普登 (UNM) 2002 Q2 法說會逐字稿

Good day and welcome to the UnumProvident second quarter 2002 earnings conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Chairman, President, and CEO, Mr. Harold Chandler. Please go ahead.

Thank you very much, and good morning. And welcome to the UnumProvident corporation second quarter 2002 analyst and investor conference call. With me are Tom Watjen and Thomas White who, along with me, will be providing prepared comments on yesterday's second quarters earnings release.

In addition, other members of our senior management will be available to respond to your questions during this call. Before we get started, let me read the safe harbor statement. A safe harbor is provided for forward-looking statements under the provident securities litigation reform act of 1995.

Statements in this conference call regarding the business of UnumProvident corporation, which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those contained in the forward looking statements. These forward looks statements are based upon management's current expectations and beliefs, As of the date of this conference call. But there can be no assurance that future developments affecting the company will be those anticipated by management.

For discussion of the risk and uncertainties that could affect actual results, see the sections entitled cautionary statements regarding forward-looking statements and risk factors in the company's form 10K in the fiscal year ending December 31, 2001, and the subsequently filed first quarter, 10-Q. The company expressly disclaims any forward-looking statements. Before I begin our discussion of the second quarter results, let me indicate that our CFO, Robert Greving and I, will be signing the sworn statement required by the FCC certifying without any qualification to the covered reports and the statements will be delivered to the SCC prior to the August 14th deadline.

Furthermore, we're studying the issue of expensing stock options and anticipate having our review complete and a decision made during the third quarter. Yesterday afternoon, we reported second quarter operating earnings of 63 cents per share compared to 60 cents last year. This was in line with consensus estimates as well as our internal plans.

Overall, we were pleased to produce the results in a quarter, impacted by continued fragile consumer confidence and as we all know, a difficult credit market. Let me highlight 4 key outcomes from the quarter. First, we produced strong overall results in our employee benefit segment. The highest level of earnings in this segment since 1999. Our group-wide STD and AD&D results improved sharply compared to a year ago, while our LTD profitability was slightly lower.

Second, we experienced stable levels of [INAUDIBLE] and submitted estimates in the second quarter relative to the first quarter of both our LTD and individual disability lines of business.

Third, our realized investment losses on a growth and net basis improved relative to the first quarter results, and were in line with the range estimated in our July 18th release. While we're still in the midst of a difficult business and credit environment and don't expect an immediate turnaround, we do expect to see further improvements in our reported results in our third and fourth quarters.

Additionally, while our portfolio yields a decline in the quarter, the discount rate on our LTD reserves continued to decline as well, reflecting the continual adjustments we have made in past quarters to reflect the current interest rate levels and our reserve assumptions. Tom Watjen will provide more details in his comments on these important investment trends, and how we're protecting the reserve margins. And forthly, during the quarter we completed our review of the Colonial operations and named Jean Duke as president and CFO, along with Mike Slade as National Managing General Agent, responsible for sales.

For those of you who may not have seen our earlier releases regarding these two individuals, Jean Duke is a CPA with significant financial and operating experience at Colonial through 1998. Since then, she has been a consultant to various insurance and financial services organizations. Mike Slade, likewise, is a proven producer and leisure, with 15 years of sales experience within Colonial. These two individuals along with several other important sales personnel adjustments, complete our senior management reorganization at Colonial. We now have a strong team in place and are well-positioned for an improved future outlook.

Let me emphasize that the changes made at Colonial are not the response to a classic turnaround need. Colonial's infrastructure and fundamentals are sound. Our opportunity is to better leverage the unique positioning of this company for improved new sales growth, in an attractive and growing market for supplemental insurance products, as well as a growing market for communications and enrollment assistance to employers.

Now, let me turn to review our sales results for the quarter. Our sales outcomes reflect a very deliberate strategy. Some products we're emphasizing and focusing key corporate resources around, while others we're stepping back and allowing our growth to retract even to the point of achieving negative year-over-year comparison.

The marketplace continues to reward specialty skills, especially when they're supported by a [INAUDIBLE] outcome analyses, such as with LTD. On the other hand, commodity-type products struggle to meet our return requirements. Products such as stand alone, large case, group life insurance. Accordingly, our core franchise driver, the North American LTD operation grew 14% in the quarter relative to last year. STD, sea-base ASO sales grew 38% as we shifted larger. Previously insured customers to an uninsured contract. And our long-term brokerage sales more than doubled in the quarter.

Our individual disability strategy has been transitioned over the past two years to a more customized use of this product as an extension to our group plans. Quite dissimilar to the use of this product sweep of five years ago. As a result, multilife sales accounted for 77% of total IDI sales, the highest quarterly mix today. Conversely, traditional individual sales continue to decline resulting in some sales volatility from quarter to quarter as we gradually work through this transition. Submit activity remains good, but selective. Indicating a 5 to 8% growth in the second half of the year. Some total company sales declined 9% over the same quarter last year. This 9% decline was driven largely by 47% decrease in large case group life sales, a deliberate margin-driven strategy.

Secondarily, large-case STD sales were down 44%, replaced, as I mentioned earlier, by 38% increase in ASO sales. During these uncertain economic times, our approach is no different, I would suggest, than other industry-leading companies. That is to protect and as appropriate, grow [INAUDIBLE] franchise. For us, this is LTD, and the companion product and services where we specialize. That is, customize multilife disabililty, not the traditional across-the-kitchen table stand-alone individual product sales, and voluntary benefits. All a part of the comprehensive group offering.

A final comment on Colonial. Sales were up only 5%, but when added to the 111% increase in our brokerage voluntary business, we produced an 18% increase in total voluntary benefit sales. We expect the recent changes made at Colonial to improve sales momentum in the second half of 2002. Moving Colonial closer to our corporate goal of 10 to 12% growth by year end.

The business is certainly there to be harvested, both within UnumProvident Brokerage, and at Colonial, and we're optimistic that both channels potential to penetrate this attractive margin and to contribute to our corporate goal of greater stability and diversity of earnings. Lastly, sea income in our managed disability segment continues to be strong, up 15% this quarter versus one year ago. This increase reflects good work at our Jennex subsidiary, both as a part of our customer carry, our planes operation and our middle market and large-case marketing strategy.

Although Thomas Watjen will comment on this further in just a few minutes, let me indicate that it is our intention to begin to more visibly leverage our scale in our core businesses, in terms of expense management. We have successfully established a strong service and support platform to differentiate our total offering. These investments in quality people and technology have been appropriate and strategic. Going forward, particularly in 2002 and beyond, you should expect to see an improving trend in our expense ratio. Now, I would like to ask Thomas White to review more specifically our second quarter results, followed then by Tom Watjen who will highlight the key operational trends. After that, we'll take your questions. Tom.

Thank you, Harold, and good morning, everyone. Yesterday afternoon, UnumProvident reported second quarter 2002 after-tax operating income, this is before net realized investment losses of 63 cents per diluted common share, up 5% from the 60 cents reported in the second quarter 2001. Consensus estimate was 63 cents with the range of 61 to 63 cents. Total revenue grew 5.1% in the second quarter to $2.49 billion, and 7.5% for our ongoing business segments. Earned premium in the second quarter grew 5.4% to $1.87 billion.

For our ongoing business segments, which are the employee benefits, individual and voluntary benefits segment, earned premium grew by 7.2% over the years ago levels. Second quarter net investment income of $515.2 million represents a 3% increase from last year. Excluding the runoff and discontinued lines of business, the ongoing business segments produced net investment income growth of 5.8% compared to last year's second quarter.

Net realized after-tax investment losses in the quarter were $55.9 million, compared to $77.3 million in the first quarter, and $200,000 in the year ago quarter. Tom Watjen will cover this in more detail in his comments. I would like to turn now to a review of our operating segment starting with the employee benefit segment.

The employee benefit segment reported income, again, this is before net realized investment losses and federal income taxes of $150.9 million in the second quarter of 2002, up 25 1/2% from the $120.2 million reported in the years ago quarter. Within the employee benefit -- benefit segment, the group disability line reported income of $85 million compared to $90.4 million a year ago. These results were driven by a slight deterioration in our LTD results that were partially offset by improved performance in our STD operation.

The benefit ratio in this line was 83.4% in the second quarter, 2002, and 83.9% in the second quarter of 2001. Premium income in this line grew 7.2% year over year, reflecting the recent successes in sales growth, renewal activity and persistency stabilization. In the group line, AD&D, and the group long-term care line, we reported income of $61.3 million in the second quarter, compared to $26.2 million reported a year ago. The improvement is attributable to better group life results compared to a very poor second quarter of 2001, as well as higher AD&D profitability. These improvements were offset slightly by lower group long-term care results. Finally, managed disability continued a strong performance with income of $4.6 million compared to $3.6 million a year ago. Moving to this individual segment, income totaled $66.6 million in the second quarter, compared to $77.2 million in the year ago quarter. Both the individual disability and long-term care lines produced lower results.

In individual disability, income declined to $66.1 million in the second quarter, from $73.1 million a year ago. The benefit ratio in the second quarter was 116.7%, compared to 107.1% last year. The interest adjusted loss ratio was 67.5%, this year compared to 61.7% in the year ago quarter. We experienced higher submitted incidence and lower claim resolutions relative to the year ago quarter.

In individual long-term care, income has declined to, um, $500,000 in the second quarter from $4.1 million in the year ago quarter. This decline reflects an increase in the average size of 20. In the voluntary benefit segment, income was $39.5 million in the second quarter, compared to $40.3 million a year ago. Premium income of growth of 6.4% and an improved benefit ratio rocks that in part by higher expense ratio and voluntary benefits. Finally, the other segment reported income of $15.4 million in the second quarter, compared to $16.6 million in the year ago quarter, reflecting the widedown of these lines of business. Also, the corporate segment had a loss of $40 million in the second quarter compared to a loss of $41.9 million in the year ago quarter. Effective January 1st, 2002, we adopted the provisions of, um, a statement of financial accounting standards, number 142, which deals with goodwill and other intangible assets.

FAS 142 requires us to complete within the year of adoption, transitional impairment tests of goodwill existing January 1st, 2002. Um, we had previously used undiscounted cash flows to determine if goodwill was recoverable. We completed the required test during the second quarter of 2002, and determined that the carrying value of the goodwill should be reduced by $11 million.

The charge, which is net of a $3.9 million tax benefit, was $7.1 million, and as reported as a cumulative effect of the accounting principle change. This adjustment relates to our benefit America subsidiary, which was a stand alone entity on January 1st, and included in our other segment. However, we're considering moving it into our employee benefit segment and modifying the business model approach to this entity.

Previously, the second quarter, excuse me, the 2002 first quarter results had been restated to reflect this charge, um, after the initial application of FAS 142. And finally, a few additional items to note, book value in the quarter was $25.42, this compares to $23.77 a year ago. Excluding net unrealized gains and losses, book value was $24.40, compared to $23.33 a year ago, which is an increase of 4.6%. The debt to total capital is -- or was 29.5% at quarter end, um, allotting partial equity credit for our $300 million trust preferred issue, the debt to total capital ratio was 27.7%. During the second quarter, we completed two long term debt transactions, totaling $400 million, this refinanced in equal amount commercial passenger, the coupons on the two transactions were 7 3/8, and 7 and 1/4%.

Return on equities was10.4% for the second quarter, as well as for the first half of the year. Our statutory net gains on operations on an after-tax basis improved in the second quarter to $45.2 million, from a slight loss that we experienced in the first quarter. And finally, we repurchased a total of 1.77 million shares earlier in the quarter, or approximately $45 million of the $100 million program authorized the board back in May.

Now, Tom Watjen will cover key operational trips.

Thank you, Tom, good morning. As Harold and Tom noted during the second quarter we continue to face a difficult business environment. In light of this environment, we were pleased to report results in line with the consensus estimate and generally in line with our internal plan.

We have talked in the past about the restructuring and repositioning basis the company has worked through over the past several years, and the steps taken during the important stages of our development strengthened our financial and operating platforms and positioned us to better respond to the challenges we face today. These steps also positioned us to begin to profitably grow our core business lines. As Harold noted earlier, we are seeing evidence that we're beginning to make progress toward this objective.

I would like now to make -- to cover a few business trends in more detail, including our claim and incidence trends, the persistency and renewal results, the investment results, and some of the expense trends and I'll wrap up with thoughts on the second half of 2002 before we go to your questions. In general, we saw some trends in the second quarter which caused us to be cautiously optimistic around the incidence in both our individual and group disability lines of business. Although our results can be volatile, we're encouraged that during the second quarter, incidence for both our LTD and individual disability lines remain generally unchanged to slightly improving.

We did see some slipage in our recovery rates in the quarter, more so on our disability lines, but we feel this was due to factors which will not have a longer term impact on the business. Moving to our LTD line, submitted and paid incidence dropped slightly in the quarter when compared to the first quarter of this year. In addition, premium for life continues to rise, up 6% over the first quarter of 2001, which reflects the impact of our renewal and pricing actions these past two years.

Recoveries decline slightly in the LTD line this quarter, but frankly, we were generally pleased with how this line behaved in this challenging business environment. Results in our STD line were significantly better than the second quarter of last year, but down slightly when compared to the strong first quarter results. We saw a seasonably higher level just by the first quarter of the year, but we were encouraged by the 8% increase from a year ago in the premium for life, as well as a reduction and the duration of our STD claims.

On balance, we remain cautiously optimistic that we will see and continue to improve in the profitability of the lines. The actions we have taken, especially in our large-case business, are beginning to have a favorable impact on our results. This included the increased pricing, as well as moving more of this business to a self-insured ASO planned design. You will recall in the quarter on you STD fully insured sales were off 25% while our self-insuranced ASO sales were up 38%.

This change in the mix is intentional, and we think we'll ultimately lead to improved profitability and consistency in this line of business. Our target loss ratio for the group disability line is in the low to mid-80% range. This quarter the loss ratio for groups disability was 83.4%, down from 83.9% in the second quarter of last year, and essentially flat with the first quarter of this year. Our new business pricing action, and the continued favorable renewal and persistency trends, which I'll discuss further in a moment, should help us maintain and hopefully improve our group disability loss ratio. An improvement in the overall economic environment would certainly help as well, but we're not assuming we'll get material health care anytime soon.

Turning to our group life and AD&D line business, our results have improved significantly against the first quarter of this year and the second quarter of last year. This improvement was the result of a -- of more favorable risk factors for both of those lines. The group life result, although significantly improved over both the prior periods, are still below our expectations, and we continue to see competitive pressure on this line of business.

As we noted earlier, our sales in the group lifeline declined significantly down by 47%, over last year, reflecting our commitment to sacrifice growth and profitability cannot be maintained or enhanced. Our AD &D results were usually strong in the quarter and we don't, quite frankly, expect that to continue in the future, we do see volatility in the quarter. We're continuing to be disciplined in both of these lines of business, generally leading with, as Harold mentioned, our core disability offering, and bringing products like this as part of our solution. Although that may occasionally retard the growth in these product lines, we're committed to improving the consistency and profitability in our group life and AD &D lines of business. Turning now to our individual business.

Although submitted incidence was higher than the same quarter last year, it did decline from the first quarter of this year. Paid incidence was also slightly higher than one year ago, but was left flat with the first quarter. Recoveries were lower when compared to both the first quarter of this year and the second quarter of last year, which drove most of the increase in loss ratio for this line of business. During the quarter, we transitioned management of a block variety of IDI claims between claims and location.

This transition has caused some disruption, and we have modified our plan for migrating this business. We view this impact as temporary, and would expect results to improve in the second half of the year. The interest adjusted loss ratio was 67.5% this quarter, versus 61.7% in the same last year, and 62.2% in the first quarter of this year. Our more recently issued business, business issued after 1995, continues to perform well, and we're confident this is sustainable.

As we have discussed with you in the past, our intention to provide supplemental segment information to allow you to better see our results by segment, including our older and newer IDI business, we expect to have that information available in the next month or so, and I'm confident that it will help support the comments we have made regarding the IDI business both old and new, as well as provide a clear picture of the growth characteristics of our growth and operating area. Finally, our long term care line was adversely impacted by new claims, relative to what we saw during the same period last year. This [INAUDIBLE] is small yet important to us strategically. We're not placed with the earnings volatility or returns in this business, and we're continuing to take the actions necessary to address these issues. There are tremendous opportunities in both the individual disability and long-term care marketplace, and we're confident we're in a position to profitably grow both of these lines of business.

Now, turning to persistency, in general, we continue to experience improving results for all of our group benefit lines. In our LTD line, consistency was 85.7% compared to 85.2% one year ago and 84.9% for the full year 2001. Persistency in our STD line was 80.1% ,down relative to the last quarter in our year end results. As we mentioned earlier, we made a conscious decision to move more of our new sales and selected existing cases to self-insured or feed basis alternatives. When we adjust for occasions that have moved from a fully insured product into a self-insured alternative, persistency at 81.7% or essentially unchanged compared to the second quarter of 2001.

Group life persistency was 82.8%, higher than the first quarter, but down slighty when compared to the second quarter of 2001. Our generally improving group disability persistence results reflect a more stable nature of the market and a strong competitive position within that market. The pressure on the life results are indicative of a market which is still highly competitive, especially in a large case segment, where we continue to see aggressive price in contract-related actions. As you know, in the past, we have spoken of the importance of the renewal action on future profitability. We feel that we're well ahead of the industry and taking needed [INAUDIBLE] action. At this point, we have completed almost 90% of our 2002 renewals and we're pleased to say this program is exceeding our expectations. In addition to carefully watching persistence, we also look at the business which leaves us. We obviously don't want to lose any business, but if we lose business, we want it to be our own profitable business.

In the second quarter, we again saw termination generally coming from our more poorly performing sectors. We expect our overall group persistency to run ahead of 2001 levels, and I would believe our only line which would be below that would be the group lifeline, below last year's levels.

And finally, let me review the implications of our renewal and persistency actions of the quarter. Our second quarter results included a total of $4 million in additional back amortization, $1.4 million in our groups disability segment and 2.6 million in our group life segment. This total compares to no additional back amortization to the second quarter last year and 9.5 million in the first quarter this year, for a year to date total of $13.5 million, compared to $20.3 million last year. We continue to remain confident. Our [INAUDIBLE] policies and assumptions are sound, to reflect the characteristics of our business.

I know that the present stock market environment has caused the [INAUDIBLE] policy to be raised and we're confident that we're not exposed to the kinds of issues which have been the cause of much recent discussion and speculation within the industry. Next, I would like to offer a few comments on on our investment results. It's no surprise that we continue to current unsettled financial market conditions. We have seen a lower rate of growth in our investing income. However, I'm very pleased that despite this environment, we still generate a 5.8% gain in net investment income and our ongoing business segments and that we reported a lower level of capital losses this quarter than we did in the first quarter of the year. I'm certain that there will be a number of questions, investor-related questions, when we move to the question-and-answer period. Before we get to that point, I would like to emphasize a few points. First, as expected, our overall portfolio yield declined in the second quarter of 7.88%, a reduction of 6 basis points from the first quarter. The change in yield is the result of several factors, all of which are associated with the present market conditions, including lower new money rates and the impact of credit losses. Given the current market conditions, it's likely we'll continue to see some pressure on the portfolio yields. We're confident, however, that our current and projected portfolio yields are adequate to support our business and financial objectives. As we discussed on prior calls we are very focused on managing the margins between our portfolio yield and the various discount rate assumptions, investment reserving, and pricing models. I'll just give you one example, um, by using a lower discount rate on new claims in the second quarter, the discount rate on our LTD block declined by 10 basis points between the first and second quarter. And although our portfolio yield also declined at a similar amount, we have been able to maintain that margin. Then we continue to have a healthy interest rate margin in all of our core products.

We believe the discipline approach we put in place over five years ago has positioned us well to manage the latest link between the investment return, pricing assumptions and return discount rates in our business despite this unprecedented volatility. Our margins will fluctuate by a few basis points quarter to quarter, but our current margins are roughly equivalent to the average of the past two years, and we're confident we can maintain margins in the future direction of interest rates.

Now, as Tom and Harold mentioned, we reported net realized investment losses in the second quarter of $55.9 million, an improvement from the $77.3 million loss reported in the first quarter. The gross loss, which is the loss prior to any capital gain, totaled $149 million before taxes for the second quarter compared to $226 million in the prior quarters. This quarter's results were largely impacted by two holdings: Worldcom and Teleglobe Canada, which accounted for approximately 3/4 of our gross losses for the quarter. We expect the credit environment to remain challenging, but expect in the second half of 2002 we will see further reductions in gross and net realized losses for the company. I will close my comments by reiterating that we remain comfortable with our long-term investment and portfolio management strategy. We're confident the approach we're taking to manage investment and interest rate risks will continue to serve us well over the long term. And finally, I would like to make a few comments on our expense trends.

You probably noticed in this quarter results some movements both up and down in our operating expenses for various lines of business. Let me start out by saying, our company line expense ratio was 22.3% for the quarter, unchanged from the first quarter, and slightly above the level of a year ago. And our expenses are in line with our expectation. We have invested in a number of areas in our company over the past year, most notably our customer service functions, and we're pleased with the results of these investments. We have made service another competitive advantage, which has contributed to our better consistency and improved sales.

In the quarter, you saw some movement of expenses in the biline of business. This reflects the changing mix of sales and emphasis within the company, changing focus of our customer service and claims organization, as well as our continued refinementing of our allocation process between products.. This refinement process is an ongoing effort to ensure we're properly evaluating profitability in returns of each of our products. As we enter our budgeting and planning process for 2003, we will be focused on issues which will continue to allow us to continue the offering in the marketplace while at the same time lowering our expense levels, as Harold mentioned. Our intention is to grow overall expenses at levels less than the projected premium and revenue growth of the company. Based upon our earlier indications, we're highly confident we will see expense improvements as we move into 2003. The events which we have made today have served us well in building a sustainable competitive advantage. In 2003, we would expect to see clear evidence of the advantage [INAUDIBLE] in our business. I'll close with a few summary comments as well, provide guidance for the balance of 2003 at this point.

First, we continue to see evidence in the market place that we're being viewed favorably by our customers and producers and consultants. The breadth of our offering, the strength and depth of our resources and our persistency, and pricing power in the marketplace. In unsettled times like these, people take comfort in dealing with a leader.

And we're working very hard to make sure we don't miss the opportunity to meet the needs in the marketplace during these generally difficult times. Second, although we're making progress, there is still tremendous opportunity to better leverage our market leadership and to improved earnings and returns. That remains a key focus of our team. As I noted earlier, we're confident that as we move into 2003, we'll continue to find opportunities to enhance our returns through improvements in our operational and financial management. And that raises the questions on our status for the EDI project. As you know, we've been continuing to analyze our IDI business and results and evaluate alternative strategies for our older business. Our objective from the start has been to consider any alternative which is consistent with our strategy of growing this business, while at the same time, improving the profitability, consistency, and returns of our company.

Importantly, we must be convinced that any action that we would consider taking would be viewed favorably by our investors. I would say as I have in the past, we will continue to manage this business as we do today, the variable viable alternative. Over the past quarter, we have had discussions with several reinsurers and made grate progress in evaluating our alternatives. At this point, we have not determined whether any of those alternatives meet business and financial objectives we have established.

We recognize the importance many of you place on this undertaking and we, too, have put a high priority on this project, and we will continue to keep you informed of any material develops. Thirdly, as I said earlier, we're committed to expanding the amount of information available to our investors about our business. We expect additional segment information, including more complete information on our IDI business available within the next month or so.

I think you will find this information will confirm the trends and directional guidance that we have been providing you over the past year or so, and I guess we all would hope that others would follow our lead in providing this level of disclosure, not just on the IDI business, but also on the group lines as well. Finally, we have spoken on recent calls that we will likely continue to see per share operating earnings growth remain at one to three cents per quarter. We're standing with that. While this is lower than our desired growth rating, it continues to be appropriate in this environment. For the near term, we continue to be more comfortable at the low end of that range. Thank you for your attention this morning, and that concludes my prepared comments. Now operator, we would like to move to the question-and-answer session.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by the digit one. Again that is star one if you would like to ask a question. We'll pause a moment to assemble our roster. We'll go first to Nigel Dalley, Morgan Stanley.

Great.. Thank you. Good morning. A couple of questions. First, on the expense reductions that you talked about, just wondering if there's a certain level of expense reductions that you're targeting or a certain level of margin improvements and if there are any restructuring charges you expect to take as a result of that. Also, just looking at 2003, I know it's still early, but any guidance -- [INAUDIBLE ] And, um, lastly, the guidance to the IDI block, looking at the internal reorganization. Is it possible to come up with a benefits ratio that would have been excluding the impact of the reorganization.

Nigel, this is Harold. We'll have a few people comment on your question. Let me first start by the comment surrounding expense management, and I think you and hopefully others are seeing our intent now that we have put the service components in place to begin to show visibly how that is benefiting not only sales but also expense level ratio management.

We do not, um, expect, nor do we even begin to suggest that there's any restructuring charges to these comments of those initiatives. This will be, um, shown primarily in reduction in the expense ratio and Bob, really as we go into the 2003 plan you may want to comment more specifically. But it's probably premature to give those levels other than to say directionally, you will see that the impact of the scale begin to benefit the expense base of a company. Bob, would you like to comment further?

Certainly, as all companies are, we're under some pressure from the outside for some of our corporate costs, Harold, like our corporate insurance costs. But internally we're starting to see, and we have made those investments in our service area in the past, and we're starting to see the benefits from that. We would think that that would give us an opportunity to start taking advantage of our scale, and bringing those expense ratios down next year.

I do think it's premature in the planning process to actually quantify that at this point in time.

but Nigel, we will begin to give specific guidance around this as we complete, um, um, the planning process, which we have already begun, and it will be something that both we management, as well as you investors can -- can metric and be able to see the results of the efforts.

Okay.

Nigel, just around the IDI question you had, when you look at the interest adjusted loss ratio, I think in total it was about 65.7%, um, for the older business, the, um, you know, the '95 and prior business, the loss ratio was 82.2%, and for the newer newer it was 44%. That 44% is consistent with what we have seen the last few quarters.

Tom, I think Nigel's question was related to the transition of the business up to our other locations, and, Nigel, I think if you look, our incidence is roughly flat to the first quarter, and barring any destruction we would have seen, I think we would have anticipated the loss ratio would have remained flat with the first quarter.

Okay, flat, um, with the, what it was in the first quarter is not an unreasonable reduction.

At this point, yeah, we don't see any major change in that.

Great, thank you.

We'll go next to David Lewis, Suntrust Robinson-Humphrey Company.

Good morning. Will you talk a little bit about the claims incidence trends. You indicated they were improving at the, um, employee benefits area, but claim resolutions remain below expectations, at least what I would have anticipated. Is this more of an internal problem that you're working on or are there other issues that's going to cause that slow recovery?

Maybe -- maybe, David, this is Tom. Maybe I'll make an introductory comment and maybe ask Ralph Mohney to speak to the recovery pieces, but I think your point on the incidence side, again I think as we evolve, all of a sudden our comments, I think we're cautiously optimistic when you see a quarter where in generally, you don't see an increased in incidence, again, it's flat or slightly down. Again, I think we're cautiously optimistic, and that's a good sign.

But again, it can move around from quarter to quarter. I think the second part of your question probably the more significant one, better understanding some of the things happening from a recovery point of view, and again, Ralph we'll just maybe ask to you speak to that. And we do recognize a part of it was really -- the IDI, there's an IDI and LTD part of this, too, which is worth being distinguished to the group

That's right, Tom, and thanks David. As Tom mentioned during the quarter, we did have some disruption relating to a transition of some of our IDI claims from one claim payment site to another, um, anytime you transition claims from one side to another, there is the potential for disruption, given the large reserves associated with this part of the business, you know, any slight disruption can cause material impact.

We did begin seeing an impact during the second quarter, and at that time, we discontinued the transition and put in place some corrective actions, which we felt would return the line to normalcy. The early indications are that those actions are proving out, the results bottomed out in the month of May, and really moved back toward more normal levels in June, and as Robert Greving indicated, we would expect to see more normal results on the second half. On the LTD side, the recoveries side, a very slight decline overall during the second quarter.

This related to one of our four integrated customer care centers where, quite frankly, we have a little bit of a spike in volume as a higher new claims come in, those are more time consuming, and it creates a little bit of pressure around the ongoing activities to, um, assist our insured and return to work. We view that as very temporary, and again, it was fairly slight as well. With respect to, um, incidence, um, as Tom indicated, um, LTD incidence flattened out in the second quarter, um, and actually -- actually declined slightly from the first quarter. We did see mental and nervous claims, um, go down, the incidence on those claims. In fact, it came in below the level of the last three quarters and in line with, um, full year 2001. Back incidents, also declined and, um, came in at a -- in line with the average for 2001.

And overall, we saw a decline in the types of diagnoses ease that are more positively correlated with economic conditions. Um, so we, again, we have seen some flattening out on the incidence side on the LTD, particularly among mental, nervous and back conditions. I would point out incidence for these conditions does remain at historically high levels, but as Tom indicated, we're cautiously optimistic about the future.

Just a final thought, if we just looked specifically at the individual disability line, the benefit ratio is 116.7% versus 107.1% in the second quarter a year ago. I would assume that you would expect for that to fall back in to something more in the 110 range. Is that reasonable?

In the second half of the year?

David, this is Robert Greving. So you'll continue to see the gross loss ratio really will continue to grow on an enforced [INAUDIBLE] like that. Because what you're doing is adding interest to the reserves.

So you will continue to see the gross loss ratios somewhat growing. It will be a little bit lower because of the recovery comments that we have already made that occurred in the second quarter. That we won't be growing as much, but you will continue to see the gross loss ratio grow because you're continually adding the interest to those reserves. The interest adjusted loss ratios is really the one that is more indicative of the morbidity changes in the business.

Just to make sure I'm clear on the -- the single point gross loss ratio, you're saying that it will grow but it should really fall back from the 116.7% in the second half, right?

Yes, yes, it should. Relative to the -- to the impact; um, of the recovery pattern that we were just commenting on.

Right, thanks very much.

And, David, just a final comment. We don't casually make a decision to transfer claims management from one center to the other.

This is a part of the integrated strategy where, you and your team held, an integrated customer in primarily Portland and Chattanooga. We specialize and stand alone individual disability in Worcester, Massachusetts,, our former Paul Revere location, and that's really what we were transitioning, we just actually slowed down the transition when we felt that we were, um, falling somewhat behind in our recovery rates.

That's correct, Harold. At the beginning of this year, about 75% of the stand alone individual disability claims were handled in Wooster. We had previously transitioned the former UNUM individual disability business there, as well as parts of the former Providence, beginning the first part of this year, we began transationing the remaining block, and it was a larger block, and encountered bottles necks, we had slowed that transition, but as we filled additional capability and even more redundant resources for the transition, we will proceed on a more gradual basis over the balance of this year.

Thank you.

Okay, Dave.

We'll go next to Edward Spehar Merrill Lynch.

Good morning, a couple of questions. I was wondering, um, when you talk about the recession related-type claims still being at historically high levels, could you give us some sense of if those claims, just those claims fell back to normal levels, what type of benefit ratio would we have seen, you know, relative to the 83.4% that was reported.

And then, secondly, um, when we look at the group life AD&D, and group long term carry line, which has bounced around a lot, which has bounced around a lot, you made comments suggesting that the AD&D results--or maybe we shouldn't extrapolate going forward. Can you give us a sense of the magnitude there, and do you feel comfortable we have stabilized in terms of the group life earnings contribution? Thank you.

On the loss ratio, um, and the -- I think if we, you know, we're right in the middle of the 8% range, um, our mix of business and pricing would normally put us in the lower end of the 80 to 85%-type of loss ratio range. I would what we would see if things kind od return to normal is, you know, initially we would see a reduction in the loss ratio to the lower end of that range.

Pricing obviously follows our incidence trends, so obviously over time, we would probably reflect, you know, our overall incidence as the incidence has increased. We have increased our pricing and we would also see probably some of that pressure being taken off of that pricing if incidence started showing a longer-term trend. We feel comfortable in the 80 to 85%-type of range.

But in an improving environment, we would look for the loss ratio to run toward the lower side rather than the higher side of that range.

I guess then with respect to the group life, I think you raise a certainly very important question that we think about frequently, which is, you know, what is the sustainable level of profitability in returns of the group lifeline. I think whereas, it's still going to bounce around, I think we do feel, that you know, it's -- it's performing probably a little more along the lines that it should in the future. But again, I can't assure it doesn't bounce around from quarter to quarter.

I guess what I can come back to, when you look at the results from the second quarter of last year, as you know, it was a pretty poor group life quarter, I don't think we expect ever to get down to those levels as we have taken the pricing actions, the renewal actions, and so forth. But again, it will move around, but I think as Harold said in his comments and I think we have reiterated some of our other prepared comments, is we're going to be disciplined in that line of business, I can assure you based on the facts our sales are off 47% over a year ago, that we're walking away from a lot of business.

The hope being as we do that, that we're adding more consistency to the results and keeping the levels of returns adequate for the kind of product that that is, so, I think the message should come across with that group of products that you talked about, the emphasis is on the word "discipline." Staying focused only on situations where we see reasonable margins and quite honestly, it supports the integrated solution, and not drift into situations where we're selling on approximate stand alone basis. I think as time goes on, the effects of the strategy become more imbedded in our blocks of business, it's going to certainly continue to give us greater comfort and consistency in the return characteristic of that business. And Harold, you may want to offer more on that. Because again, this is the place where we're not bashful about letting the gross slip really dramatically if we can't see returns and levels we'e expecting.

Right, and, Tom, I think that, um, we might even want to ask Kevin to comment. I think we want the group on the phone this morning to realize that renewal actions around underperforming live cases is not as, um, as predictably strong as we have, for example, in renewal actions for LTD, because it's a commodity-type product, it's somewhat less served as you move into renewal action for group life insurance, and therefore, that's why we try to really keep anyone from seeing some this as a line that's going to quickly spring back into the return levels we had say. three years ago. But Kevin, you might just want to comment briefly on the difference in renewal expectations for life insurance versus LTD.

Thank you, Harold. We're taking some pretty aggressive actions on our in-force group life block of business where, renewing that business up to a much greater level this year than in previous years, in terms of amount of increase and in terms of volume of business that we're working on; however, that market place continues to be somewhat more commodity oriented and price sensitive.

Our ability to place sustained significant renewals is not of the same level as it is in LTD, although we still have a reasonably solid persistency level on Placer Hills.

I think let me come back and add one piece to it. Bob's discussion around the recession impact. I think if you look at our claim activity the past couple of quarters and you don't want to draw enormous conclusions from it, if you try to suggest levels of net worth in terms of loss ratio, it will probably be a couple of points as we look to what happened in the quarter from a loss ratio point of view that was. generally, we think, recession based.

Okay, just -- maybe one very quick follow-up. Is there any way you could just give us a number about AD&D, I mean any sense of sort of the normal relative contribution in that line versus what it was this quarter, thanks.

Yeah.

give us just a moment, Ed. As you're indicating, this was a quarter which we feel like we overperformed there, and so, Bob, do want to try to give some sense of normalization, or Tom White?

Yeah, Ed, um, let's see. The magnitude of the earnings contribution, um, group life is probably about three times, 3 1/2 times larger than the AD&D contribution.

Guess the point, Tom is it's not a huge driver in that reporting segment, um, but it was probably this past quarter maybe, um, 30% above what it was, maybe in a more normalized quarter

In the second quarter of last year, you know, the earnings are a little bit, almost $10 million, in this quarter, they're probably around $14 million for the AD&D line of business. Your numbers are all right, Tom, but it was about $5 million more in this quarter than in the second quarter quarter of last year.

Thank you, sir. Thank you very much. It was very helpful.

Thank you, Ed.

We'll go next to Michelle Giordano, J.P. Morgan.

Good morning, I was wondering if we could get a little bit more color on the individual long-term care claims and experience in the quarter. Is this business really core to your operations, and can you tell us if the claims trends are improving the third quarter this far in the long-term care.

Maybe I'll make a strategic comment and ask Bob to talk about the claims fees, Michelle.

Just to separate our long term care practice from any others that you might follow, our long-term care is primarily a -- almost a business owner or executive sort of focused initiative. Our long term care products are really being directed to much the same market place our individual disability products are being directed. In fact, our current product design actually allows to you convert an individual disability product into a long term care product to a certain part in your life span. I just want to emphasize our focus is somewhat different than companies that might be selling this exclusively to the seniors market, which can be an attractive market. That's not the place we have chosen to direct our energy.

My point is we're not in all segments of the long-term care market. We're very, we believe, narrowly focused around more of the business executive, more of the group environment, and that's again, very consistent with as you know, what our focus has been on the individual disability business. So your point is about the core, strategic, the answer is yes.

It does fit well with the ability to offer a set of comprehensive solutions that extends to both income protection to the disability product as well as long term care, which is obviously something that provides more protection as you move into the retirement age, so at this point, I don't think we're trying to be all things to people, but we're trying to bring that in lock step with the sorts of things that we sell on the income protection or disability side. Now with that, maybe Bob, you can just briefly share with the group, Bob, a little more on the specific claim trends.

As far as, Michelle, as far as the incidents we're seeing, the pad incidence from the individual long-term care was actually up from the first quarter, but flat to down from the second quarter of last year.

What really drove our incidence and claim, you know, increase for this -- this particular quarter was our average size. Average size in this quarter of the claim was up, which actually created the pressure. We're seeing, um in the third quarter that the incidence in the long term care so far, um, is back in line with its more historical patterns. So I think what we saw was some pressure being caused by some fairly large individual long-term care claims in the second quarter.

Thank you.

We'll go next to Jason Zucker, Bank of America Securities.

Good, thank you. A couple of questions for you. The first, um, I was hoping you could give us some more color on LTD sales, um, more in large, more in medium, or more in small case in the current quarter, um, you have discussed, um, leveraging scale and visibility with leveraging scale. I assume we'll do that with an expense ratio. Do you think that's going to also translate into a price advantage over time in the marketplace; and the third question, with new management at Colonial, is there also a new strategy to drive growth. Thank you.

Um, Jason, let's start first with your LTD question, um, we had actually solid year-over-year sales in all of our segments, up 15% in large, what we consider to be large case, above 2000 lines, the midmarket, which is a sweet spot for us, I'm sure others, was up 47%. And small case was about, um, about the same as a year ago, so it's primarily in the middle market with some growth, of course, in large case, but, um, fairly moderate to even in small case.

You were right when you indicated a moment ago the visibility comments were being made just to say that we would rather be able to comment on the expense management with specific metrics to follow it, and our point is that we have made, um, substantial investments in our service area. We think it's helped us, as Tom indicated, around persistency and even new sales growing, but we got those things in place now.

We would expect both the benefit of premium growth as well as not having to make those individual investments we've made on the accelerated bases over the last 18 to 24 months in place, so we expect the expense ratio to begin to move in a new direction; however, the reason we're somewhat hesitant in giving more metrics today, is that we want to make sure we understand the implications of the ASO and other business that we're now integrating with the fully insured so that our ratios can be properly articulated. That will cause somewhat of a change as we begin to continue to build ASO relationships. As it might relate to Colonial, um, I would say, that um, the strategy for the most part, um, is being unadjusted. This market has a very interesting opportunity in the small to medium-sized cases.

We would not begin to suggest we change the primary market to Colonial. They do quite good work there, both in the public sector as well as in the nonpublic sector business, what we feel we needed was a just greater emphasis around the new sales process. Persistency, actually, is above the average at Colonial. If we can get the new sales somewhat higher with our above-average persistency, we believe the appropriate growth, both top line and bottom line will begin to appear.

As I mentioned a moment ago, operation of that company is sound, but we do believe with Mike Slade running sales and with Jean Duke, a wonderful operational and financial complimentary skills, we're asking Jean to do that, not smother the sales organization, but be complimentary to them. It's not a strategy issue, it's not an operational issue; this was a execution issue and making sure we had a complementary team in place.

One last question, too, and I think about fully insured STD versus ASO STD. Am I correct in thinking that we get probably more earnings out of fully insured STD but a lower ROE?

Um, this is Tom. I would say that again in, theory, you would be right if you priced the STD at levels that are appropriate.

I think as you know, there are degrees of pricing pressure in that marketplace, and so, um, there is very low capital in the ASO business, so therefore it has a higher return, but again, I would come back to the point that there is part of what is being, driving some of our strategy is the objective of being sure we actually are being sure we write this business profitably, if we can't write the insurance business profitable. We certainly want to provide an ASO alternative on the STD, which can be profitable. I think you're right. The profit contribution being equal, would be less, but I think again, that's where you have to take in account the market conditions right now [INAUDIBLE] quite honestly, As you know the industry profitability is quite low. In fact, actually, even before the changes that we made, our company actually had the highest if not one of the highest profitability levels in the STD line.

Great, thank you.

And Tom as we close that question, we look not only at stand-alone pricing of STD, but the impact we think it has on the recovery rates and LTD but not as a lost leader rate.

Right.

We'll go next to Jody Hanson, First Manhatten Capital.

Hi, good morning, the question on the high yield, it's a 10.24% on your portfolio. If I'm correct, that's above your policy, your investment policy. Could you comment on that, and specifically what the outlook for that ratio is and losses as you see them now. Then the second question is on the investment yield and the, um, the margin between your discount rate on your reserves and the yield. Can you remind us about what your margin goals are and maybe be specific by a couple of lines of business, how that margin has changed over the past couple of quarters. Thanks.

Tom White?

We'll try to do this here in a couple of minutes. But in the high yield, the way we really look at the high yield is to look at it on a market value basis, relative to investment assets and pull policy lines out. When you do that, we're basically at 9.6%, we have been, you know, roughly 9 1/2% for the last few quarters on that basis.

Um, we do manage to keep that, um, within the 101% limiting a, um, as we, you know, said in our May analyst meeting, we have done very little purchasing of, um, new high yield in that portfolio. Basically, you know, you have downgrades and we, you know, we kind of work out of a ground crowd, we work out of existing high yields in order to manage that. One thing we have not done is do much in the way of intentional purchases, and I suspect that trend is going to continue going forward. We're going to see more downgrades than upgrades, um, and we'll continue to work through that same situation and, um, you know, do our best to maintain that overall percentage, you know, somewhere in the 9 1/2 to you know, maybe approaching 10%.

As far as the, um, --

maybe I can -- I think you said it. But maybe just to remind the group that half of our high yield portfolio is fallen angels, actually. So again, we talk about high yield as much as anything, the high yield percentage that Jody referred to was driven by the nature of the credit environment generally, not the high yield market specifically. I'm sorry.

I would also add to that, there are times the high yield market actually performs pretty well, and in doing so, the market value goes up, and so you know, that puts the pressure on getting up to the 10% in the last, I think in the first half of the year, the performance of our high yield portfolio has been better than the performance to the overall portfolio, so you know, that puts a little bit of pressure on just that because of the relative good performance there.

When you go back, Tom, looking at our capital loss situation, it's not so much the high yield per say, but the issues in telecom. Quite honestly, that has been the issue that we have we have confronted, which is that everybody else has, and I guess as you were saying, the outlook is one we're not adding to that asset class. We're [INAUDIBLE] comfortable with the asset classes we have right now.

So I don't think there is any intent, Jody, to change in terms of selling down to a certain level. You think we're comfortable with the assets that are in the portfolio now.

Jody on your question on the, um, the investment yield in the margin, if you look at the LTD margin, um, in the -- in the first quarter, um, we had a 61 basis-point margin, and that was a 7.78% portfolio yield, and 7.17% discount rate. Um, in the quarter, the portfolio yield declined at 7.67%, and the discount rate declined to 7.07%. So, basically had an 11 point decline, or 11 basis point decline in the yield, and a 10 basis point decline in the reserve discount rate. Keep in mind when new claims come in and we price new business, we're using a much lower discount rate assumption.

So, what with the 61 basis point margin stays basically flat at 60 basis points, and that's, you know, that's kind of in line, you know, somewhere in the 60 to, you know, probably high 50s to high 60s in a margin that we're comfortable with. Similarly on the, um, individual disability block, you don't get as big a movement because you have a longer duration portfolio. I think are the portfolio yield by IDI declined maybe two basic points and the discount rate maybe came down by like one basis point.

So again, the margin stays basically flat because, you know, when we're putting new claims on the books and new business, we're using discount rates that reflect the current new money yields.

Could you give me a sense of what those new discount rates that reflect what the money yields would be?

I don't have those exactly with me. But we're basing those off of the new money yields that we're looking at in the marketplace.

With the 60 or -- 60 to 65% -- basis point margin.

That's right.

Right.

Just to finish, that the general story to that, the LTD portfolio, Tom, targeted between the high 50s and high 60s. The margin, the target and the IDI business is to the high 30's to 40s and I think they're margins we have looked at over the last several years and we're currently comfortable with both of those margins [INAUDIBLE].

Yeah, and keep in mind, the IDI has a longer duration, and there is more hedges that are in place, and so that's, you know, the portfolio yield on IDI is going to be more secure, around the 8% level.

Thank you.

Thank you.

We'll go next to Vanessa Wilson, Deutsche Banc.

Thank you, good morning.

Good morning.

In the LTD business, um, I think Bob Greving indicated that as incidences improved, over time pricing would follow it.

Given the uncertain economic environment we're in right now, where is your pricing going in LTD and renewals?

Kevin, -- Kevin, would you like to answer Vanessa's question?

Thanks, Harold. Good morning, Vanessa.

Hi

Our pricing in LTD renewals is moving up in the sort of upper end of the single digit range, um, that varies by, of course, um, you know, loss ratio and experience results by case. But generally in the, you know, 7 to 8% rate, renewals is a reasonable target.

Thank you, Kevin; and Tom, given, um, the stablization to slight improvement and incidence, could you just give us sort of the bullet point of what leads to your caution to guide us to the lower end of 1 to 3 cents per quarter for the second half.

I think it's probably the , -- caution that this team has coming through the recovery. We have been through quite a bit prior to the economic environment we face right now. I think we want to be cautious and be sure that, again, as we provide guidance, we're comfortable that we can not only achieve but perhaps exceed that guidance.

And obviously in this environment, when you have got things you can't control like the economic environment, the interest rate environment, things of that sort, I think that's why we, our sales and starting with Harold, have really developed I think, hopefully, an appropriate but cautious outlook for the business as we see things emerge. Obviously we have been open on this call, sharing some of those things including some things which seem to be stabilizing. But I think after a couple of quarters, we're hesitant to extrapolate that until we see clear signs externally that we have a recovering economy.

Thank you very much.

We'll go next to Eric Berg, Lehman Brothers.

Thank you very much, and Good morning. I wanted to revisit the long-term care care question. Just sort of a technical question--would the size of claims, that wouldn't affect incidence, right? As I understand, incidence is a figure that captures the number of claims, um, um, per thousand lives insured, sort of annualized and doesn't speak to -- that figure doesn't speak to the size of the claims. Is that right, Bob?

Yeah, this is Bob. You're absolutely right. The incedence as I indicated actually was flat to down relative to the actual number of claims.

What is driving the pressure financially for us is the size of claims which obviously drives our reserve higher, as well as our paid claim on those claims a bit higher, so it's the size that is driving the financial impact but the incidence was actually relatively flat. We're seeing the size of claims and the incidence in, you know, better in line in the third quarter so far.

Great, and then one question on individual disability, um, I certainly understand that there was a development in the quarter, I think, um, um, you -- you did a great job of laying out how you're moving the claims resolution, or the claims management process to Paul Revere, um, but I guess what I would like to know is with respect to your older block, would you describe from a very high level, um, the financial condition of that older block to be stable, improving, or deteriorating?

I think -- this is Bob again, Eric. I think on the older block, we would continue to see that as pretty stable. That's -- that's a very large block of business, as you're aware. It's about a billion dollars worth of premium and about $8 billion worth of reserves and right now, we're seeing that as relatively stable.

So you would -- you would view the deteriation in the interest-adjusted benefit ratio as sort of anomolys, the result of this, um, transfer of claims to [INAUDIBLE]

Sir, for this period, that's correct.

Thank you.

We'll go next to Robert Glasspeigel, Langen-McAlenney.

General question for Bob, if I could. It seems like there has been some trauma in the life of the reinsurance industry in the last quarter. I was wondering how that impacts, A, your use of reinsurance in general, and, B, the potential I.D. transaction, um, which perhaps is Bermuda and less impacted by what is going on in the global returns markets, but what are you saying?

All right, yeah, Bob, this is -- the use of reinsurance. We have not changed our reinsurance. Obviously we have established our group reinsurance insurance, which is our life insurance on an annual basis toward the end of the year. We actually reinsured with our prior carrier last year, and did not encounter anything. We reinsure an individual life in excess of $500,000 for both individual -- for the life portion as well as AD&D. We have not changed that on our life side of the business.

Obviously our catastrophe coverage, which we have spoken to in the past, was much more difficult to place what. But when we did place this year, we did place without any limitations to terrorism or, you know, the -- the new nomenclature for biological and nuclear and chemical limitations. So we were very fortunate to gelt ahead of the market, um, when we placed that this last year. With regard to the I.D., the I.D. project takes on a different view than what the market is experiencing in its life side of the business. And obviously the disability side of the business is quite different, and so we're not seeing any of the issues, um, that the life side of the business seems to be encountering in these discussions.

So you would say the marketplace is quite fluid and there is no limitation in capital, just a question of praise?

I think we can get things done. Obviously, disability reinsures are not very plentiful and, so, there is a limited universe out there of interested parties in doing a significant disability transaction. As you can imagine, this is not a small transaction you would do with a very small carrier. It's a large block of business if we're going to do a transaction of any kind. It's going to have substantial growth to it. So the universe of potential parties is more limited to your large multi-nationals.

Thank you.

Thank you.

We'll go next to Ronald McIntosh of Fox-Pitt, Kelton, Inc..

Thank you, just two last questions.

I guess just asking Bob's question differently, you mentioned you did get clarity in the quarter as a started your negotiations with the reinsurance or discussions. Could you say whether or not you're more or less likely to have a 2003 event there than you did maybe three months ago, more or less likely to happen again this year and secondly, could you tell us how large the unrealized gain is in the [INAUDIBLE] portfolio?

um, Ron, it's probably still premature -- premature. It's a fair question but premature for us to say it's less likely or more likely. We're running a number of different alternatives, that um, I'm sure that you and others are speculating around, um, I think we have always fried to give guidance to how a single transaction is less likely than maybe what could be a series of smaller transactions, but if you will allow us, lets us not try to put any weight today on whether that likelihood has gotten greater or less. We're pleased with the discussions that we have been having. In the end, it's going to be whether we believe this is creating the objective we want; which is the improved returns, um, longer term, and there will be a cost of capital question, quite frankly. The unrealized, Tom, the unrealized --

Ron, I'm embarrassed that I don't have that number, when you ask often. It was a nice turn from the first quarter, from March 31 out is at about a $380 million swing from about a $200 million being below water to about $170 to $180 million above the market. Or above book.

Thank you, Harold and Tom.

We're -- [ Overlapping Speakers ] We'll confirm that, but you're saying roughly, again, Tom, about --

about $180 million market over -- $180 million at this point.

Operator, we'll take one final question.

There appears to be no further questions at this time.

Why good, well, that was good timing. [ Laughter ]

Well, um, we appreciate your engaging us this morning, and we have attempted to review with you the results of the second quarter, which we believe are -- are generally solid improvement on a number of fronts and a challenging environment.

Tom, Bob and others discussed the interest trends appear to be stabilizing, group life earnings did show improvements, investment results did improve, statutory averages rebounded from the first quarter, and our sales results, we believe, provided highlights for the disciplines we're trying to bring to our business. And we feel we're being successful. We're still a long-term oriented group, and although we're continuing to make tactical adjustments, still believe in the business model we put in place and are optimistic as we look ahead. So again, thanks for your time. This ends our conference call.

Thank you for joining joining today's conference, you may now disconnect.