普登 (UNM) 2010 Q1 法說會逐字稿

Good day and welcome to the Unum Group first quarter 2010 earnings results conference call. Today's call is being recorded.

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

Thank you, Operator.

Good morning, everyone, and welcome to Unum's first quarter 2010 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 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, 2009. 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're 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 our website, also in the investor section.

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

Thank you, Tom. Good morning.

We are off to a solid start for 2010, and before turning the call over to Tom and Rick, I want to touch on a few highlights.

First, consistent with our results of the past several quarters, our risk experiences remain generally stable and as a result we continue to maintain solid margins and profitability. Excluding net realized after-tax investment gains and losses and a tax charge related to the tax law change regarding Medicare subsidies, we reported $0.67 per share in operating income for the first quarter, an increase of 8.1% compared to a year-ago quarter. Our core operations continue to produce solid results, with Unum US reporting operating earnings growth of 8.5% and Colonial reporting growth of 3%.

Let me also just touch briefly on the environment. The high level of unemployment in the US and the UK continues to put pressure on premium growth in both markets, and we expect improvement to be slow in developing. We have also seen some very aggressive pricing and underwriting actions by certain competitors, particularly in our Unum US markets, which has reduced the number of profitable sales opportunities in the market.

We are however, remaining disciplined, and are not going to chase business that's inconsistent with our risk and profitability guidelines. I am, I must say, very pleased though with our position in our target market and we are poised to accelerate growth when the opportunities arise.

And lastly, as we said before, we continue to build on our already strong capital position. Our weighted average risk-based capital ratio is approximately 397% at the end of the first quarter, with holding Company cash and marketable securities at $775 million. This positions us well for a review of our capital strategies options with our Board at our regularly scheduled meeting in two weeks.

In summary, I feel very good about our start to 2010. While we continue to face selective top-line growth challenges, our operating and investment results remain strong and we continue to generate excess capital.

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

Thanks, Tom.

Net income for the first quarter was $229.8 million, or $0.69 per diluted common share, compared to net income of $164.9 million, or $0.50 per diluted common share, last year.

Included in the results for the first quarter of 2010 is a tax charge of $10.2 million, or $0.03 per diluted common share, related to the change in tax treatment of the Medicare subsidy for retiree health benefit plans. Also included in the results for the first quarter are net realized after-tax investment gains of $16.5 million, or $0.05 per diluted common share, compared to losses of $41.8 million, or $0.12 per diluted common share, in the first quarter of 2009.

Net realized after-tax investment gains for the first quarter of 2010 include an after-tax gain of $11.9 million resulting from changes in the fair value of an embedded derivative and a modified co-insurance contract, compared to an after-tax gain of $15.4 million if the first quarter of 2009. Also included in net realized after-tax investment gains for the first quarter of 2010 is a net realized after-tax investment gain of $4.6 million related to sales and write-downs of investments compared to a net loss of $57.2 million in the first quarter 2009.

So excluding these items, after-tax operating income was $223.5 million for this quarter, or $0.67 per diluted common share compared to $206.7 million, or $0.62 per diluted common share, in the year-ago quarter.

Turning to the operating segments in total, the Unum US operating income increased 8.5% to $199.2 million in the first quarter. Within Unum US, the group disability line reported another strong quarter, with income up 31.4% to $75.8 million. These strong results were driven by a continued improvement in the benefit ratio, which declined to 84.2% in the first quarter, compared to 88% in the year-ago quarter, and 84.6% in the fourth quarter of 2009. 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 4.4% in the quarter, reflecting in large part the impact of today's level of -- high level of unemployment on the natural growth of our business. Within the group life and AD&D line, operating income increased 6% to $51.2 million in the first quarter, compared to $48.3 million in the year-ago quarter. A slight improvement in premium income as well as stable risk experience helped to generate the improved earnings.

In the supplemental and voluntary line, first quarter net income -- first quarter income was down 7% to $72.2 million from $77.6 million a year ago. The decline is primarily due to elevated risk experience in individual long-term care, and accelerated DAC amortization due to lower persistency in lower policy issue years.

Reported sales on a fully insured basis for Unum US declined 9.2% in aggregate compared to the first quarter of 2009, in what continues to be a highly competitive pricing environment. We would also note that activity and quoting levels in our markets appear to be restrained somewhat. This helps to explain in part our strong persistency results in our group line, but it is pressuring new sales opportunities.

A few comments related to sales in Unum US.

First of all, poor market sales for our group lines, which are LTD, STD and group life and AD&D combined, declined approximately 5% in the first quarter. While activity levels seemed lower than normal, we are pleased that our new sales to existing customers rebounded strongly this quarter. Sales in the large-case market for these lines declined 21% in the first quarter, with lower sales to existing cases.

Finally, the supplemental and voluntary lines reported mix results, with voluntary benefit sales increased 1.4% with strong activity in the core market, offsetting a decline in sales in the large case voluntary benefits market.

Moving to Unum UK, operating income in this segment decreased 2.7% to $60.6 million in the first quarter, compared to $62.3 million last year. The strengthening of the British pound provided a benefit to this quarter's results, as income and local currency decreased by 10.4%. Premium income and local currency decreased 6.5% in the first quarter due to lower premium growth from existing customers and a decline in the in-force block of group LTD business resulting from lower sales. The benefit ratio in Unum UK increased to 63.1% in the first quarter from 53.3% a year ago. The increase is -- excuse me, primarily due to higher claims in the group life block and a slight increase in incidents for the group disability line, when compared to the very favorable experience of the first quarter of 2009. First quarter sales increased 13.2% in local currency, with a sharp increase in sales in the group life market, offsetting a decline in group disability.

At Colonial Life, concluding our core operations, Colonial Life had a very strong quarter, a very steady first quarter, as well, with premium growth of 4.6%, and operating earnings growth of 3%, compared to last year. The benefit ratio of 47.1% this quarter was slightly elevated compared with the year-ago benefit ratio of 46.3% but still a very favorable result.

Sales at Colonial Life continue to be encouraging, increasing 8.4% for the first quarter, underlying these results are several positive trends, highlighted by new account growth of 30.8% compared to the first quarter of 2009. Sales in the under-1,000 life commercial sector increased 9.9% this quarter and both the public sector and the over-1,000 lives commercial sector posted year-over-year increases in sales. In addition, recruiting continues to remain strong, with growth in new rep contracts up 24.9% this quarter. Finally average weekly producers increased 8.5% in the quarter compared to last year.

The individual disability closed block, operating income was $11.7 million the first quarter of 2010, compared to $11.3 million in the year-ago quarter. The interest adjusted loss ratio was slightly higher at 84.5% this quarter, compared to 81.2% in the year-ago quarter. Premium income declined 6.8% and net investment income increased 2.3% compared to a year ago, driven by a higher level of miscellaneous investment income.

And finally, the Corporate and other segment reported an operating loss of $8.9 million, compared to a loss of $12.9 million in the year-ago quarter. Net investment income was higher, reflecting higher levels of invested assets, while interest expense increased to $30.3 million this year, compared to $26 million last year, reflecting the debt issuance from late September of 2009.

With that review of our operating results, I will turn the Rick McKenney for further analysis of this quarter's results. Rick?

Thank you, Tom.

As you can see, our first quarter operating trends remain very consistent with our experience of 2009. That is generally stable risk results, coupled with a challenging environment to grow our top-line. I will take a few minutes now to discuss the key drivers of the quarterly results and also provide insight on our investment portfolio and our capital position.

First on our margins, our overall risk experience is performing well. In Unum US, it is improved relative to last year, and was the primary driver of this segment's 8.5% increase in operating earnings this quarter. We have continued to closely monitor our claim incidents in the group long term disability line, and it continues to show a slightly higher level of volatility, with new submitted incidents for the first quarter slightly elevated from the year-ago quarter, but also slightly below the levels we experienced in the second half of 2009.

Net claims recoveries continue to be strong, and are the primary driver of this quarter's improved benefit ratio, combined with the ongoing shift in the mix of business. As we mentioned on previous calls, we continue to expect that the benefit ratio in this line will moderate at its current level as we move further into 2010. As this driver moderates, longer-term improvement in the profitability of Unum US will likely be driven by further mix shift and by further diversification with stronger growth in the voluntary benefits line of business.

Looking to the UK, risk results also exhibited some volatility this quarter. Our group life results were negatively impacted by a higher-than-usual mortality, which was the result of a number of large claims. Also within the group disability line, we saw a slightly higher level of new claim incidents compared to the very favorable levels we experienced in the year-ago quarter.

And lastly, our margins at Colonial Life remain solidly in line with our expectations. The Colonial Life benefit ratio for the first quarter was 47.1%, slightly higher than the year-ago level of 46.3%, but in line with the full-year 2009 benefit ratio of 47.3%.

As margins have held very well, we now turn to our growth and our top-line challenge we face in today's environment of high unemployment and ongoing market competition. Based on what we are seeing, it is our general sense that the premium erosion has slowed. However, it is difficult to say that the environment has improved.

Within our Unum US results we estimate the impact of the natural growth of our group business was still negative, down about 1.5%, on an annualized basis for the first quarter. But that is better than the 3% plus drag we felt in 2009. Unum US sales were generally lower this quarter, reflecting the competitive pricing environment we are seeing, and also from a comparative perspective, the generally strong sales results in the group core and voluntary markets we had in the year-ago period.

A third factor is due to a lack of movement of existing cases, which we have also seen in higher persistency in our in-force business. Generally speaking, activity levels in our markets appear to be slower, and there is strong competition for those cases coming to market.

We are seeing positive signs of the shifts we have made in our business model to more core market and voluntary benefits emphasis over the past few years are paying off. As a result, we saw good new account sales growth in voluntary benefits, strong sales to existing customers in our core markets, and a growing number of sales through Simply Unum.

Within our Colonial Life results, we believe that the positive trends we are experiencing result primarily from the execution of our plan, rather than a change in a direction of the economy. Our first quarter sales growth of 8% is the third consecutive quarter of accelerating year-over-year sales growth. We attribute the success to a number of factors, including strong recruiting trends over the past several quarters. This has driven noticeable success in new account growth which is up 31% for the first quarter. This enhanced footprint will allow us to grow more quickly as the economy improves.

And finally, within our Unum UK results, we continue to see pressure on our in-force premium levels, from a reduction of covered lives. While first quarter sales increased by 13% in local currency, we are typically seeing smaller average case sizes on these sales.

For the overall Company, we continue to strategically invest in many areas of our business, from distribution through other capabilities, readying the business for the growth we expect in a better economy.

From a foundational perspective, our investment portfolio continues to perform very well, both fundamentally and fueled by the ongoing rally in the bond markets. With further tightening of corporate bond spreads in the fixed income markets during the first quarter, our net unrealized gain position in our fixed maturities securities portfolio improve further.

It stood at quarter-end at $2.5 billion unrealized gains, compared to an unrealized gain of $2 billion at year-end of 2009 and is the mirror-image of an unrealized loss position of $2.5 billion we saw one year ago.

Our internal watch list continues to shrink as companies have found ready access to the capital markets. It is also reflected by our total impairments on the quarter being less than $1 million. When you couple that with net gains realized as a result of normal trading, we booked a $7 million pretax gain in the quarter. Also as far as the five European countries that have been in the news as of late, we have no sovereign exposure to any of them, and the $50 million in bank paper that we have in these countries is all trading in an unrealized gain position.

The improvement in our investment portfolio is also reflected in Company's book value per share, which was $26.38 at March 31, 2010, a sequential increase of 3% from December, and an increase of 36% relative to a year ago.

These strong operating and investment results continue to produce strong statutory earnings and corresponding capital growth.

First quarter 2010, net income on a statutory basis for our traditional US life insurance subsidiaries was $146 million compared to $143 million a year ago. This consistency has allowed us to grow our capital base at our insurance subsidiaries, which has improved to estimated RBC of 397% as of the end of the first quarter. This is at the upper end of the range that we established and we are now running at approximately the 400% level.

We also finished the quarter with strength in our holding Companies with cash and marketable securities, ending the quarter at $775 million, down slightly from year-end as we added $67 million to the pension plan to bring its funding into the 90% plus range, and in addition to paying debt service and dividends, we also retired a small piece of debt where our leverage ratio now stands at 20%. We continue to expect that year-end 2010 weighted average RBC for our traditional US insurance subsidiaries will be approximately 375% to 400%, and that holding Company cash and marketable securities will range between $1 billion and $1.3 billion.

Given the strong position, consistent operating results and a solid investment portfolio, we continue to have significant amount of financial flexibility.

Finally, even with this building capital position, our ROE for our core operations was a very good 13.6%, and on a consolidated basis was 11.4%.

Now, I will turn it back to Tom for his closing comments.

Thanks, Rick.

As we have said this morning we are pleased with our first quarter results and the consistency of our performance over the last several years. While top-line growth remains a challenge, we are well-positioned in our market and we will not chase business that does not meet our financial and risk management target.

We have maintained a very strong capital position and are generating capital from operations, which provides us many options for our discussion with our Board in a couple of weeks. 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 range of 4% to 6%, and I would direct you to our November 2009 Investor Day presentation for additional detail on our business segment outlooks. This completes our formal comments, and, Operator, let's move to the question-and-answer session.

Thank you.

(Operator Instructions).

And we'll take our first question from Steven Schwartz from Raymond James.

Good morning everybody.

Morning, Steve.

Two if you will, I think they should be quickies.

First, you said in your commentary about the group DI benefit ratio that has been benefiting from, I guess, recoveries. I would be interested in knowing what kind of recoveries, if there has been anything in particular that has been driving it.

The second question I have is on capital, and maybe you can confirm, if I am doing the numbers correctly it appears that your required capital went down from the fourth quarter and that was part of the driver of the increase in RBC. If you can confirm that, and if that is correct, if you know the reason why? I would appreciate it.

Maybe we'll ask Kevin just to speak generally to the group LTD business and recovery experience. I am not sure there's anything specific things, Kevin, on the question, but maybe just generally the recovery experience.

Thanks, Tom. Morning, Steve.

I don't think there's anything in particular in terms of types of recoveries by age or diagnosis or anything like that. I think it is good solid continuous customer relationship management, and the fact that the economy, I think, although it pressures our top-lin, probably encourages people to get back to work to preserve their employment.

I think it is just across the board good solid performance.

Okay, thank you.

In terms of the capital, actually required is pretty flat. So what you would have seen coming into the RBC is the statutory earnings coming in, which is adding roughly 15 points off of what we would have seen at year-end.

Rick, the fact that required capital didn't grow at all is really just maybe slow top-line growth?

I think hat's a factor in it, but I think you would also have to say we didn't see any migration in the bonds because they're of good, high quality. There's a few other factors in there. But i think that as a premium has been pretty flat. That element, or (inaudible) of RBC has been pretty flat, as well.

Okay. Thank you.

Steven, thank you.

We will go next to Colin Devine with Citi.

Good morning.

Morning, Colin.

A couple of questions, the capital management discussion is front and center for a lot of us right now. Should I take it that we should expect something perhaps coming out of the Board meeting. I noticed last year you announced on May 22. If something is going to happen, is that still the timing perhaps? Second, I wouldn't mind if Susan could expand a little bit more on what happens in the UK this quarter, a little bit of a surprise there with some of the experience. As well for Kevin, you put out that press release talking about the about causes of disability claims last week. I'm wondering if you could just expand on that just a little bit maybe on what the top five were and if there has been any changes in those at ,all I am not sure if anybody caught it, and it should be quite helpful.

Good, Colin. Let me just address your capital management plan. I think you are absolutely right. If there's a pattern to the way we have sort of governed the business, we've tended to use the May meeting of the Board, at the time to raise the issue of capital.

So I think you are right, no one should look into it anymore than that. We have our meeting in a couple of weeks. I think as Rick said, and Tom and myself actually in our prepared comments, we certainly entered that discussion with a lot of flexibility because we have continued to produce good results and meet or exceed some of the capital targets we set for ourselves.

So again we, fully do expect to come out of that May meeting with some views on how to deploy the capital, which again we believe we have high-quality choices. With respect to the UK, maybe before we go to Susan, maybe just Rick or Tom want to speak to the overall financial trends it seems, I think, that you've highlighted before, and then maybe Susan can get down to a market-level commentary.

Yes, just in speaking in term of the risk experience, what we saw this quarter, particularly on Group Life was, just some higher mortality experiences. That business has been pretty steady for a long period of time. This was a, a quarter, I think we had four fairly large group life claims, which is a bit unusual for us. So that, that caused a negative swing on the group life side.

Now, the other piece in there, the group disability, and keep in mind, this block of business is about three-quarters group disability and one-quarter group life.

So the group disability part, the benefit ratio was worse this quarter, now this we're comparing to a very, very good quarter from a year ago. This first half of last year was exceptionally good, our view is that our first quarter this year for group disability, it's a more normal quarter, a more normal level of claim incidence, good solid quarter for claim recoveries, but from a profitability margin perspective, it was a little worse than what we saw in the first half of last year. So put all of that together, we had about a 63% benefit ratio; our view is that this is probably about a 60% benefit ratio business, if everything is working as we would expect. This quarter, a little worse, and we would attribute that to the group life experience.

But Susan you may want to touch on market conditions in the UK.

Sure. Thanks, Tom.

In addition to the volatility we have seen with regard to our mortality and experience,obviously we have seen pressure on the premium line. Primarily with regard to our great disability premiums where we are seeing still shrinkage in (inaudible) and benefit coverage and also from pricing pressure. So really, I think it is a result of the economic conditions within the market. So from a market point of view, we're not really particularly any signs of recovery so far. Unemployment levels have increased marginally beyond the fourth quarters last year, and (inaudible)'s growth is down marginally versus last quarter. Consumer confidence has improved a little, which is always a positive sign as as the GDP growth rate is just touching into the positive at not 0.2%. So while there are signs of recovery, we're not really seeing that as far as and the experience, which within our block is concern so far, so that certainly puts some pressure on the premiums.

But if you wanted me to comment more broadly, sales, as we already sai, are up 13% on the prior year, Persistency is very strong, right across the board it is in the 90%-plus.

So I think as far as the top line is concerned, while there's pressure on an existing blocks, there so there was some very positive trends with regard to both sales and consistency.

Can I answer anything else, Colin?

Just to follow-up, Tom White mentioned the 60% benefit ratio, sort of announced pricing targets, is a fair term that you'd want to apply to it. Is that for a group life or group disability combined or was that just --

That's combined, Colin.

Okay. Thank you. I think, Colin, your third question had to do with some of just the causes of disability claims, and Kevin, do you want to speak to that? Good morning, Colin.

The big news, I think, is cancer continues to be the sort of the primary leading cause of disability. But the durations, I think, over the course of time are getting shorter in cancer, primarily because of continuous improvements in medical treatment and care.

Then maybe the other news is that the cardiovascular and heart disease is not the top five. I think that's also a reflection of how medical technology results in getting people back to work, and productive much faster from that disease, than maybe, what happened ten years ago. Those are the big take aways, I think.

Then one quick follow up, Kevin, in terms of this sort of mix shift away from the large case, is this just about done? I mean looking at the way your sale have come down in that segment, it almost seems that you basically, if not abandoned it, pretty close.

I think mix shift from here on out would be between employer paid and voluntary products as opposed to being between large and small. I think large case, we're pretty much where we want to be. We're focused on taking the right shots and the right cases and being disciplined about it, and so you're going to get volatility from quarter-to-quarter about large case sales, and that in turn, obviously, will translate into volatility in that mix.

But our target of approximately 60% on the core and 40% large, I think is still a good target, but I think we're going to have quarters where we're 70%-30%, we're going to have quarters where we're 55%-45%, depends on whether we get the right large cases or not. The mix shift I think going forward in terms of profitability impact will be much more from the growth of our Simply Unum and voluntary business.

Thank you.

Thanks, Colin.

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

Hi. Thank you.

Good morning, Jimmy.

I had a question on your disability benefits ratio. A lot of your competitors have actually seen an uptick in their benefits ratio, not a lot, but a steady up tick. The yours has improved the last two years. Now you are starting to see a pick-up in incidence, I wanted to get an idea on what your views in terms of expectations for recovery rates and the benefits ratio overall over the next year or two years or so, assuming the economy doesn't improve in rapid fashion.

Secondly, just on your RBC, I think you are sitting at 397%. I just wanted to get an idea on what the minimum level you would be comfortable with in this type of environment, 350%, 375%. And then on capital, you mentioned you've got several alternatives, and I'm just trying to get an idea of what they are, besides buyback, there doesn't seem to be a lot of growth in the business and not sure if they're acquisition opportunities, but if you can review what, besides share buybacks, what other alternatives would you have for deploying your capital?

Jim, let's go to your first question on the benefit ratio. Kevin, you want to take that one, please?

Yes. Good morning, Jimmy.

Well, I guess a little bit different from what you have been hearing in the marketplace. We have seen mostly volatility around incidence, since about the middle of last year. Incidence this quarter is slightly higher than it was first quarter of last year, but lower than third and fourth quarter of last year.

So we are not really seeing anything happening there at all in incidence, and when we look across the other lines, like individual disability, voluntary disability, , we don't see any indicators there, either, in terms of incidence, other than a little bit of volatility.

On the recovery side in general, as Rick said, I I expect to see the group disability/income loss ratio moderating and flattening. I think we have made all of the sort of operation l changes that I think we can make, I think all of the improvements we have made over the last two or three years are sort of in place and operating steadily and consistently. Quality, I think, of that performance remains high. I think recoveries might be slightly elevated right now because perhaps, this is pure speculation, that people may be anxious to get back to work while their job is still there. But other than that, I don't think we are seeing anything

Okay. Rick, a couple of capital-related questions.

A couple of questions on, first RBC at 397%, certainly at a comfort level there. It is in excess of what we need, as the environment has improved from what we would have seen a year ago when we set out those targets. However operationally, running at 400% is still fine. You'll see us start to move dividends out of our insurance Companies to the holding Company, but still maintaining levels that are in that approximately 400% level until the need to deploy for certain purposes, which leads me into the second part of your question, which is where to put that capital.

We have talked about the organic growth of the business, as we've talked multiple time where we're pushing as quickly as we can, putting as much money behind at that growth that we can.

Acquisitions are still out there, and possible, in terms of being close to core and what we want to do. We would be very comfortable spending some of that money there for the right deal and right construct. Lastly, I think that a year ago, you would have seen us increase our dividends; we do look to our dividends and making sure that we maintain a level there, and then ultimately in buybacks.

So more to come on that front, as Tom mentioned, but that's how we see the priority order and you would see that come out over a period of time with that excess capital position.

Thank you.

Thank you.

We will go next to John Nadel with Sterne Agee.

Good morning everybody.

My question is really on the investment income. This quarter, I guess what surprised me most is I sort of looked across the businesses, and maybe on a consolidated basis was -- investment income was up very nicely on a quarter-over-quarter versus the year end, or versus the fourth quarter, I should say. Was there anything that you guys would highlight as not sustainable in that regard, or is this sort of a reasonable level?

No, yes, John, it is Tom White. It is hard to call whether it is sustainable or not. But we have a large long duration corporate bond portfolio, for the most part.

Yes.

And as a result, we will get miscellaneous investment income from bond calls, prepayments, those types of corporate activities coming off of the bond portfolio. This quarter, that number was kind of reminiscent of where we were a few years ago, when there was more activity in the market. Then when we hit the financial crisis about two years ago, there wasn't as much refinancing by corporate America, and so therefore there was less bond calls and less prepayments. So the last couple of years it has been fairly choppy.

So again this quarter, a little more noticeable, you will see that in our closed disability business, which again is a flat business, it's going to be flat investment income, and then we will get a $2 million or $3 million bond call, and it will be noticeable, and if we don't get it, that will also be very noticeable in that particular line of business.

So this quarter, we had a little higher activity relative to a year ago. It was more consistent with where we were a couple of years ago. Looking forward, in the second quarter, to be honest, we don't really see much in the pipeline. These are -- a little visibility on these, and we don't see much activity coming up here in the second quarter.

So, again, it is just a function of the investment portfolio, and what's going on in the investment world and refinancing activity, It did help us a little bit in the closed disability block, I think a little bit in group income protection. We saw some there. But that's the story on miscellaneous investment income.

That's helpful. Thank you.

A quick one for Kevin, just the normal quarterly update on competitive pressures. Again, not singling anybody out, but just wondering if you'd sort of compare where we are in the current environment versus, let's say, three to six months ago. What, if anything, has changed? Is it more on the pricing side, is it a specific group line like life or disability, terms and conditions or is it just a broad-based?

Yes, hey John, how are you doing.

Good.

Well, if we look at the first half of last year, we had a very strong first half and the large majority of our competitors did not. And then, around the time of our call at the end of the second quarter last year, we talked about that we expected the second half of the year would be more difficult as competitors started to try to regain some grip, and maybe be more aggressive with their pricing, and we saw that play out in the second half of last year. That's continued on into the first quarter of this year. Closing ratios are down for us, average pricing levels when we look at it in th marketplace, while our pricing levels are stable, pricing levels in the marketplace look like they're down 10% to 15% versus where they were at this time last year. We have got a number of players out there that I think are being more aggressive in terms of trying to get the sales organizations back on track, they're defending their in-force business a lot more aggressively than they were in terms of renewal.,

So in general, I would say this is about as hot of a pricing environment as I have seen in a couple of years. Our philosophy about that is to stay tight, stay disciplined, stay focused on selling quality business to clients that value quality, consistency and service, and we're going to stick to that.

Kevin, if I could just follow-up. Is that also, if you think about employer size, is your comment about the most aggressive you've have seen in a couple of years? Does that cross from small- to mid- to large-case, or is it a specific employer segment?

It cuts across all size segments. The large case segment is always (inaudible - multiple speakers) because you get companies chasing more key accounts. But I think the noticeable part is that the very small end of the marketplace, the less than 100 life marketplace, seems to be much more aggressive to me than it has been in recent years.

Terrific. Thank you very much.

Thanks, John.

We will go next to Ed Spehar with Banc of America.

Morning, Ed. Thank you, good morning.

I had a question on the sort of long-term care, and the DAC -- elevated DAC expense you mentioned this quarter. Do you see that -- first of all, on the DAC expense, did that cost you maybe a penny per share in the quarter? Is that close?

The DAC was primarily in voluntary benefits probably, it wasn't worded as well as it could have been in the press release, but the DAC amortization was mostly in voluntary benefit, and it is about $4 million or $5 million. Yes.

Pretax?

Pretax, yes, quite a bit.

Okay. And that is not something that would be expected to recur. Is that correct?

Not, at that level, no.

Okay. And then in terms of the long-term care, how much of an unusual would you say you had that number?

I think this -- this is Kevin. How are you doing?

Let me go back quickly on the voluntary benefits, I want to be clear that our voluntary benefits persistency hasn't deteriorated. It is very consistent to historic levels. In fact, first-year persistency is actually slightly improved.

So the effects, that you saw on the DAC side was more from certain policy issue periods, and I wouldn't expect that to be a recurring element.

On the LTC side, I think it is pretty much normal volatility. It's a small block of business, the large majority of LTC earnings is based on our ability to sort of estimate going out 25 to 30 years in terms of what's going to happen. And during this quarter, we had an elevated sort of average claim size versus the first quarter of last year. And that kind of volatility, I think we just -- it is sort of a normal element of that business.

Okay. So if we look at the -- maybe add a little extra bond call prepay income this year, maybe offset a little bit by the elevated DAC, you have a $0.67 quarter. I think your first quarter is, if it's not always the lowest quarter for the year, it is -- it pretty much is in terms of earnings. I don't know what the view is on how you think about guidance, if you could remind us. Is that just something you set out there, and unless something dramatically changes you don't really revisit on a quarterly basis.

Is that correct? I'll ask Rick to speak to that, actually. Ed, that is correct. I think that we reiterated the 4% to 6%. There will be movement in given quarters, and we expect that, so to extrapolate too much off of this given quarter, we still think the 4% to 6% range we put out there is valid.

Okay. But just to be clear, would you say that in terms of the two items we've just been talking about, is sort of maybe a little bit off of the normal level. Did they sort of offset each other this quarter, the bond call prepays and the DAC amortization?

I wouldn't want to offset just two items. There's an awful lot of moving parts. So those two, correct, would have offset each other pretty well. But there's pluses and minuses elsewhere and I take you back to the full-year view.

Thanks.

Thank, Ed.

We will go next to Bob (inaudible - technical difficulties).

Hi. I have a couple of questions for Susan, if I may.

Sure, Bob.

Currency, as I understand it, you're managed -- you're evaluated on local currency as opposed to what you bring back? Is that accurate?

That's right.

Okay.

And let me add our incentive plan certainly for the UK would be driven on local currency, that's right.

Right. So, it seems like you don't try to hedge. I mean, the switch from local currency to US seems to pretty much match the US -- the dollar-pound movements year-over-year. So you are going to have some obstacles over the next three quarters, but I assume there's nothing operationally you're doing, with respect to that.

This is Randy, maybe I can answer that from a corporate level. We don't hedge that earnings exposure because it is purely translation, it's out about the cash moving back and forth.

So there could be, you have to tell me where you expect the currency is going to move or -- we saw a little benefit this quarter, year-on-year, but depending on where it goes over the course of the year, it could go in either direction. That's the easier question.

The tougher question is Contagion and what it does to the UK, and none of us have any idea on that question, but Susan to the extent that you are unfortunately trying to run the business, that dealing with the -- how do you factor that into your pricing underwriting, if at all?

Contagion in respect to the other European countries or (inaudible - multiple speakers).

Yes. I am talking economics, GDP, what do you do if all of a sudden you have five countries around England wobbling a little bit.

Yes, I mean, we don't -- that doesn't really affect how we price our products or anything like that. We stay the course in terms of pricing, we can always (inaudible) for the margin that we expect. So that doesn't really affect us. As you know, we're not in Europe, so we basically insure we maintain pricing discipline within the UK and within the UK constraints.

Okay. So the thought process is UK isn't sort of a steady recovery. That's gradual from a small level base and that's your compass from here?

Yes. Very much so. So, as I mentioned to Colin's question earlier, we are seeing signs of a recovery, but it is very slow and it's probably much slower than we anticipated. But there are some signs, and we're obviously just making sure we watch that and that we stay the course in terms of staying focused, sticking to our core, staying disciplined and our approach to the market.

Okay.

Last question, is your guidance, Tom, is for 4% to 6% operational. That would be off the $0.67 as opposed to $0.64 base for the quarter?

It's 4% to 6% is for operating earnings growth. We are out of the earnings-per-share guidance. So, we are talking about operating earnings growth, and really on a full-year basis.

I know, but the tax item is an operating item. I am just trying to figure out if it is the [233 or the 223].

Why don't we take that offline.

Thanks, Tom.

Thanks, Bob.

We will go next to Mark Hughes with SunTrust.

Thank you very much. Good morning.

Morning, Mark.

Do you think you'll be able to maintain this momentum at Colonial, you've done quite well. Is there any reason you might have to stop and catch your breath or should this momentum continue?

Thanks, Mark, actually for the question.

Randy, you want to speak that that? Because obviously the results at Colonial are very good this past quarter. And have been so for a while.

You bet, Tom. Good morning, Mark. We think the momentum is going to continue. It is not based on any type of one-time thing or special event or large case, or anything like that, Mark, it's really based on the fundamentals of our agency business, sustained focus on growth of our agency system and the productivity of our agency force, just sound rework management, account management and continuing good customer service. And we think as long as we stay focused on those fundamentals that we should see this momentum continue.

Any increased competition in the broker channel?

Well, there certainly is increasing interest from brokers in the voluntary space, if that's what you are referring to. But we do do business with brokers as well, and we are going to take advantage of that growing interest also.

And then a final question, why less quoting activity at this point, talking about the broader US business? Is that a cyclical issue or what's behind that?

Kevin?

Good morning, Mark.

I think during the first quarter we just saw fewer accounts coming to market, if you will. I think that some of that is probably economic and some of that is come-in carriers defending. They're in-force positions, and I think some of it is probably employers that are not looking to shop employee benefits, given the disrupting effect of maybe how they consider health care reform and its impact.

Right. Thank you.

Thank you, Mark.

We will go next to Darin Arita with Deutsche Bank.

Good morning, Darin.

Hi, good morning.

I guess starting with the holding Company and the liquidity there, the $1 billion to $1.3 billion target for 2010, is that assuming no change to the current capital management approach?

That's correct.

Is that a hard target, the $1 billion to $1.3 billion, or is that can vary depending on decisions and capital later in the year.

That's our current target and we will be adjusted for other capital management decisions we would make over the course of the year.

Okay, great. And then coming back to the question on competition in the US, group market. Has that carried over into the second quarter, what you've seen thus far? It seems like one of your large competitors did seem to back away from the market in the first quarter.

Kevin?

Good morning, Darren.

So far, at least in the second quarter, I haven't seen any change in the comments that I made earlier about the first quarter and the latter half of last year. I think, I mean I would like to think a little more rational in the second half of this year, but haven't seen it yet.

Okay. Great.

Then just lastly coming back to Colonial, the growth in the average weekly producers has been very strong and it continues to rise. Can you talk about what's behind that?

Randy, you want to take that question because I think, obviously, there's good work that has been started some time ago that you are benefiting from. Sure, good morning, Darin.

It is just really a culmination of the strong agent recruiting that we have had over the last couple of years now, combined with improved training and just getting those new agents prospecting more continuously. So the combination of those two thing has just come together to keep tat average weekly producer number moving up nicely.

Okay, great, thanks very much.

Thank you, Darin.

We will go next to Sean Dargan with Wells Fargo Securities.

Thank you and good morning.

Good morning, Sean.

I can appreciate that you don't want to extrapolate too much out of first quarter earnings, but at Investor Day, the guidance for earnings growth in Unum US is 4% to 6%. You were up 8.5% in the first quarter. Should we think of that 4% to 6% as being something -- that's one the low side, or should we think of moderating benefit ratios, bringing future quarters down in with that guidance?

No, I think I'll stick with the guidance we laid out at Investor Day and until we see adjustments off of that or some trends we've seen over a couple of quarters, we will stick with it.

Thanks. And one quick follow up on capital. Can we think of the -- now that you are within the 375 to 400 RBC range, if you are generating run rate statutory capital of $150 million per quarter,r should we think of that as all being available to dividended up to the hold Co.?

I think that's probably a good way to look at it. Actually, we were at the top of our range from a 375 to 400, we don't have a need or desire necessarily to go above that, so we will be dividending up, and that's why you will see the holding Company cash and capital grow in here as we go through the future quarters.

Okay. Thank you.

Thank you, Sean.

We will go next to Thomas Gallagher with Credit Suisse.

Good morning.

Good morning, Tom.

I just wanted to come back to net investment income, and how we should think about that. Tom, so if I understood your comments correctly, in terms of the prepayments, and then considered the current environment, is it fair to say, and this is going to be somewhat simplistic, just looking at the sequential change, is it fair to say that the $18 million or so increase in net investment income relative to 4Q was all prepayments, or some portion of it? That's my first question.

Probably a little less than half of that incremental change was due to prepayments. The investment portfolio continues to hold in well The portfolio yield held in pretty well.

I'd also add that we see the asset base growing, so as we haven't been dividending access out and we haven't seen any impairments, that asset, and particularly interest-bearing, asset levels continue to grow as well.

Okay. And on page 13 of your supplement, it talks about -- or it mentioned a duration-weighted book yield of 675. How does new money compare to that, is that 675 portfolio yield something you would expect to just maybe trickle down a little, how do you see that playing out? The first question, where were we in the first quarter, that was 6.21% in total, so if that continues than obviously there will be a little bit of pressure on that portfolio yield. Now keep in mind, I don't have the number in front of me, the duration on the portfolio eight to nine years, it is in the supplement in the back the. So it takes a while to move that -- we don't have huge cash flow to invest, we're investing roughly $2 billion a year, on the $40-ish billion investment portfolio, so it takes a while to move that number. Okay. Should we think about the change in discount rate, and overall ability to manage the liability side being close to lockstep, with the changes in overall portfolio yield, because understanding it is -- you do have, for the most part, a matched book here. Where will we see a little bit of margin pressure from this dynamic?

Actually when you look at -- these are at the total company level, so you'd have to look product by product, and if you think about our group disability line, we actually are still building margin, we built a little bit of margin in that line on the investment side, in the quarter. So you really have to just aggregate it in term of looking at the overall. We don't feel any particular pressure, particularly in our group disability line.

So Rick, net-net, as it relates to interest rates, you still have considerable cushion, in fact you're adding to that cushion, at least based on 1Q results?

We did in the last quarter, yes.

Great. Last question, I guess this is for Tom Watjen, can you give an update on sort of where you stand with the rating agencies and whether or not that has any meaningful impact on capital management plans?

I will make an overall comment and then ask Tom to speak to specific updates with the rating agencies, but I think as we have shared with the group before, as we think about capital strategy we are not waiting for some event from the rating agencies. We want to be prudent and thoughtful about how we think about capital strategy, but those two things I would say are independent. That's why I come back to what I said earlier, this capital strategy decision and discussion will be certainly a big part of our Board meeting coming up in a couple of weeks. We don't want to do things that erode the credibility we have with the rating agencies, but this is not all -- that decision is not connected some of the rating agency discussion. With that, Tom, maybe you want to give a brief update on where the rating agency discussions are.

Sure, just to let you know we are, Tom. We had meetings with Fitch and AM Best with toward the end of 2009, and earlier this year, you saw a Fitch upgrade, AM Best looked positive. We have had a meeting with Moody's. and I would expect over the next month or so they will have a committee review meeting and we'll see what comes of that. We have not scheduled S&P meeting but it will occur some time this summer.

Thanks.

Thank you, Tom.

We will go next to Eric Berg with Barclays Capital.

Thanks very much. Good morning, Tom.

Morning, Eric.

Thank you.

My first question is meant to build on Tom Gallagher's question. What have the rating -- can you share with us what the rating agencies' position has been regarding your buying back stock? That's a specific question, thank you, and I have some follow ups.

Maybe, Tom, again, any more color you can give on the rating agency discussion.

I don't think we want to get too deep into the details, but but as I said before, Eric, I think we obviously on one hand want to continue to be sure that we're building the strength of our rating agency relationships and not doing anything that distracts from that. On the other hand, obviously make the right decision as we look to the accumulating capital position, and those are two independent thing.

Eric, I really don't see any capital issues with the rating agencies.

Our view is that our RBC and the holding Company liquidity is well above what they would traditionally look at, a level as it rates to a specific rating. So I don't think capital is an issue, I don't think it's been an issue for a while. I think more the issue with rating agencies in the last couple of years has been what's going to be the impact of a slow down in the economy, and what are we going see i n incidence. And I think we have answered that question pretty well, with an improvement in the benefit ratio, and not just a stable benefit ratio, but an improvement.

As Tom said, what the agencies are looking for is how are we going to perform, I think we've had very good consistent performance, and that should benefit us. I think that benefited us with FItch and the positive outlook from AM Best I think is a reflection of that.

But again, anything we do with capital management, we certainly discuss with the rating agencies. We walked through a lot of different scenarios, and anything we end up doing, they will be well advised of it in advance.

My second question relates to a subtle point that you were referencing earlier, the distinction between providing guidance for earnings and earnings per share. Should we infer from the fact that you are out of the business providing earnings per share guidance, but remain in the business of providing total dollar earnings guidance, that the issue of capital management, the share count, in short, that the visibility that you enjoy on that is less than on your earnings, or that there's greater uncertainty about that than there is for your earnings. What should we infer from your willingness to forecast earnings, but not earnings per share?

First of all, what we've given out there in terms of outlooks for the Company has been disaggregated to a couple of different way by business line. And we're trying to give insight on the business, we are not trying to lead to a particular answer. With regards to capital, as you would have seen in our Investor Day last year, we really broke the capital line out, because I think that at that point in time, as well as in the future, there will be changes in capital we can't predict, and we don't necessarily want to have to update our outlooks for how the Company is earning based on what we might do on the capital front.

That answers your question to say there's a little bit of what you say, which is capital is disassociated from the earnings power of the Company, but at the same time, I think that our outlook from an earnings growth perspective is really intended to give how we see the performance of the Company and how it is expected to run , not to necessarily take you to a particular

Last question is for Kevin on the outlook for the benefit ratio. Again, I'm hoping you can build on your earlier responses, and my question is if the mix shift, I think you said, between core and non-core has largely run it's course. And if the improvement in your claims management operations has also largely run it's course, where will the -- I'm trying to hone in on exactly what it is going to drive from here, given your previous responses, the improvement in benefit ratio, or does earning growth really need to be about top-line growth from here. Thank you.

Morning, Eric. Well first of all, on the group disability income/loss ratio, your comments are correct. I don't think we'll continue to see much benefit from mix shift from large to small. We may periodically get some shift in terms of industry mix as we continue to manage our pricing and underwriting and sales toward industries that is are better performers in this economy. I don't expect recovery management to get sort of much better than it is. So in general, we've said that we think that the group disability income/loss ratio will basically moderate around this current levels for the most part, and flatten out. And I think growth profitability benefit will come from growth, particularly in Simply Unum and core mark and voluntary lines where the loss ratios are lower in general. So if you think about our employee benefits loss ratio for the quarter, I think it was 75.8 overall and we'll continue to add voluntary business to that from growth and voluntarily that loss ratio will continue to come down and that's where earnings power will come from.

Thank you. Very helpful.

Thank you, Eric.

I think at this point, I am a little conscious of time. We will take one more question.

We will take our last question from Christopher Giovanni with Goldman Sachs.

Morning, two quick questions on the persistency rates, they appear to be very strong and getting better across the board despite the price competition that you guys eluded to in certain pockets of the market. So clearly customers are finding value and satisfied with Unum's products.

So I guess the question is, if price competition remains so intense, why are we seeing continued improvement on the in-force book, but not a carryover to new sales?

Good morning, Chris.

I think that you have two things going on with the in-force book. One, customer satisfaction ratings are very high, broker likely to recommend and renew with us, those ratings are also very high. I think the quality and consistency of our claims management performance has been well recognized by customers, as well as our ability to package up products and have multiple product relationships with customers, which that aspect of our business continues to grow, and our experience is the more types of relationships we have with customers, the more product lines we have with customers, the better the persistency. and that plays into our Simply Unum voluntary benefits strategy. The second element is a little different. an that is that I think in in this economy coupled with healthcare reform, there is some inertia out there. And I think in general, activity levels are lower and many employers are just staying out with where they are.

Okay. And then quickly, just on the normalized outlook that Rick eluded to from the Investor Day, are you guys still comfortable with sort of that normalized consolidated organic earnings growth of 6% to 8% and then your ability to get another sort of three to five points from capital management?

We are, and that's a view longer-term, and there's a few items I would throw in to say what we have to see in the longer-term. One is getting back to the natural growth we expect in the better economy in the US, and we are still comfortable with the overall view.

Thanks.

Thank you, Chris.

Thank you actually all for taking the time to join us. This will complete our first quarter 2010 earnings call. Thank you very much.

Thank you, that does conclude today's conference. We thank you for your participation.