maturity bonds. So all it does in our reporting is that we include those bonds on that page.

And so what I am just pointing out -- that as you do your fourth quarter to first quarter comparisons, keep in mind that we have included an additional $279 million of these hybrids. They are trading at a loss right now. So of the change from fourth quarter to first quarter, $164 million of that change is the addition of these bonds on that particular page in our disclosure.

Understood. Thank you. And I believe the overall mark on the hybrids is in the neighborhood of $0.44. Do you have a breakout of where the Tier Ones and the Tier Twos are marked?

I don't have that right now. Our mix really didn't change. The portfolio didn't change. I think we had one small maturity, so we went from about $495 million to -- I think we said, what, $486 million here in the first quarter. So the mix between the Tier One and Tier Two didn't change.

OK, so we will just back into the 44?

Yes.

Great. Thank you.

Colin Devine of Citigroup.

Good morning. I've got something for everybody, I think. Why don't we start with Randy -- [all up for it]. If you could talk a little bit about why your lapses are so really -- remain quite strong when AFLAC's basically imploded this quarter? And yet you are in the same sector? What are you seeing? And also, AFLAC had very strong agent recruiting. and I'm wondering if you could comment on that?

For Kevin, it's nice to see this benefit ratio keep coming down. I assume at some point that starts to stop. But also the operating expense ratio continues to trend up. And does that reflect more the mix shift towards the small case? Or do you have an expense problem?

For Susan, you promised to get the expense ratio down. You did it. Is this level sustainable? And I guess, also, is this benefit ratio sustainable?

And then Tom, so you don't feel left out here, is there any update on the CFO search? Or have you been fortunate in talking Bob into not retiring?

You're right, Colin, you did hit us all. We appreciate that actually. None of us feel slighted here. Let's go back -- let's do it in your order. Randy, do you want to pick up on Colin's points on persistency in recruiting?

You bet, Tom, and good morning Colin. Yes, we are just not seeing any kind of significant decrease in our persistency ratios, Colin. And that's very broad-based all over the country and within most of our industry classifications. I think it really speaks to the fact that even though the recession is having an impact, and certainly there is very strong concern on everyone's minds about job outlook and that type of thing, that people value the benefits that they do have.

As I think you know, we emphasize benefit counseling very heavily. And our folks are out there talking to people about their in force benefits. And I guess my read on it, Colin, is that people are going to drop a lot of other things before they drop their insurance coverage. I, of course, cannot speak to AFLAC's situation and what they experience. But again, we are seeing very steady results all over the country.

In terms of our agent recruiting, that is really a silver lining of this economic environment. We are seeing continuation of very strong new agent recruiting. It was up about 24% in the first quarter. And we are seeing very strong levels of production coming from our new agents. So we are very encouraged about that in terms of future outlook.

Thanks.

Kevin, the benefit ratio in the expense ratio question?

Yes, great. Good morning, Colin. I think you're right on the money in terms of what you are anticipating here. Case size mix is definitely a driver here both in terms of an improved loss ratio performance, but also, it does have a different effect in terms of acquisition costs. As you know, our core sales this quarter were up 16%. So there's higher acquisition costs, both as a percentage of premium and in volume. And our case sales were up 28% in the quarter. And so you've got policy issuance costs as well going up. So we don't have an expense ratio problem as much as we are, I think, spending money in the right place in terms of our business acquisition and our claims management. And that is showing up in our benefit ratios.

So we should see this perhaps continue a little bit? The expense ratio is just going to continue to rise slowly?

I think a little bit. I think it will eventually level off as we sort of reach a stable mix. But for a while, I think you will continue to see some anticipated improvement, perhaps in the loss ration, and a slight uptick in the expense ratio.

OK, and all your major redesign is done now?

(inaudible)

And it came out of, again, the claims reassessment and all that?

Yes.

OK.

Yes, all of our claims management redesign is completed. And as you know our renewal program is also stabilized as well.

Susan, on the expense ratio and benefit question?

Yes, absolutely. Thanks, Colin. First of all, the expense ratio -- we have been maintaining strong disciplined expense control of management, particularly with regard to operational expenses, which are well-controlled and managed to within budget.

Obviously the expense initiative that we undertook at the end of last year has really helped. And the performance [incentive] has been sustained from that. And the part which won't be sustained -- which will mean that there is a slight increase in our expense ratio going forward -- is that some of the expenditure, particularly in relation to development, has been delayed or deferred. So what we will see is a slightly different shape in terms of those costs coming through during the year. So that piece I don't think will be sustained. But we do expect the strong management on operating expenses to be. So there will be a slight shift in that. Perhaps --

On the benefit ratio was there anything extra this quarter?

Yes. On the benefit ratio, again, we have some -- seen very good risk management results. We haven't seen any negative impact from the recession. We've delivered good strong [recoverage] in the quarter. What we have also seen is that incidence has been down as potential claimants have really stayed at work. And that, we do think, has been partially a recessionary impact from a positive point of view. What we don't think is that that will be sustained on an ongoing basis. So I would expect to see, again, an increase in the benefit ratio, but obviously we are still expecting to maintain very strong recovery in return to work.

OK.

Hopefully that answers the both of the -- Colin? Great.

Yes.

And good, Colin, just on the CFO search -- I think, as you know, we want to be very -- this is a very important hire for us. We want to be very methodical and careful in this process. And we've got big shoes to fill with Bob's announced decision to retire. The good news is, Bob is certainly, as you know, been willing to work with us in whatever length or period of time is necessary. It is hard to get a search going in the first quarter, I have to say, when you look at people going through year-end closings and things like that. So it's well underway. Maybe a little slower than I would have hoped, but as I look back to what you would expect to accomplish in a first quarter when, again, many people you would be talking to are going through year-end closings themselves, it's probably where it should be in terms of our process.

But again, the good news is, Bob has been very willing and gracious in working with us over a period of time that's necessary to be sure we got the right person and the right transition plan in place.

Maybe just one final one just to reconfirm. You feel very comfortable with Unum's capital position? Very comfortable with your dividends? Just -- that sort of sets you apart from your peers, but it's always nice to have that just reaffirmed.

Yes, we do. I mean again we've -- it's because of two things. One is that we obviously think we have a good set of business plans in place that we are executing very consistently and it is producing very consistent results, which is important, including very strong statutory results.

The second thing is, we have a very strong financial position and capital position that we think is good at all levels. It's good at the insurance company label. It's good at the leverage level and it is good at the liquidity level. And so again, we feel good. We don't want to spend, as we said before -- we want to be careful that we continue to warehouse capital for this environment. But again, we feel very good about where things stand right now.

Thanks.

Thank you.

Mark Hughes of Unum.

Thank you. You had mentioned a couple of times you might expect an uptick in large case new sales. Was that a couple of big wins? Or is there something broader going on there?

Mark, good morning. I'll ask Kevin to speak to that.

I think for the most part the sales cycle for large case is somewhat longer than it is for small case. So we get a line of sight to the future a little bit easier in large case. And we've got some fairly good-sized wins that we can see that are going to merge in the second quarter. And that is primarily what we are talking about here. As far as the broader picture, a little bit too early to tell how that is going to play out.

What is -- is there some change in either the market or in you that has allowed you to be more (technical difficulty)? You have been didn't willing to be more aggressive in these large cases?

No. We really haven't changed our [posture] regarding aggression in large case. I do think that we are always disciplined about it. And so that is why you get volatility in the sales. You know, we always right, you know, a moderate amount of it every year. And we are consistently doing that. But how it times itself during the course of the year varies.

And I think all of our positive performance over the last several years in both renewal management and the pricing stability that has occurred from that as well as our positive claims performance and the profitability that we've had in our improved service value proposition -- all of that, I think, is probably contributing to some increased competitiveness there.

All right. And then in the core market, you've obviously done very well. When do you come up against some tough comps in trying to sustain that growth?

Some tough comparisons?

Yes.

Probably the fourth quarter. We had a very strong fourth quarter in 2008. And so the comparison, I think, there will be some pressure on us during the fourth quarter of 2009, given how strong we were in fourth quarter 2008.

OK. Thank you.

Mark Finkelstein with Fox-Pitt Kelton.

Good morning. I guess I have a couple of questions. I guess one of your competitors talked about, I guess, some pressures in small case in terms of one -- I think it's just one -- kind of just bankruptcies occurring, and it's kind of reduced plants, etcetera? Secondly, some looking for kind of lower-cost alternatives. And I'm just curious in your core market if you are seeing any of those same kind of trends in terms of looking to kind of reduce some coverages and/or pricing or what have you? And kind of how you are reacting to that?

Kevin?

Good morning, Mark. Yes, we have seen a little bit of it. Our case persistency was down a little bit in the first quarter after we had, I think, three consecutive years of steady improvement in case persistency. And when we looked into that a little bit more deeply, it's primarily at the very very small end of our business. And there was a fairly dramatic increase in reported very small cases that were dropping the coverage because they were under financial or budgetary pressures.

OK. And then I guess --

It didn't affect premium very much. It just affected case persistency. In fact premium persistency was solid.

Ok. And then I guess just following on the prior question, you've got a couple of competitors/blocks that are apparently out there. How is just some of the disarray with some of your competitors on the group side impacting your quote activity? And I mean, I understand that you've got a couple of large cases? I mean, are you seeing additional opportunities for quotes? Not just at the large case but also throughout the business? I mean, how should we be thinking about just any kind of structural changes in the competitive landscape in light of that?

Well, our activity levels were up 17%, and our close ratios in the quarter were up 10%. And I don't know if that's totally driven by the behaviors of competitors as much as our continuing improved performance. And also we continue to ramp up our core sales rep staffing levels. But there is probably some combination of those.

Ok, and then just I guess finally, on claim incidence, I think, Tom, you broke down the higher sensitivity claims -- is, I think 25% -- some of the mental claims. Just to clarify the comment, broadly, in those specific claim areas, are you not seeing any trend movement, increases in those claim activities, due to kind of economic weakness? And that statement can be made across industry sectors and case sizes?

It can, Mark, but I will ask, maybe Kevin, if you want to add anything to that? Because, again, I think we -- as I said, those are the areas you tend to think about, but frankly we haven't seen it.

Right. I think the comment, Mark, it's more about -- if you are going to see something, that's probably (multiple speakers) how it would occur. But we haven't seen it. We haven't seen any discernible change in reported incidence levels by cause of disability.

Ok great. Thank you.

John Nadel, Sterne Agee.

Good morning everyone. So most of mine have been asked and answered. But just maybe a high level question for you guys. If we strip out the potential positive or negative impact of foreign currency -- you look at your results so far this quarter and some of the expectations, I think, around some of the larger case sales that you have sort of highlighted is coming on. Persistency of the business is generally stable. Can we expect topline growth on a consolidated basis? Or, I guess, premium growth on a consolidated basis in 2010?

Go ahead, Tom.

John, I would really, I guess -- you need to break it down. Because we've got four different stories going on. And clearly, the Closed Block is going to decline 5% a year. That is not going to change and not going to necessarily accelerate anytime soon.

Unum US, you got a couple of factors going on in there. We still think that we will get to -- we can get to a positive year-over-year comparison as we get towards the year end. We've got a little headwind developing with the recessionary pressure that Kevin talked about. So we will just have to see how that plays out. But with the sales that we are seeing, with the persistency we are seeing, we are still looking good there.

Yes, that was sort of my point.

Yes, I think Colonial is kind of the same thing. That's pretty consistent 5% or 6% topline growth. We will have some challenges in the UK. We've seen the last handful of quarters' year-over-year premiums are down a little bit. That's a function of sales activity being lower; persistency being lower for the last couple of years. But persistency is firming up for the most part. Sales are starting to come back, and that will be a gradual process.

I hate to kind of give a single answer for the total company, because you really have different things. And again, you know, when you think of our strategy, it is not to necessarily grow the topline. We want to be selective -- core market business, voluntary business, certainly Colonial, to see growth there. But it's still very much a focus on protecting profit margins and improving the overall profitability of the business.

Yes I guess where I'm going is -- I mean, the capital, the balance sheet story, the liquidity at the holding company, the lack of debt maturities, etcetera, is all very strong and very defensive on a relative basis to the vast majority of your peers right now. And I'm thinking just about the earnings outlook. And in this environment, right, to Colin's point on how much lower can the benefit ratio go with the pressures of the economy, notwithstanding the changes that you guys have made that is positively impacting that -- but at some point, the premiums have to flatten to go up, to drive earnings growth, and that was sort of my point.

And I think, [John], I would just add to what Tom shared with you. I think, Tom, also what you were getting to is because there's three or four different themes going on here, some of what we are seeing in some of the markets we are targeting in terms of (inaudible) core markets in voluntary -- the margins are actually better in some of those products. So that can also be one of the things as you think forward. Because the mix of business shift, I think, has different margin characteristics to it, which maybe in the topline, I think, as you were saying, Tom, may not -- may be telling you one thing. But the margin actually may be telling you something very different.

OK. And just to the increase in quoting activity, not necessarily closing ratios, but the increase in quoting, any sense, Kevin, as you think about the US market, how you would attribute -- or what portion of that increase in quoting activity you would attribute to employee benefits -- to folks actually really looking to shop because they are concerned about their current carrier?

No I don't have -- I don't really have much of a sense of that. I think it's probably more that we have been very disciplined about building out our distribution capacity and capability. We've added, I think, 34 core market reps between last year and this year. And then of course we have rolled out our Simply Unum initiative which gives us, I think, greater ability to get multiple quotes across multiple product lines with the same customers and brokers.

Alright, thanks very much.

Tom Gallagher, Credit Suisse.

Good morning. First question is, just on the improvement in the benefit ratio and group disability -- I know you cited favorable claims recovery trends. Can you talk a little bit about what's underlying that? Is it return to work? Is it more settlements? I guess the reason I ask is just intuitively you would think returning to work is likely to be more difficult when there's fewer jobs. But anyway, that's my first question.

Kevin, you want to pick up on that one?

Yes. There's a number of factors, Tom. Good morning. As I mentioned, the disability ratio is driven by a lot of factors. Paid incidence was slightly lower quarter-over-quarter versus the first quarter of last year. Our in force pricing is up slightly. And that contributes to the loss ratio. It is up about 1% on a premium [for life] basis. We had higher average-sized recoveries in terms of their indemnity value. And we had lower average-sized new claim submissions coming in.

So all of those sort of affect our loss ratio. And we do continue to get steady claim management performance. We had slight increases in recovery rates, slight increases in death resolution rates and slight increases in settlements. And all of those sort of add in.

So a little bit of a lot of things, it sounds like.

Yes.

The next question is just on stat earnings. I noticed they were particularly strong at least on an operating basis. Can you talk a little bit about what was driving that?

Tom?

Yes. Statutory earnings were very good. When we get those statements out on the website here in a few days you will be able to look through those. We do get a little bit of benefit as -- with the relationship between the special-purpose reinsurance vehicles when they have investment losses, and it gets reimbursed. And so that helps the statutory earnings the way it gets presented. So what I would probably ask you to do this quarter is to focus on the net income line where all that impact washes itself out. And the fact that we are $140-something million of statutory net income in a first quarter is an excellent result for us.

There is some seasonality in our business. We tend to see a little higher group life claim incidence in the first quarter. And there is a little bit higher disability incidence just on a seasonality basis. That comes through in statutory earnings. So the fact that we have a strong statutory net income in the first quarter is pretty powerful for us.

So Tom, from a sustainability standpoint, you would direct us to net income as opposed to the stronger operating income?

Yes, I think for this quarter -- and we can get together off-line and kind of talk through some of that. When those filings are out there, we can walk through it. But, yes, I guess probably the better way to focus is to look at the net income for this quarter. Which, again, was excellent.

One other thing I noticed, just on page 14.2 of the supplement, was -- it looks like incurred on prior-year claims was a large negative number and --

That's positive reserve development, the way it is presented on that page. So when you look at the last four or five quarters or so, we have had very positive reserve development. And that is what drives a lot of the improved results you see in statutory earnings.

Is that -- how should we think about that? Is that just underlying relative to prior estimates of reserves? You're just seeing better underlying?

We are seeing better experience. We are seeing better incidence. We are seeing better recovery. Pricing, as Kevin mentioned, is coming through nicely. Mix of business is coming through. And it all feeds together. You got a lower benefit ratio, you got a better profit margin. You see better reserves development, stronger statutory earnings, stronger cash flow. And it's just all driven by the changes that we've put in place over the last handful of years in that business.

Got it. Last question, just on the UK. Susan, can you just talk a little bit about the environment? I guess the way I sort of look at that business is, it's been by far the most volatile just looking at [all] sales and premium revenue and profitability. Has the competitive environment stabilized? Is it lessening? Is it just as intense as it was? I recall back on investor day, there was discussion about what sounded like massive price disparities in the market. Maybe you could just give us an update of what's happening there?

Yes sure, absolutely Tom. I would say that it's just as intense. I wouldn't say that it's [buried]. So it's something that we continue to sort of monitor and keep an eye on. But we ensure that we don't get distracted by it. We are maintaining our pricing discipline. And we are still very strongly positioned from a market point of view both in group income protection, group disability, where we have the market lead, and also in group risk overall which includes all the group protection products. So we are very focused on making sure we continue to deliver to our customers, and what they want, and develop the offerings and the services that we deliver to them. So just as intense, but we are just as equally focused on what we need to do.

And Susan, would you say you are still seeing some price activity that's 30%, 50% away from what you think is reasonable? Or is the price war letting up at all?

No, I would say, again, we are still seeing some very aggressive pricing. But having said that, as a result of that we have seen some losses with regard to our group life business. So you will have seen from the results that our persistency for group life wasn't where we would have liked it to be for the first quarter.

Having said that, though, our group income protection, our group disability persistency, was very strong -- in fact 91%. And our group [catch-old] persistency was just under 90%. So we are very much focused, and our field force is focused, on making sure that we maintain the business that we've got.

So there is some very aggressive pricing out there. But our service offering is very strong. A lot of what we offer from a product point of view means that we are very well-positioned, in some cases uniquely positioned, with the features and services that we offer. So we continue to focus on making sure that we develop and deliver that.

Thanks.

Thank you, Tom. I think we only, guys -- we have time for one more question.

Eric Berg, Barclays Capital.

Thanks very much, I think this is a pattern, I always seem to be last.

We don't do that by design here. Good to have you call in. You're batting clean up here.

After all these years and after this market my skin is about three inches skin, so no offense taken at all. It's absolutely fine. I was hoping to follow up on a comment by Kevin and Susan regarding the recession. Why do you think it is -- and my question is very narrow and very precise. I've listened to everything you have said about -- very attentively -- about the changes you've made in your business. But my first question is, why do you think it is that in the corners of the economy, here and in the UK, that would be hit right by a recession, and in which you would expect to see an elevated level of claims, including mental and nervous claims, we have not? What's your best sense of what's going on different this time around?

Kevin, you want to start that?

Let me say two things about it. One is sort of factual and one is highly speculative. The factual one is that although with everything that's going on in the economy, the unemployment rate change in our mix of business, particularly in for example the education and health sector where you have still got employment growth going on, has a dampening effect, I think, on expected results. In addition to that, particularly in group disability income, we tend to insure a lot of people who are college educated or higher. And as you know looking at unemployment, our employment level statistics, the change in our unemployment rate is much smaller than the headline rate. So that is sort of factual side of it.

I think the speculative side of that is -- is it's awful hard to try to get inside of people's heads as to what makes them or doesn't make them file for claim. But as I have said in prior quarters, I think right now, if you have a job, taking the chance on filing for disability at the risk of your job is probably not a great plan.

Susan, do you want to comment from the UK market?

Yes, sure Tom. I mean, in the fourth quarter last year, I don't know whether you remember, we did actually see some increase in claims incidence, but that hasn't been replicated in our experience for the first quarter. So what we saw last year was, in particular, claims -- mental and nervous disorders -- and they tended to be short duration claims. And this quarter we have seen lower inceptions. I think the primary reason for that is because potential claimants are staying at work because they don't want to see the sort of job closed out or restructuring that could happen behind them when they go on to disability claims. So I think people are sort of staying put for fear of further changes.

The other thing that we are seeing in the UK as well is, certain employers are actually withdrawing claims. So they are submitting them and then withdrawing them fairly quickly. The reason for that is because they are undergoing organizational changes. They're restructuring. In some circumstances, they are making categories of employees, which includes that potential claimant, redundant. So there are two factors going on, really.

My final question relates to profitability in your core business. What you call your core business is of course a corner of disability that lots of people have been pursuing very aggressively for years. Lots of people have told us about their desire, whether it's StanCorp or Reliance Standard -- I think Met and Hartford have both focused -- created units to focus on this [core] market. Why do you think profitability continues to be better in your core business than in the large case market, given what would appear to be increasing attention by your competitors to your target market too? Thanks.

Kevin, I think that falls more on your lap.

Yes, I think you're right that there is increasing attention. But still, if you look at the size and scope of our field sales and service operation and its focus and attention on the core market, I think we have broader and deeper coverage there, and a long history there with a lot of brokerage relationships. In addition to that, we continue to redesign our offerings to fit that core market. 71% of our sales this quarter had two or more lines of coverage. So I think that we are able to maybe serve that brokerage market and that small case market place with a breadth of offerings supported by service, and even supported by the ability to add on voluntary benefits with enrollment. And I just think we have maybe a value proposition that is more focused on that market.

Thank you.

Thank you, Eric, and then thank you all for taking the time to join us on this call. And this will complete our first-quarter 2009 earnings call. But as always, we are all available for questions if there are some to follow up. Thank you.

Thank you. This does conclude our conference call for today. You may now disconnect your lines, and everyone have a great day.