普登 (UNM) 2009 Q4 法說會逐字稿

Good day and welcome to the Unum Group fourth quarter 2009 earnings results conference call. As a reminder, today's call is being recorded.

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

Great. Thank you, operator. Good morning everyone and welcome to Unum's fourth quarter 2009 analyst and investor conference call.

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 section 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, as well as subsequently filed Form 10-Qs. Our SEC filings can be found in the investor section of our website at Unum.com. Please take note that the statements in this morning's call speak only as of the date they are made and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found on the website in the investor section.

Participating in this morning's conference call are Rick McKenny, Executive Vice President and CFO, as well as the heads of our three core operating segments, Kevin McCarthy, Randy Horn and Susan Ring. And you now I'd like to turn the call over to Unum's President and CEO, Tom Watjen.

Thank you, Tommy. Good morning.

I'll start my comments this morning with just a few observations on the fourth quarter and then Tom White will then review our operating results for the quarter and Rick McKenny will follow up with some of his comments on the quarter, including a review of our capital management and investment portfolio results. In the fourth quarter, we saw a continuation of many of the positive operating and financial trends of the past several quarters and, frankly, was a very solid year for this Company, especially given the difficult economic and business environment. Let me touch on a few of the highlights I'd like to bring to your attention. First, excluding the net realized after-tax investment gains and losses we reported $0.66 per share in operating income for the fourth quarter, ahead of last year's fourth quarter of $0.63 per share. The operating earnings of our core operations increased 10%, driven in large part by an 11% increase in operating results in Unum US, but also with solid performance in Unum UK and Colonial Life. The soft economy and ongoing high levels of unemployment continue to put pressure on our ability to grow the top line, but our risk experience across all of our businesses has remained generally stable.

Second, while our overall sales results for the quarter were below our long-term expectations, we did see some positive trends this quarter. For Unum US, fourth quarter 2009 core market sales were down 1%, but for the full year we actually grew 8%, a strong achievement driven by increased sales to new customers which offset weaker sales results to our existing customer base. Additionally, Unum US we saw a strong pickup in voluntary benefit sales which increased 13% in the fourth quarter. Sales in Unum UK remain strong as we continued to benefit from the exit of a competitor in that market and sales at Colonial grew at 4% in the fourth quarter and 1% for the full year, a solid result in Colonial's marketplace. Generally speaking, many of the same trends we saw in the first three quarters of 2009 continued in the fourth quarter. The premium income under pressure across all of our businesses as employers are reluctant to add new benefits in this environment and in many cases are reducing employment levels. While we have been very successful in adding new customers, it's only partially offset the pressure felt by the lack of growth within our existing customers.

Third, the investment portfolio continues to perform well and the investment quality continues to remain very high. Our net realized investment losses are manageable and Rick McKenny will cover this in more detail in a moment. Finally, we continue to build significant financial strength and flexibility. Again, Rick will provide greater detail on our capital position, but we are comfortable -- but we comfortably exceeded our 2009 targets for holding company capital and risk-based capital and we are well on our way to meeting our 2010 targets.

In summary, I feel very good about our fourth quarter results and our position as we move into 2010. Our core operating segments continue to perform well and are generally meeting our expectations. The strong risk results and the margins we are producing reflect our emphasis on disciplined pricing, underwriting, and risk selection and position us well for profitable growth as the overall economy improves. Sales momentum in our targeted markets remains generally positive. Our strong value proposition and broad array of product choices supported by our commitment to service is serving us well in the marketplace. While the economic and competitive conditions may continue to adversely impact premium growth, we will remain disciplined and will not stretch for growth. Our investment portfolio continues to remain in excellent shape and finally, with our strong balance sheet and excess capital position, we have significant financial flexibility, which we continue to believe is a valuable asset, especially in today's economic environment.

Now I'll turn the call over to Tom White, who will provide an overview of our operating results for the quarter. Tom?

Thank, you Tom.

Net income for the fourth quarter was $199.4 million, or $0.60 per diluted common share, compared to net income of $41.8 million or $0.13 per diluted common share last year. Included in the results for the fourth quarter of '09 are net realized after-tax investment losses of $18.9 million, or $0.06 per diluted common share, compared to losses of $167.6 million or $0.50 per diluted common share in the fourth quarter 2008. These amounts include the change in fair value of an embedded derivative in a modified co-insurance arrangement which resulted in a fourth quarter 2009 realized after-tax investment gain of $22.7 million, compared to a $120.1 million after-tax loss in the year-ago quarter. Net realized after-tax investment losses related to sales and write-offs of investments were $41.6 million in the fourth quarter of '09, compared to $47.5 million in the year-ago quarter. So excluding these items, after-tax operating income was $218.3 million for the quarter, or $0.66 per diluted common share, compared to $209.4 million or $0.63 per diluted common share in the year-ago quarter.

Now moving to the operating results, in total the Unum US operating income increased 11.2% to $203 million in the fourth quarter. Within Unum US, the group disability line reported another strong quarter, with income up 22% to $72.6 million. We continued to see improvement in the benefit ratio, which declined to 84.6% in the fourth quarter, compared to 88.7% in the year-ago quarter and 85.3% in the third quarter this year. A number of factors continue to drive this improvement, including favorable business mix shift, net favorable claims experience, and ongoing adherence to pricing discipline. Premium income declined 6% in the quarter, reflecting in large part the impact of today's high level of unemployment on the natural growth of our business. The Unum US Group Life and AD&D line operating income in this line declined to $47.7 million in the fourth quarter, compared to $50.3 million in the year-ago quarter, primarily driven by lower premium income, which declined by 2.6% and a slightly higher expense ratio. This quarter's benefit ratio of 69.9% was stable, compared to the 70% benefit ratio in year-ago quarter.

The Unum US supplemental and voluntary business line fourth quarter income was strong, growing 14%, to $82.7 million, all three primary business lines, that is the individual disability recently issued, the long-term care line and the voluntary benefits line had year-over-year improvement in operating income. Reported sales on a fully insured basis for Unum US declined by 2.8% in aggregate. As Tom highlighted, core market sales for our group lines, which are LTD, STD, Group Life and AD&D combined, declined by approximately 1% in the fourth quarter, but for full year 2009 sales in the core market increased by 8%. Sales in the large case market for these lines declined 7.7% in the fourth quarter, but grew by 1.2% for the full year. So the mix of core market to large case sales in 2009 is 68% in the core market and 32% in the large case market. The supplemental and voluntary lines reported a combined sales decline of 2.6%. The voluntary benefits line had improved sales this quarter, increasing 12.6% over a year ago, with particularly strong sales in the under 2,000 life segment of the market where BD sales increased 20% in the fourth quarter.

Moving to Unum UK, operating income in this segment increased 12.3%, to $61.3 million in the fourth quarter. The strengthening of the British pound provided a benefit to this quarter's result, as income in local currency increased by 8.7%. The underlying operating performance in the UK remains very healthy, with before tax operating margin of 34% in the fourth quarter and 36% for the full year. The benefit ratio in Unum UK declined to 59.6% in the fourth quarter, from 63% a year ago. New claim incidents trends and claim recovery performance in the group long-term disability line were generally favorable relative to a year ago, while risk experienced in the Group Life line was slightly worse. Fourth quarter sales remained very strong increasing 48% in local currency, as we benefit from the exit of a competitor in the UK group risk market. Looking into 2010, this benefit will not persist as the majority of that available business has been placed, and we expect to see more challenging sales comparisons again next year, in 2010.

Colonial Life, concluding our core operations, Colonial Life finished a strong year with growth in fourth quarter operating income of 3%, to $68.3 million. Premium income in Colonial Life grew 3.3%, while the benefit ratio of 48.5% this quarter was slightly elevated compared to the benefit ratio of 48.3% a year ago. Sales at Colonial Life continued to be encouraging, despite the difficult economy and business environment, increasing 3.7% in the fourth quarter, and 1.1% for full year 2009. Many of the same trends we have discussed with you throughout 2009 continue this quarter, with strong new account growth of 17.9% in the fourth quarter, compared to a year ago. We also saw favorable sales growth of 15% this quarter in the public sector, an important market for Colonial Life, which contributes about a quarter of its sales. Recruiting continues to remain strong, with growth in new rep. contracts, up 36% this quarter, and 32% for full year 2009. Finally, average weekly producers increased by 7.9% in the quarter, compared to a year ago.

Moving to the Individual Disability-Closed Block segments, operating income here was $5.8 million in the fourth quarter, compared to $7.1 million a year ago. The interest adjusted loss ratio was stable at 81.6% this quarter, compared to 82.6% a year ago, and also 81.6% in the third quarter of '09. Premium income declined by 8.3%, and net investment income declined by 3.4%.

Finally, the Corporate and Other segment reported an operating loss of $16.6 million, compared to a loss of $400,000 in the year-ago quarter. Expenses are higher in this segment, reflecting approximately $10 million of incremental quarterly pension cost. Interest expense increased to $31.1 million in the fourth quarter of '09, compared to $26.9 million a year ago, reflecting the debt issue from late September.

So with that review of our operating results I'll turn to Rick McKenny for a further analysis of this quarter's results.

Thank you, John.

As you can see, consistency remains a key theme to our fourth quarter results. I'd like to take a few minutes to discuss with you the key drivers of this quarter's results and also provide an update on our investment portfolio and capital position. First, steady risk experience across our major lines of business continues to be the primary driver of our strong operating performance. We commented in the third quarter that we saw a slightly higher level of volatility in claim incidents in our US group disability line. Claim incidents continue to be slightly volatile in the fourth quarter, but less so in this quarter relative to the third quarter. We continued to experience favorable net claims recovery results which, along with the ongoing shift in the mix of business, resulted in further improvement in the benefit ratio this quarter. We anticipate that the benefit ratio in this line will begin to level out in 2010 with further long-term improvement, primarily coming from mix shift changes. Over the past four years, since the implementation of many changes to our claims management processes, the benefit ratio has declined over 9 percentage points, while at the same time, our customer satisfaction ratings have also improved materially.

In the UK, risk results were also generally in line with our expectations. Our fourth quarter claim experience for group long-term disability was in line with the incidents and recovery trends of the third quarter. However, Group Life experience was slightly worse than prior quarter results. We believe this quarter's risk results are more indicative of the trends we'll see in 2010 than the extraordinarily favorable results we experienced in the first half of 2009. Colonial Life's risk results also remain in line with our projections with favorable results in the accident, sickness and disability lines, offset by slightly higher claim experience in the life and cancer and critical illness lines. The overall benefit ratio for the segment came in at 48.5%.

Turning to our top line performance, we've described the challenges faced in today's environment of high unemployment and ongoing market competition to grow our top line. These trends remained evident in the fourth quarter and provided meaningful headwinds to each of our businesses. For example, we estimate that the natural growth of our Unum US in-force business, that is the premium growth we normally generate from customer growth, salary increases and benefit plan enhancements, resulted in over a 3% decline in our block in 2009, compared to the expected growth of 2% to 3% we typically experience in a more normal economic environment. The impact of premium income in our group lines by -- this actually impacted premium income in our group lines, by approximately $200 million in 2009.

This will turn with the economy and improved employment levels. I'm encouraged as well by our new account growth and generally stable persistency trends which bode well for resumed top line growth as economic conditions turn more favorable. I'm also encouraged by the improvement we saw in Unum UK with fourth quarter premium income rebounding from decline we experienced in the third quarter, and this was the first sequential quarter improvement in premium income we've seen in the past six quarters. The recent increased sales activity and firming up persistency in 2009 has helped stabilize our in-force premium. Thirdly, our investment portfolio remained strong again this quarter, reflecting the ongoing rally in the fixed income markets both in terms of spreads and improvement in default trends. For reference, the spread on Barclays US investment grade credit index is tightened further to 157 basis points in December, from 198 basis points at September 30th.

This tightening was offset by widening of the US ten year Treasury rate by 53 basis points. The net unrealized gain position on our fixed maturities securities portfolio reflects these movements and with $2 billion at year end 2009, compared to $2.2 billion at September 30th. With this stability in the investment portfolio, the Company's book value per share was similarly stable. Book value per share was $25.62, at December 30th, 2009, a sequential increase of 3% from September 30th and 33% higher than a year ago. In the fourth quarter our reported net realized investment losses, excluding the embedded derivative gain of $22.7 million after-tax, totaled $42 million after-tax. This after-tax realized loss this quarter compares to $19.4 million in the third quarter and $47.5 million in the fourth quarter of 2008. The losses this quarter were primarily related to impairments on certain holdings of securities in the financial institution sector. As we look forward, we expect a level of reported net realized investment losses to improve as unrealized losses on credits on our watch list has dropped by 85%.

One area that continues to receive more attention in the world around us is exposure to commercial real estate and mortgage loans. First of all, we have no CMBS exposure and our commercial mortgage loans currently total $1.4 billion or around 3% of our investment portfolio. At year end 2009, we had one delinquent loan with a book value of $2 million two foreclosed properties where we expect to fully recoup our principal. We only have nine loans maturing this year and, in fact, we only average $30 million of loan maturities per year for the next four years. Our current loan to value ratio is approximately 69%, and our portfolio is well diversified with respect to geographic distribution and property type and our underwriting standards have remained conservative. We're confident that our portfolio is well-positioned and that any losses we may incur will be manageable.

When turning to our capital position, the solid investment performance and good risk results not only produced strong GAAP earnings this quarter, it also generated strong statutory earnings in our traditional US life insurance companies. Fourth quarter 2009 after-tax stat operating earnings were $246.6 million, which brings our full year after-tax operating earnings to over $740 million. These strong results, which also reflect some intra-Company dividends, are outlined in our statistical supplement and drive very positive momentum in our capital management metrics and overall financial strength and flexibility. As a result of this strong earnings profile we estimate that our year end RBC for our traditional US life companies, traditional life subsidiaries was 382%. Looking ahead we continue to expect to manage our RBC ratio during 2010 within a range of 375% to 400%. holding company capital finished the year $915 million, ahead of our expectations, and leverage at year end 2009 was 20.5%. We have no debt maturing in 2010. And with a small contribution our pension underfunding is down to $77 million.

You can see from these results that Unum's financial and cay capital positions remain very strong. As we discussed with you at our investor meeting back in November, we've had a conservative stance regarding deploying our excess capital, specifically through share repurchases. We do recognize the cost of maintaining this posture and continue to reflect on the environment, and its contribution to making these decisions. To be more specific, the primary factors that will influence our thinking include macro level impacts such as our assessment of general economic and business conditions in the US and the UK and the investment environment and potential impacts on our portfolio. We'll also take into account the outlook for our businesses which include the level of our statutory earnings and free cash flow and finally, we will evaluate our ongoing capital levels including RBC and holding company capital. We feel well-situated beginning 2010 and we will monitor these factors as we move through the year. All in, it was another very good quarter for the Company, with solid operating performance and further strengthening of our financial platform and flexibility.

Now I'll turn the call back to Tom for his closing comments.

Thanks, Rick.

I think as we've all shared with you this morning we're certainly very pleased with our fourth quarter and full year results, and I'm extremely proud of the work our people have done to help us deliver these results. While profitably growing our top line remains challenge for us in this environment, I am encouraged by the underlying trends we're seeing in new customer account growth and persistency, both of which bode well for resumption of premium growth as better employment conditions emerge. While top line growth is important, I can assure you that we will remain disciplined in our pricing and underwriting to protect the margins that we worked so hard to restore over the past few years. In his comments, Rick outlined several factors that will drive our capital management strategy and the potential redeployment of our excess capital. While general economic and regulatory conditions remain uncertain, our fourth quarter results were certainly very strong relative to these factors. Our risk experience and operating trends remain strong, our statutory earnings are at an historically high level, our year end RBC of 382% and holding company capital position of $915 million are comfortably within our projected levels for year end 2010 and our watch list of potential problem credit has declined significantly in 2010 which, again, is why we feel so good about the things that we can control.

A final comment before we go to your questions. With respect to our outlook, we continue to expect operating earnings growth for 2010 within our previous expectations of growth of 4% to 6%. I would direct you to our investor meeting presentation of November for additional detail on our business segment outlooks. This completes our formal comments, and operator, lets move to the question and answer session.

Thank you. (Operator Instructions). We'll go ahead and take our first question from Mark Hughes with SunTrust.

Thank you very much. Good morning.

Good morning, Mark.

The core group sales have been very strong for the full year, little bit of a deceleration in the fourth quarter. Anything notable there, little more competition as to why you might have slowed a bit?

Sure, Mark. Let me ask Kevin to take that one.

Good morning, Mark.

Good morning.

You recall that during the first half of the year, our sales were up considerably and I think generally speaking the rest of the industry was down. In fact, through the third quarter, LIMRA also reported that disability and life sales were flat to down, whereas ours were up. So we expected an increase in price competition during the fourth quarter and in fact we saw at beginning in the third quarter and stretching into the fourth quarter average price levels looked like they were going down in the market, and I think that affected our core sales a lot during the fourth quarter.

Nevertheless, I think we had a pretty strong quarter. We had a strong full year. We're positioned very well I think for 2010. Our business mix is running well. Customer satisfaction ratings are high. And I would expect that as the economy recovers, also upgrades in benefits or what we call MBOC, new business on old accounts, will also I think improve in the latter half of 2010 and that lagged significantly all during 2009 including during the fourth quarter. For the most part, I think we're in a good place.

Okay. And then the uptick in the Colonial cancer claims, was that a frequency issue or was that a pricing issue? Is that -- are you seeing it across most cancer policies?

Tom White, you want to take that one?

Mark, it's Tom White. It's really kind of embedded in some older policies that we have there and we've initiated some pricing actions to address that.

Okay. Thank you.

Thank you, Mark.

We'll take our next question from Colin Devine with Citi Investment Research.

Good morning.

Good morning.

I guess I'll put Kevin on the spot a little bit to talk about where we stand with Simply Unum. You were quiet on it this quarter and how that roll-out is going.

And I guess Tom, the other question now with the mix shift having played itself out, probably taken about as much out of expenses as you can. Where else is growth going to come from for Unum beyond just a rebound in the economy?

You talked about perhaps getting into some other products. Met was going on and on about how successful dental's been for them in the group business and they seem to be competing with you side-by-side. Is it time now to talk about product expansion and that's obviously Simply Unum, but perhaps some other products and using capital to accelerate that.

Kevin, first one on the Simply Unum roll-out.

Good morning, Collin. Simply Unum is going very, very well for us. During the course of the year, we had good and steady progress in terms of growing account acquisitions through Simply Unum. I think something like a quarter of our under 500 life business was put on that platform in the group business, and more than a third of our core VB business was put on that platform.

As we look at that business strategy with Simply Unum, a primary element of it is to provide increased purchasing pricing flexibility for employers by combining employer paid and employee paid coverages. We saw a significant increase during the course of 2009 in package sales involving both group and voluntary benefits. And I think that strategy seems to be playing out well for us.

During the fourth quarter, we introduced an expansion of our offering there. Where we provide additional funding, flexibility and group disability for the packages of employer and employee funding. We test marketed that in four offices and had outstanding results in those four offices. We'll be rolling that enhancement out during the first quarter of 2010. So good solid steady progress in the core market in terms of new account acquisition through our Simply Unum platform.

If I could pick up on your second question, then I'll ask the business heads to embellish a little bit but your question is really about where the growth is going to come from. As I look back at 2009, I'm especially pleased to see that we've actually across all of our businesses had very good new account growth. The good news is your value proposition, our product deliverables, our people, those sorts of things are leading us to build additional customer relationships across each of our businesses and certainly we could use an uplift in the employment picture to help get some of of that natural growth back into the system, but certainly from my point of view I'm very, very encouraged by the ability to attract new business in this environment without compromising any of our risk or those sorts of disciplines.

Kevin, you talked about Simply Unum. I think it's safe to say in Unum US, for example, there are other initiatives under way, some of which have a little bit of product extension perspective to it, but I think there's good growth in things we're doing just in the normal course.

During the course of the year, let me just reflect quickly on 2009. Our new group account growth, the premium growth was 20% for the year. Our new core VB growth in premium was 18% for the year. So in our strategic growth areas, I think we're doing pretty well.

Most of our lag in sales in total sales was reflected really more in two key areas. One as I mentioned earlier, so-called MBOC, upgrade in benefits which were down significantly for the year. In group they were down 19%. That can sometimes account for 25% to a third in our overall sales. That decline shows up in the overall sales picture. We would expect that to recover during 2010. And then our other declines in sales were more reflective of lines of business that we are being extremely cautious with, those lines being individual disability income, in this economy, and also long-term care.

So in terms of growth, I think as we look forward, growth's going to come from our business strategy. It's going to come from core group. It's going to come from packages with voluntary benefits. It's going to come from a recovery in MBOC and then as the economy recovers, on the top line earned premium, we also should start to see an elimination of the drag that we had from lack of normal growth in 2009.

If I could shift, actually, Randy, maybe speak to Colonial. Let me just say that I think for Colonial, one of the great growth segments for us, as Tom mentioned in his comments, is the public sector. Public sector sales were up almost 12% for the full year so again, we are seeing growth in the existing businesses, and I think Randy your new account growth was up about 13% for the year. But anything you want to add to that. We don't need to get too far afield for us to see growth from your business; maybe it's more laser like focus around those areas that I mentioned.

That's exactly right, Tom. We still feel very optimistic about our conventional value proposition, packaging our individual products with our enrollment and benefits communication capabilities. Primary focus on growth, Collin, as we discussed in the past is around growing our agency system and developing them more effectively.

We've had very strong trends in all those areas over the last couple of years. Our new rep. recruiting level was up over 30% again in 2009 and that's two back-to-back years growing our agency system at that level. We continue to see good, strong production from those new reps. As Tom pointed out, very strong new account growth. Average weekly producers is growing close to 8% in the fourth quarter of 2009.

So we're very encouraged about the opportunity and just think we need to stay focused on growing distribution, stay focused on our core commercial market and public sector, whereas Tom said we've seen very, very good growth there. So with a little help from the economy, we think there's great opportunity out there for us.

Lastly, Collin, just Unum UK, very much I think, Susan, similar sort of approach, staying the course. We are seeing obviously some hypergrowth, comes from a competitor exiting the marketplace. Even beyond that there's a lot of focus on repositioning a couple of the products and some of the services. You may want to speak to that.

Yes, sure, Tom.

You're right. We did benefit from the exit of Aegon during the course of 2009 and that gave us an increase in our sales results of over 40% versus last year. Even if you exclude that, our sales growth versus 2008 came in just slightly under 10%. So we did actually see good results and certainly key sales drivers showed improvements in terms of close rates, case counts, and average premiums. Similar to Kevin's story where we didn't see sales growth come through with regard to upsale to our existing clients. Due to economic reasons, we were falling short on that.

In terms of growth for 2010 and beyond, we're really looking to deepen and widen the penetration and -- of our products across the market and also within employers. Seven out of -- one in seven employees are covered by our products and so we still have to widen the penetration. We've got a great opportunity to do that. And the ways in which we'll do that, we're making changes to our existing offering and what we have to offer currently is really right at the forefront of the market. We want to make sure that we stay that way. So we're refreshing our group long-term disability offering during the first half of this year, and we have, again, plans to revamp and refresh and relaunch our Group Life offering. We did that in the course of 2009, and that showed some nice, strong improvements this year as a result.

We also have some technology changes to support our small to medium case proposition which we think will provide us with further opportunity. We have a new focus segmentation model and there are some new block segments that we're working on developing a new proposition for where we again have identified some good opportunities; and we have a customer segmentation model to help us target new employers and in addition to that, you've raised a question about Simply Unum and as you know we've been working on a new proposition to launch to the UK market to really take advantage of that platform and roll that out so that we're able to target new segments and that's very much on track for launching during the course of this year. I think those, Tom, are the primary areas of the UK.

And Colin, if I could just close. I think hopefully you sense from the businesses, whereas certainly we would love to see the economic environment improve, especially around employment, we're certainly doing a lot of things within our businesses, things we know and control to be sure we can continue to build our presence in the marketplace. Staying disciplined, staying with the things we know. I'd say there are a couple things that maybe fall in the category use, which is product extensions, but that's not really the primary focus. The primary focus is continuing to drive home some of the things we've been talking about the last couple of years.

Thanks, and just a quick follow-up. Do you expect you'll be able to recommend to the Board a dividend increase this year?

Well, if could step back. I think as you know, we feel very fortunate, Colin, to be in a position to have the excess capital we have. As you know, very few if any actually other companies in our industry are in the position that we're in. If you look back to the pattern of behavior that we as a Company have exhibited over the last couple of years with the Board, as you know in 2008 we had a share repurchase. Last year we raised the dividend by 10%.

Those are all happening at times when the vast majority in our industry have pulled back from those kinds of commitments. I just ask you to have that sort of context as they think about the question you just raised. As I mentioned in my comments, we feel very good about the operating performance in the business. There continue to be some economic and regulatory uncertainties out there. So we're not going to be held to a time frame, but I think we know there's a t cost to continue to have excess capital like we do, and hopefully, again, our behavior and our actions in the past show that we recognize that we've got to put capital back in the hands of our shareholders and we'll do it when we feel we've got -- the things are lined up properly.

Thanks a lot, Tom.

Thank you.

We'll take our next question from Randy Binner with FBR Capital Markets.

Hi. Thanks. Just wanted to dig in on the Colonial sales a little bit more. There's a trend here where sales seem to be better last several quarters relative to your largest competitor. And I guess when Randy Horn was talking, it seemed like the agency focus there was the key. So just curious to explore that a little bit more and also to get the kind of agent recruiting number for the fourth quarter specifically?

Randy Horn, you want to take Randy's question.

Sure, Tom. Hi, Randy. Yes, just going from the back of that question, our new agent recruiting was up 36% in the fourth quarter, up over 32% for the year and that's on top of a 30% plus increase in 2008. So we've had very consistent focus and great results in terms of agent recruiting. We're working very hard to develop those new people effectively.

That's led to opening of a lot of new accounts, Randy, again in the fourth quarter. We were up almost 18% in terms of the number of new accounts. We're seeing some excellent results there. We had some headwinds early in the year, really going through the first three quarters, actually, in terms of selling new products to existing cases. We saw some improvement in that in the fourth quarter, and actually moved into positive territory in terms of that NBOC number and again, I just see -- I wanted to mention public sector as well, Randy.

I think Tom mentioned we were up almost 15% in our public sector sales, excellent results in the educator market, for example. So I think it's just overall a result of good focus, growth in our agency system, and continuing to develop those new people effectively.

Okay. That's helpful. But there hasn't been -- there's been no change in your product or pricing or anything like that?

No, no, there has not been any significant -- we continue to refurbish our product portfolio. We did release a new critical illness product in the second half of 2009 and that's been very successful but no significant change in our pricing levels.

Okay. And then just one other clean-up item if I could. I think Rick had mentioned that the benefit ratio for the fourth quarter would be more reflective for Unum UK of what we're going to see in 2010. The seasonality in the fourth quarter is a little high in the UK. So was it more like the second half '09 benefit ratio we should think about or was it that fourth quarter number?

I think it's more the fourth quarter number. I think when you look at the first half, certainly we're much better. Third quarter we talked about at some length some one time effects going into that quarter. I think fourth quarter is fine to launch off of.

We'll take our next question from Jimmy Bhullar with JPMorgan.

Hi, thanks.

Good morning, Jimmy.

Good morning. It seems like your commentary on market conditions and pricing is a little bit more cautious than it was even in the last quarter and earlier last year, but wondering if Kevin has some thoughts on this.

And secondly, not trying to pin you in terms of timing but just on capital deployment you mentioned $915 million of holding company capital, strong RBC. What are you looking to see in terms of either your own results or the macro environment before you start deploying some of this capital either towards buybacks or something else? And then just in terms of timing, how long would you have to see a stable environment for you to start taking some action?

Kevin, you want to pick the pricing/marketplace question up?

Good morning, Jimmy. During the first half of last year, we were significantly ahead. I think a lot of our competitors were significantly behind. We expected that to correct itself to some degree during the second half of the year. Especially with the more aggressive competitor pricing actions and as many of our competitors settled down on some of their balance sheet issues.

That's exactly what we saw in the second half of the year. We saw our competitors defending their in force business much more aggressively. Making share capture therefore much more difficult. We saw pricing levels go down. In fact, during the fourth quarter -- unit days was up third quarter, our closing ratio on sales was up year-over-year. And during the fourth quarter, our closing ratio in comparison to fourth quarter '08 was down 17%. We didn't change our pricing levels and we didn't change our sales goals and sales objectives, but we did just maintain discipline and diligence around underwriting pricing levels during the fourth quarter and I think that showed up in the comparison in the sales results in the fourth quarter.

Okay.

Rick, you want to take up the follow-on question Jimmy raised with relation to capital?

Be happy to. This is Rick McKenney. With regard to the share repurchase, or if you look at capital deployment in general, first you have to start back with the fact that we are in a very fortunate position with the excess capital that we do have. We have had a conservative stance; if you look at what the world looked like over the last year, not rushing to return our free capital this year too quickly was the right answer when we talked to investors in November. It's still the right answer.

I would say from a trend perspective, two things really have improved. The world around us does seem a little bit better, although far from healed and our capital does continue to build. We will factor those trends in with our Board of Directors when we discuss with them and continue to discuss with them when we will redeploy capital if we don't have other uses for it, whether it's through dividend, as Tom talked about, M&A, or through share repurchase.

Okay. Thank you.

Thank you.

And our next question comes from Darin Arita with Deutsche Bank.

Good morning.

Good morning, Darin.

I guess just as I think about the RBC ratio being at 382 and it's already within your year-end target of 375 to 400, would that mean that your holding company liquidity should end the year around the high end or above that high end of the target range of $1 billion to $1.3 billion.

Rick, do you want to take that one?

I think that's fair assumption as we continue to generate statutory earnings within the Company, and start to push our RBC levels up towards the top of the range. As you mentioned, we're in that range today. That free cash will go to the holding company and should continue to build. Look at our statutory earnings over the last couple years, give you a sense that our expectation is we'll continue to generate strong earnings and capital.

All right. That helps.

And in terms of the UK, the life sales have been strong, but I think you mentioned, Susan, that even ex-Aegon, the sales were up. Was just wondering kind of what's driving that? I know you mentioned the Group Life market had been very competitive in the past.

Susan, you want to take that?

Yes, sure, absolutely. We have reorganized and changed the focus with regard to our sales force, so we made quite a lot of changes there. We changed the components and really we focused on all of or different product lines so as I mentioned close rates have improved right across sort of our products, group products; and case count improved right across the board and average premiums are up, so really we've been focused on all products, not just Group Life. And we've made some good, positive results.

So we've just been very targeted, very focused, worked on the relationships where we have very strong relationships across the market. There is some new areas that we intend to progress for 2010 and such as some broker segments. We've identified three where we don't quite have the penetration and support that we would expect to. But we have worked very closely with our distribution partners and we've got results pretty much across the board.

All right. Thank you.

Does that answer your question?

Yes, that was very helpful.

Thank you, Darren.

And we'll take our next question from Tom Gallagher with Credit Suisse.

Good morning.

Good morning, Tom.

I guess I'd like to start on capital and just maybe how strategically you're thinking about it. When I look at importance of ratings for your business, I think you've clearly shown you can operate pretty successfully with where you are. Is there truly consideration right now for continuing to harvest capital, potentially getting upgrades, and seeing an impact on your growth rate from that angle? Is that really in the mix right now? Or is it truly just -- are you just wanting to make sure the economic environment clears before you start getting more proactive?

Because I'm just looking at the absolute levels, and just wondering at what point do you have to start pulling the trigger? Is it when excess capital's 20% of your market cap? Because I think it is getting to pretty extreme levels right now. So anyway, that's my first question.

Tom, let me start and then I'll ask maybe Rick and Tom to pick up. Your last point, we feel the same way. We recognize the wholesome nature of our capital position right now is starting to get to the point where more and more questions are going to be asked about what we want to do with it. I think as Rick said in his comments, what we do want to do is just be very careful. We still believe it's an incredibly valuable asset to have excess capital these days. As we went through the different things that a consideration for us. we want to be very thoughtful about that. Some of those considerations are things that are outside the operating purview, if you will, of the Company. The environment is something we have to factor in. Obviously the rating agencies, Tom White you are going to be part of that too. I don't know if you want to touch on where we are with the rating agencies? I'd certainly want to make that a consideration, but not the driving consideration.

Thanks, Tom. It's not really a driving consideration at all. Just kind of where we are in terms of discussions with rating agencies; with two of the agencies we had annual reviews kind of at the back end of 2009. With the other two we'll wait probably until sometime in April or May to have annual review meetings, and certainly every quarter it's our practice the week before we report the earnings to go through the results with the rating agencies so they see what's going on in there.

This time of year, we tend to kind of fine-tune our business plan. We fine-tune our capital management plan and that's something that we'll be presenting to them. It's clearly a little frustrating from our perspective. We think we've posted some very strong results. The ratings at this point we don't think necessarily reflect that.

There's not a whole lot we can do about it other than continue to operate the business the way we have and continue to maintain a strong balance sheet and a substantial amount of flexibility and ultimately that will come through in higher ratings. But I think you raise a great point in that we have operated very well with these ratings. If you think back over the last five years, I think we had only had one ratings upgrade which is S&P a couple years ago, and it really -- it's not a significant headwind to sales or our perception in the marketplace right now.

Also, just maybe Tom add too, even though certainly as we've said to the group before in previous calls, we want to continue to keep our eyes open for acquisitions that fit within the framework of the things we're looking at. I also don't want to think, we're not warehousing capital for those sorts of things. We certainly take that -- we've got obviously as I said before substantial amounts of excess capital. But it really comes down to feeling comfortable -- the environment and the factors that we can control as well as the ones on the outside that we can't control are in such a position that we can make another step towards continuing to return capital to shareholders as we've done the last two years.

Got it. That's helpful.

Couple of other questions. One is can you comment a bit on how we should be thinking about your margin of safety and reserves, vis-a-vis discount rate? Obviously, low interest rates and lack of ability to get good yield on new money is a headwind, but can you update us as to what that margin looks like and I don't know if you can give us any perspective on new money discount rate versus in force and what those levels are?

Tom White, you want to pick that up?

Sure. Just a few numbers about where we are and the numbers I'll quote are for our our Unum US LTD business. Keep in mind, we look at this on every different line of business by Company and by line of business so there are a lot of different portfolios that we manage because they're different cash flow characteristics and duration characteristics. But just focusing in on one, for Unum US LTD, we have a 92 -- we currently have a 92 basis point margin between the portfolio yield and the aggregate discount rate on the claims. And that's made up of a portfolio yield of 6.74% currently, and the aggregate discount rate is a 5.82%.

Now, for new claims that come in, we use a much lower discount rate when we set up those reserves. Now, we don't disclose what that is, because it is part of our pricing formula and we don't like to talk about assumptions that go into our pricing formula. So that's where we stand today. I'll note that in the third quarter, that margin was 91 basis points, so we expanded by 1 basis point over that period of time.

Now, the way we manage it is to really look at it over a much longer period of time because that 92 basis points is good to know at this point, but what's more interesting to us is what is it going to look like over the next handful of years, given a bunch of different interest rate scenarios; and I went back and I looked three years ago, if you just took a snapshot of fourth quarter of '06, we had a 66 basis point margin. And what happened over those three years is that our portfolio yield expanded by 5 basis points, so we took advantage of a few opportunities in the market when rates were up and corporate spreads widened out, so we got a 5 basis point expansion in the portfolio yield, but a 21 basis point expansion in that discount rate. So I think -- so what happened is it went from a 6.03% down to a 5.82% and I think that gives you an indication that for new claims that came in over that period of time, we were using a much lower discount rate and so those things will move gradually over time.

We feel very, very good about where we're positioned right now. Certainly, we would love to see a higher interest rate environment. That would be beneficial to us but given that margin that we have right now, it will take a very long time for it to eat into that margin in a substantial way and as it does, then, at that point is when we look at making some small adjustments quarter to quarter which really wouldn't have much impact in the market.

Tom, just two things to add to that. I think that 92 is in relation to a target we have of 50 to 60. The other thing is that's on roughly $6 billion or $7 billion of long duration assets. And we have roughly, what, about $50 million of new money we put to work each quarter.

Yes, it just doesn't move that much from quarter to quarter. Because as Tom said, you've got roughly a $7 billion reserve base, probably six or seven year duration on it and at most, we're probably investing a couple hundred million dollars a year of new money in there. So it just takes a long time to move those numbers.

That's very helpful. I appreciate it. Just one follow-up.

So it's fair to say that even if interest rates remain where they are today, even go a little bit lower, you've got a lot of cushion. There may be earnings pressure and that's a separate issue. But in terms of balance sheet being strong or not, you have a lot of margin for interest rates to decline before it would become a balance sheet issue?

Exactly right. And you contrast this to back in 2002, one of the reserve charges that hit us was because that margin was a lot lower. It was 20 basis points or so and it went through a lot of defaults in the investment portfolio and sold off a lot of high yield, had had a significant hit to the portfolio yield, and that's what led to a reserve charge at that time. And that's one of the lessons learned coming out of that experience, so again, today, a 92 basis point margin which just doesn't move very much because of the cash flow characteristics and again, we feel very, very good about where we are. We would rather have a higher interest rate environment, but we're well-protected in today's interest rate environment.

Thanks.

Thank you, Tom.

We'll take our next question from John Nadel with Sterne, Agee.

Good morning, everybody. A lot of my questions have been asked and answered so I guess I'll ask you this question, and I want to begin by saying I'm definitely not asking you to highlight any specific competitors. I'm just more interested in the state of the environment. And so I'll ask it this way. What's the most aggressive behavior, given it's such a difficult sales environment and companies really, I think insurance carriers are largely really trying hard to keep business on the books, what's the most aggressive behavior you're seeing from competition for new sales? I mean, just how far out on the limb are some companies going to either retain business or to obtain new clients?

To use your comment, we'll just see how far on a limb Kevin wants to go on that one, actually, John.

I'd love to name some competitors, but I won't.

That's okay. [ LAUGHTER ] Listen, I think we all know who they are.

Well, we see a couple of different kinds of behaviors. We see incredible discounting rates. Over the years, I've spoken, other members of my team have spoken, we talked about the -- other carriers have spoken as well at those conferences about just the degree of volatility that exists in pricing levels and underwriting performance company to company during the course of a given year. You can see rates be off by 25, 35, 45% sometimes. So that's one kind of behavior that you see.

And I think a lot of times you see it on what I'll call quote, unquote, important accounts, an account where either it has a name brand in the large case business or in the mid-sized business market you see it because acquiring that one mid-sized case can make up for missing on a lot of small cases, so you see that kind of behavior. The other thing I'd say is just the extended rate guarantees. In this economic environment, I'm sure I'm not the only one who would say that's not a great idea, but nevertheless we see it. We've seen four, five, even seven year rate guarantees offered up to defend cases. That kind of behavior is not a great long-term proposition and we're not going there.

And when you -- and Kevin, when you're talking about sort of 25% to 45% rate discrepancies from one bidder to the next or four to seven year rate guarantees, is this -- I mean, is this current?

That's pretty current. Yes, that's fourth quarter current.

Yes? Okay. Okay. I'll follow up with you guys offline on some more modeling oriented stuff, but thank you very much.

Thanks, John.

We'll take our next question from Sean Dargan with Wells Fargo Securities.

Thank you.

Good morning, Sean.

Tom Watjen just said that you're not warehousing capital for potential acquisitions, but given the nature of the competitiveness out there now, and perhaps the more challenging return outlook going forward, do you sense that any competitors may be looking to exit the business? I know at your Investor Day you said it didn't seem like anyone was ready to sell.

Yes, Sean, I don't think we've seen any changes in that, but I would ask Rick who was maybe a little more closely involved in that to comment.

I think that's exactly right. I think it probably has trended the other way where people are enjoying their group businesses today and things that are close to what we do. Strong results we've seen today we're very proud of. I think others have seen good results as well, so I think that trend continues.

Thank you. That's all.

Thanks, Sean.

I think let's just do a time check. I think we'll have time for one more question.

Thank you. Operator. One more question.

We'll take our last question from Mark Finkelstein with Macquarie.

Snuck in there. Some follow-ups here. Knowing profitability is a lot more important than top line -- Kevin, you did give an outlook at the Investor Day of flat top line in the US. Given cautionary language, do you still feel comfortable with that assumption.

Yes, the the flat top line's an earned premium number. We do think we'll be in the 9% to 11% range in terms of sales. Flat top line is basically driven by the economy and the fact that we've got abnormal growth lag and that of course we had also NBOC sales lag during 2009 that will show up as an earned premium drag in 2010.

So but otherwise, I think things are looking pretty positive. Our sales momentum is strong in the core market and our voluntary benefits. I said earlier that I'm hopeful that NBOC and even normal growth will recover in the latter half of 2010. Our customer satisfaction ratings are terrific. And I think across the board, all the metrics are sort of lining up positively for us going into 2011 and 2012. 2010, we have to stick with flat sort of reasonable assumption.

Is there anything you can say about I guess the key first quarter sales activity?

No, it's a little too early to talk much about first quarter. Most organizations are in January to sort of, they're trying to get a good start into the new year but they're also trying to make sure they close out effectively the paperwork that's necessary for the fourth quarter. I would say in the in-force business, early signs in terms of renewal and persistency are better than our expectations and that bodes well for the year.

In thinking about where you're losing business, and you're talking about somewhat irrational pricing environment, you're making the comment, others are making similar comments, frankly. When you look at business that you're losing and you try to reverse engineer the pricing that competitors are coming in, just putting terms to the side, what is your feel for where this business is actually being written at on the stuff that you're losing?

Oh, gosh, I mean, I think that's a tough question to answer. It varies by markets, the size, and when you get into mid-size and larger, experience rating and how each Company looked at their own reserve level, how much credibility they give to past experience versus forward-looking assumptions, that's over the lot.

When you get into the smaller size market, I think a lot of it has to do with how each company views their market segment based on their own block experience. I just think it bounces around all over the place. There's no simple answer to that question, Mark.

Worth mentioning, too, that even though the focus has been on the competitive dynamics for the fourth quarter, this historically has been a cyclical business. Very hard to analyze it. Quite frankly irrational behavior. Heavier dose with some of the dynamics you talked about.

If you things about, I'll just use large case for example, we always talk about volatility in large case business. Impossible to do sort of quarter-over-quarter comparisons in large case. For the full year in large case, I think our sales were up 1%, basically flat with last year, yet quarter by quarter we had a terrific second quarter and not as terrific performance in other quarters. That's because we're pretty disciplined about our pricing.

We get our shots and sometimes we see pricing levels that we think we can see and manage risk at and sometimes we don't. That kind of behavior in the large case market I think reflects itself, but it's muted of course when you look at the total marketplace. But you always, as I think Tom said, get competitors looking at their overall sales results and sometimes being more aggressive for a short period of time, and that kind of volatility has been in the business as long as I've been in it.

All right. Thanks.

Thank you, Mark. Thank you all for taking the time to join us this morning. We certainly know we didn't get to everyone's questions, but hopefully in follow-on calls. Look forward to seeing many of you at the various industry conferences and investor events that will take place over the next several weeks. This completes the fourth quarter 2009 earnings call.

That concludes today's conference. Thank you for your participation.