普登 (UNM) 2002 Q3 法說會逐字稿

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

Thank you and good morning, and welcome to the UNUMProvident Corporation's Third Quarter 2002 Analyst and Investor conference call. With me are Tom Watjen - and Tom, along with me, will be providing prepared remarks on yesterday's third quarter earnings release. In addition, all the members of senior management will be available to respond to your questions during this call.

Before we get started, let me read the Safe Harbor statement. The Safe Harbor is provided for forward-looking statements under the Private 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 risk and uncertainty that could cause actual results to differ materially from those contained in the forward-looking statements. These forward-looking statements are based upon management's current expectations that believe as of the date of this conference call, that there can be no assurance that the future developments effecting the company will be those anticipated by management.

For a discussion of the risk and uncertainties that could effect actual results, see the sections entitled "Cautionary Statements Regarding Forward Looking Statements" and "Risk Factors In the Company's Form 10k For the Fiscal Year Ended December 31, 2001" and the subsequently filed 10Q's. The company expressly disclaims any duty to update any forward-looking statements.

Yesterday afternoon, we reported third quarter operating earnings of 64 cents per share, compared to 61 cents last year. These results were in line with the consensus estimate. Overall, we are pleased to produce these results in a period when the economy remained weak, consumer confidence remained fragile, and a difficult credit market persisted.

In many ways, however, the third quarter presented a few business events that had not been assumed in our plans. With that said, let me highlight the key outcomes from the quarter.

First, we produced stable results in our employee benefit segment even as economic indicators continued to slide. Incidence levels remain challenging, but our dual activities and pricing actions are enabling us to maintain stable results by, at a minimum, off setting these negative environmental trends. Certainly, nothing flashy, just protecting the core of our franchise.

Second, net realized investment losses declined again in this quarter despite the fact that we're still in the midst of a difficult business and credit environment. Importantly, with only a two-basis point decline in our portfolio yield during the quarter, we continue to maintain a healthy margin between our portfolio yields and discount rate assumptions. Tom Watjen will provide more detail on this in just a moment.

Third, finally total company sales are up five percent over the same period last year with all product segments, individual, employee benefits, and voucher (ph) benefits achieving year over year growth. I will provide further details on our sales in just a moment. But let me emphasis now that we continue to manage our growth selectively, waiting for a more appropriate environment to highlight the top line.

On a different topic - but one most of you are familiar with - during the quarter, we were challenged by adverse media attention. I want to thank all of our stakeholders including the investment community and in particular, our shareholders for your support. It has been confirming to us, meaningful in this impact and genuinely appreciated. Thankfully, we have received overwhelming support from our employees, producers, and our customers.

The preliminary results of our most recent third-party customer research completed after the broadcast story aired, confirmed our proactive communication strategy was the right thing to do. Knowing very well the specific sources of these stories, I doubt that we've seen the end of their efforts. Plaintiff attorneys are still aggressively pursuing publicity. Thus, we believe there could be additional television and/or print stories.

Frankly, their strategy has not been a surprise. Rather as expected, it is simply a constant repackaging of the things already raised by the well-identified group of plaintiff attorneys and former employees. We will remain focus on our business while reinforcing our key messages and the documented facts with our producers and with customers, taking every opportunity to tell our value story.

So, we have a solid plan and appropriate resources committed to dealing with this issue. Please know, however, that we have and will continue to learn from this experience. We will strive to continue to improve our process and qualifying of people, among other things, due to this event. The lessons will not go unheeded (ph).

Now, let me turn to review our business development and retention efforts for the quarter. First, let me say that we are basically pleased with our sales efforts from the quarter and year-to-date. By design, our sales growth is not within our long-term target of eight to 10 percent. We, like most others, have taken deliberate steps to manage down sales in specific segments of our business. Let me give you some highlights.

In Employee Benefits, sales were up in the aggregate by only one percent, compared to one year ago. However, the big - the mix was good and essentially mirrored our internal plan. For example, Group LTD sales grew 17 percent, led substantially by opportunities emerging in the UK. Growth in our core North American brokerage operation was five percent.

Some additional statistics indicative of our strategy, our STD ASO sales grew 19 percent, driven b a very healthy increase in the small an middle market. While fully insured sales dropped by 44 percent, again, primarily in the larger market. By the way, starting next quarter, we will begin breaking out our LTD sales on the basis of ASO and fully insured, similarly to the way we now spread out STD sales.

Group life sales were up only three percent, as we continue to de-emphasize standalone business. Group long-term care saw a nice increase of 19 percent. Total Voluntary segment sales were up 12 percent, driven by a 56 percent growth in brokerage integrated sales and three percent at Colonial. We do not expect the impact of the management changes and the sales organizational adjustments made at mid-year at Colonial to begin to emerge until 2003.

In the Individual segment, sales were up 10 percent, led by a 27 percent increase in individual long-term care, and 46 percent growth in the UK's individual disability business. In the U.S., our individual income protection sales declined four percent verses one year ago. However, multi-life sales represented 72 percent of these sales, a four percent increase compared to the third quarter of 2001.

The inventory of multi-life IDI cases, our future strategy of course, continues to build due to our substantial book of enforced LTD customers. As you may recall, a market share approaching 30 percent. Lastly, fee income in our managed disability segment, led by GENEX, continues to be strong, up 13 percent this quarter verses one year ago.

Two additional brief but important points. As most of you know, we filed a $1.5 billion shelf registration on November 1st, which we expect will be available for use around the first week of December. Our objective is to follow our traditional practice of maintaining maximum financial flexibility and always biasing ourselves toward balance sheet strength and long-term opportunities.

Secondly, we will remain conservative in our forecasting and guidance due to the less accommodating environmental indicators that we see. We are not economic taverns (ph). We simply accept the reality of the likelihood that following quarters will not bring any predictable relief relative to interest rates, incidents and trends, and the reality of elevated pension, insurance, and other similar costs. Of course, we will work diligently to appropriately offset these expected increases. Tom Watjen will provide further comment on both of these two final points later.

Now I'd like Tom White to review more specifically our third quarter results, followed then by Tom Watjen who will highlight the key operational trends. After that, as is customary, we will take your questions. Tom?

Thank you, Harold, and good morning, everyone. Yesterday afternoon, UNUMProvident reported third quarter 2002 after tax operating income, this was before net realized investment losses, of 64 cents per diluted common share, up 4.9 percent from the 61 cents reported in the third quarter 2001.

Including the $15.6 million special item, which was six cents per share related to the September 11th attacks, last year results were 55 cents per share. Consensus estimates, as Harold said, was 64 cents, within a range of 63 to 65 cents.

Total revenue grew 5.3 percent in the third quarter to $2.51 billion and 7.1 percent for our ongoing business segments. Earned premium in the third quarter grew five percent to $1.88 billion. Again for our ongoing business segment, earned premium grew by 6.4 percent over the year ago levels.

Third quarter net investment income of $532.7 million represents a 3.3 percent increase from last year. Excluding the run offs and discontinued lines of business, the ongoing business segments produced net investment income growth of 6.5 percent compared to last year's third quarter. Net realized after tax investment losses in the quarter were $45.8 million, compared to 77.3 million in the first quarter, and 55.9 million in the second quarter. Again, Tom Watjen will cover this in more detail in his comments.

I'd like to turn now to a review of our operating segments beginning with the Employee Benefits segment. This segment reported income before net realized investment losses and federal income taxes of $149.1 million in the third quarter, up 18 percent from the 126.4 million reported in the year ago quarter. Excluding the special item related to the segment, which was $14 million, income grew by 6.2 percent.

Within the Employee Benefits segment, the group disability line reported income of 85.4 million in the third quarter, compared to 86.4 million a year ago, or 79.1 million with the special item. These results were driven by an improvement in our LTD line of business, but offset by lower earnings in our STD operations. The benefit ratio in this line was 83.9 percent in the third quarter of 2002 and 84.6 percent in the third quarter of 2001. Premium income in this line grew by 7.1 percent year over year, reflecting the recent successes in sales growth, renewal activity, and persistency stabilization.

In the Group life, AD&D, and Group long-term care lines, we reported income of $59.2 million in the third quarter, compared to 50.8 million reported a year ago or 44.1 million, including the impact of the special item. The improvement is attributable to better Group life results as well as higher Group long-term care profitability. These improvements, however, were offset somewhat by lower AD&D results. And finally, the managed disability continued it's strong performance with income of $4.5 million compared to $3.2 million one year ago.

Moving to the Individual segment, income totaled $70.7 million in the third quarter, compared to 71.3 million in a year ago quarter, or 61.3 million reflecting the $10 million special item allocated to the IDI (ph) line of business. Within the individual disability line of business, income increased to 68.8 million in the third quarter, from 66.7 million a year ago or 56.7 million with the special item.

The benefit ratio in the third quarter of 2002 was 115.5 percent compared to 109 percent last year. And the interest adjusted loss ratio was 69.4 percent in the third quarter compared to 65.4 percent a year ago.

In Individual long-term care, income declined to 1.9 million in the third quarter from 4.6 million in the year ago quarter. This decline reflects higher benefits and expense ratios. In the Voluntary benefits segments income was $41.7 million in the third quarter, compared to 37.4 million a year ago, which is an increase of 11.5 percent. Premium income gross was 7.9 percent.

The Other segment reported income of 12.2 million in the third quarter, this compares to 13.6 million a year ago, and reflects the wind down of these discontinued lines of business. Finally, the Corporate segment had a loss of 34.6 million in the third quarter, compared to a loss of 36.4 million a year ago.

A few additional items to note, statutory net gains from operations, this is on an after tax basis, improved in the third quarter to $80.3 million, compared to 44.2 million in the second quarter and a loss of 8.1 million in the first quarter. Our statutory net income, including the after tax net realized investment losses, was 41.4 million, following net losses in the first two quarters of the year.

Our book value was $27.62 at September 30th, compared to $24.90 a year ago. And when you exclude the net unrealized gains and losses, the book value was $24.69, compared to $23.71 a year ago.

Debt to total capital declined again to 29.3 percent at quarter end, and allotting 50 percent equity credit for our trust preferred issue, the debt to total capital ratio was 27.5 percent. Return on equity was 10-and-a-half percent in the third quarter and 10.4 percent for the first nine months of the year. And finally, the tax rate in the third quarter was 35.2 percent, which was slightly higher than 34.3 percent rate of the second quarter as well as the third quarter of last year. And this is driven by a reduction in the tax benefits realized as part of the Group tax relief in the United Kingdom. And with that, I'll turn it over to Tom Watjen who will cover some key operational trends (ph).

Thank you, Tom, and good morning.

As Harold and Tom noted, the present business and financial environment has continued to place pressure on our ability to achieve our long-term financial targets. We are pleased, however, that we were able to report results in line of the consensus estimates and generally in line with our internal plans for the quarter.

The actions we have taken over the past several years have certainly positioned us to respond more effectively to the challenges we face today and we're continuing to face it. We maintain a cautious outlook until we see signs of a business and financial recovery.

I'd like to cover a few key business and financial trends in more detail, including claim and incidence (ph) trends, persistency and renewal results, investment results, some of the expense trends, and our capital position. Then I'll wrap up with some thoughts on the fourth quarter and next year before we go to your questions.

With respect to claims trends, we continue to see generally stable incidence trends and recovery rates in the quarter. We still remain cautious about the future will bring, however, particularly in an economic environment characterized by low consumer confidence and slow growth. So and the price increases we instituted and the renewal actions we have taken have offset these pressures somewhat, but it still remains a challenge for us to fully offset these environmental factors to pricing and renewal actions.

In LTD, while submit (ph) and unpaid incidents were both up this quarter compared to last, our actual to expected experience (ph) was essentially unchanged. Our premium charge for Life increased about six percent over the year ago level, which reflects the impact of the renewal and pricing actions I mentioned earlier.

Recovery rates were consistent with previous quarters this year. Now while recoveries did decline slightly this year from 2001 levels, they continue to remain above historic levels. Risk results in our LTD line were mix compared to last year and the second quarter results. Paid incidents was basically flat with the year ago results, and improved over the second quarter results. Our weekly indemnity was below our year ago results, but up over second quarter results.

Premium for life is up six percent over last year and flat with the second quarter. I will say we remain cautiously optimistic that the actions we have taken in this line, including price increases and moving some of this business of fee based products and away from insured products will have a favorable impact on this line of business going forward.

Now turning to our Group life and AD&D lines of business, our results improved compared to one year ago, but are down slightly with the second. This quarter favorable results in our Group life operations were offset by seasonal volatility in our AD&D related businesses. We're certainly not yet - not yet satisfied with our Group life results but we are pleased with the actions we took to strengthen this line of business are beginning to have favorable impact. We are disappointed in the results o four AD&D line and we believe that there are actions we can take to improve the level and consistency in the results of this line of business.

Now, in our Individual arm (INAUDIBLE) and disability line, both submitted and paid incident levels were down this quarter and recoveries improved as well. Last quarter, we referenced a disruption, which occurred, as we migrated the management of a block of individual disability claims between two locations.

In the third quarter, we saw indications that this situation has stabilized and our results have begun to improve, although recoveries are still below 2001 levels. We continue to see a similar trend to what we have discussed with you in the past regarding our various blocks of business. That is our newer business continues to perform well with loss ratios at or below our pricing assumptions. While the loss ratio in our older business continues to be almost twice that of the newer business.

In a related matter, we continue to make progress in our review of potential strategies for our older block of business. We are having discussions with several reinsurers, but at this point, we have not determined whether any of the alternatives we have under review will meet our business and financial objectives.

If any transaction or transactions emerge, it would most likely involve a more traditional earnings or stock loss (ph) protection, and not a full block transfer as some have speculated in the past.

And also, we have discussed in the past our desire to begin to provide more detail reporting of our individual disability results between the older and newer business, to provide more clarity around the trends in these lines. We have elected to wait until we complete the reinsurance project I noted earlier before rolling this expanded disclosure. This will ensure that our disclosure would accurately reflect any reinsurance transactions we would like to pursue. And we are still very confident that we will have something to make a decision in that event within the next couple of quarters.

And finally, in Individual long-term care, paid incidence is down compared to the second quarter, but up over a year ago. And I think as we all know, this is a relatively small line of business and could be followed from quarter to quarter.

Now turning to our persistency for the quarter, in general we continue to experience improving results in our Group Benefit line. In our LTD line, persistency was 85.5 percent compared to 84.8 percent last quarter. While persistency in our STD line, after adjusting for those cases that moved from a fully insured product to a self-insured alternative, was 83.2 percent, basically flat compared to one year ago. Group life persistency was 83.7 percent, down somewhat from the third quarter of last year.

The pressure on our life results is indicative of a market that remains highly competitive. We continue to (INAUDIBLE) to remain disciplined in this market, which is reflected in our lower persistency and very modest sales growth.

As I noted earlier, our renewal program is critically important to the success of our business. Since 1999, we have placed over $400 million in renewals into the marketplace. Over this period of time, we have also learned a great deal about how to deliver rate changes into the marketplace with the least disruption possible on our customers and producers. Although there are always ways to improve, we believe we have developed a strong competency in this area. At this point, we have completed almost all of our 2002 renewals, and we're pleased to say that this program continues to exceed our expectations.

In the third quarter, we continue to see terminations generally coming from our more poorly performing sectors. For the year, we expect our overall Group persistency to run ahead of 2001 levels, with only our life line expected to run below last year's levels.

Looking to next year, our 2003 renewal programs will be of a similar size and scope as to those we've put in place in 2001 and 2002, with continued focus on our poorly performing segments and cases (ph).

And finally, let me review the implications of our renewal and persistency actions (INAUDIBLE) for the quarter. Our third quarter results included a total of $8.7 million of additional back amortization, 7.7 million in our Group disability segment, and one million in our Group life line of business. This compares to $8.5 million in the third quarter of 2001.

I know Jack's (ph) Policy continues to be a topic of much discussion in the industry, but we continue to remain confident in our Jack (ph) policy and assumptions, and our approach to lining our amortization exactly to business changes.

Next, I'd like to provide an update on our investment results. Obviously, the financial market conditions remain challenging. And generally, a lower level of interest rates and a limited supply of attractive of long duration assets are putting pressure on our investment operation. Despite this environment, as Tom said, we're very pleased that investment income grew 3.3 percent - and actually investment income from continuing operations actually grew 6.5 percent. I'm also very pleased that we experienced lower gross and net realized investment losses this quarter than the prior two quarters.

As we've discussed in the past, interest rate management is critically important in our business. In the third quarter, we maintained a portfolio yield of 7.86 percent, only two basis points lower than the prior quarter. As most - as most of you know, we closely manage the relationship between our portfolio yield and the discount rate assumptions we use in setting reserves. The difference between these two for our margins is very closely managed by all of us. Each product and block is managed in this manner.

In our LTD business, to use one example, our margin actually widened by five basis points in the third quarter. This widening was accomplished through reductions we have made to our reserve discount rate assumptions over the past several quarters. All of our core products continue to have healthy interest margins, and we remain confident that we can maintain adequate margins regardless of the direction of interest rates.

Moving onto our net realized investment losses, our net losses declined from $45.8 million after taxes in the third quarter from $55.9 million from the second quarter and $77.3 million in the first quarter. Our gross losses, which are those losses net of any - before any realized gains, also improved to $83.9 million in the third quarter, from $149.1 million in the second quarter, and $225.8 million in the first quarter.

While we have net unrealized gains of $1.4 billion, in the third quarter, we took fewer capital gains to offset losses, choosing instead to retain these higher yield and securities to maintain the portfolio yield, which are critical to our business.

Importantly, too, our statutory after tax realized losses declined to $38.9 million in the third quarter, from $168.7 million in the second quarter, and $169.5 million in the first quarter. This improvement was an important driver of the improved statutory net income that Tom referenced earlier.

Finally, our total non-current investments declined by $27.8 million during the quarter to $217.1 million. We are expecting the present challenging credit environment to continue into next year, which will result in continued higher than average credit losses and slower investment income growth.

We remain very confident, however, that the investment and the portfolio management strategies that we have followed in the past, will continue to serve us well in this difficult environment.

Let me now make a few comments on our expense trends. Our total operating expense ratio is down slightly compared to last year, and down one percent compared to the first half of 2002. As I noted last quarter, we have invested in a number of areas of our company over the last year, most notably in customer service and return to work services on our claims operation. And we are quite pleased with the results.

Our service and return to work capabilities are having a positive impact on our persistency and sales results. I would add that we are funding much of this investment through process improvements and productivity enhancements in other parts of our company.

For 2003, our attention continues to be to grow expenses less than our projected premium and revenue growth. The investments we've made today has served us well in building a sustainable and competitive edge.

The last general areas I would like to comment on is our capital position. As Harold said, maintaining a strong balance sheet remains an important priority of our company. The first half of the year was particularly challenging for us as it was for the industry. As Tom noted, we have shown steady improvement in our statutory results over the last two quarters, and we expect this trend to continue into the fourth quarter.

We're also exploring in several reinsurance transactions as we did in 2000 to further strengthen our capital position. We would expect our risk base capital ratio, which is, as you know, is our regulatory capital level, to close the year below our 2001 level, but probably very consistent to where we stood at the end of 2000, which is certainly very adequate.

Our holding company leverage continues to improve as well, standing at 29.3 percent at the end of the third quarter, or 27-and-a-half percent when allowing for partial equity credit for the capital securities, which again, is a slight (INAUDIBLE) to the prior quarter.

We remain very comfortable with our capital positions, but I this environment we want to continue to seek opportunities to de-leverage our balance sheet. It's with that in mind that we recently filed a new shelf registration that Harold referenced in his comments. Our previous shelf has been fully utilized with our debt refinancing in June.

At this point, we've made no final decisions on whether we will use any portion of our shelf this year, although, as you know, many insurance companies in the U.S. and Europe have been very actively recently in the capital market. We do intend to continue to help de-leveraging our balance sheet as a priority, but only to the extent it's viewed favorably by our key constituents such as rating agencies and shareholders.

Now I'd like to close with some updated guidance on our outlook to the fourth quarter and into 2003, as well as a few other summary comments. As both Harold and Tom referenced, the economic and financial markets remains extremely challenging, impacting our investment results as well as incidence trends and economic - sectors of the economy. This environment has persisted longer than any of us expected, and frankly, we see little evidence of improvement in the areas, which are important to our business.

In addition, as we look into 2003, like most companies, we expect the impact of low interest rates and a weak stock market, to increase the cost of our pension plan. It's still too early to have a firm estimate of the impact, but our current estimate is for a 45 to $62 million increase in benefit cost in 2003, which translates into roughly 12 to 17 cents per share. We're working on refining the estimate as we move to the balance of the year.

In light of these environmental factors, we would feel more comfortable guiding earnings to a flatter pattern rather than our previous guidance of growing from one to three cents per share. And obviously, this implies that we'll continue to look for offsets to those increased costs of doing business next year.

We believe that we are well position to grow earnings and improve returns if the economy recovers, particularly as we see improving consumer confidence and higher long-term interest rates. Until that time, we will continue to focus on the things we can control, such as operating our business more efficiently, implementing the pricing and renewal actions required into today's environment, extending our leadership position in our businesses.

In closing, we continue to be pleased that we have extended our leadership position in our market during these challenging times. The feedback we are receiving from our producers, consultants, and customers tell us that we are serving well the needs in the marketplace.

The breadth of our product offerings, and the return to work solutions, and customer service, has positively impacted our sales, persistency, and pricing power. More and more people are looking to work with a leader in this kind of environment that's (INAUDIBLE) benefiting our company. And we are confident that the long-term targets that we've talked to you about in the past are still appropriate, but we do need to have some help from the economy for us to achieve those.

Thank you for your attention this morning, and that concludes my prepared comments. Now, operator, we'd like to move to the question and answer session.

Thank you, sir.

If you would like to pose a question on today's call, you may do so by pressing star, one on your touch-tone telephone. Again, that is star, one to pose your question. If you're on a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star, one to pose your question.

We'll take our first question from David Lewis (ph) with SunTrust Robinson.

Good morning.

Good morning, David.

A couple of questions. First, a couple of years ago, Bob Greving talked at the analyst meeting about the Benefit ratio spiking up probably somewhere in the 250, 300 basis point range during kind of the peak weak economic period, 1995. Where do you think you are on that level now and do you think it'll deteriorate further in 2003?

David, this is Bob. Yes, the Benefit ratio does speak up where it did peak up normally as a result of the incidence pattern. We see relatively a stable pattern where we're at right now. We are - we are still getting higher than normal, what we consider historically normal levels of incidence in our LTD and in our ID line of business. But it has - as it seems to have plateau in those lines of business.

So we're hoping - and are cautiously optimistic that, you know, that the economic environment if it doesn't deteriorate further, will either remain stable or start coming down next year. But, as you recall, this time last year we were looking for a stronger economic environment going into 2002.

So, you know, there's an element of caution in that - in that projection.

Just to touch on that, you're assuming probably lower rate increases on the Group LTD's than what you took in 2002, and then if incidence kind of continue to rise at the same level, wouldn't you actually see some deterioration?

Well, that's under the assumption that - about the renewal plan - and Kevin, you might want to comment. Kevin is our Senior Underwriter.

Thank you, Harold. Good morning, David.

Actually, our 2002 and 2003 renewal plans contemplates a continued relatively aggressive and focused LTD and STD life renewal plan, and the rate increases in 2003 would be anticipated to be on the (INAUDIBLE) and certainly higher than in 2002.

And with that comment, Bob Greving, you might want to...

And, you know, obviously, David, there's a certain lag between the actual experience and where we can get these rate increases through our entire portfolio of business. And so, you know, we do continue to experience that pressure that occurs as a result of the incidence as it's occurring and the lag of trying to get these price increases, you know, through our - through our book (ph) of business.

Great. Just a final question, do you have a statutory earnings for the nine months verses the year ago period?

Hold on a just second, David. We should have that - yes, absolutely. Just one moment.

David, on a...

Yes, your net - your net gains from operations, David, year to date through September 30th, is 117.4.

Verses last year.

Last year's number was 217.6 million.

Thank you.

We'll take our next question from Nigel Dherling (ph) with Morgan Stanley.

Great, thank you, and good morning.

Good morning, Nigel.

Good morning.

First question on the pension expenses, the estimate that you provided us, does that involve changing your pension assumptions or is that purely just the impact of the (INAUDIBLE) equity markets? And then I have a follow up as well.

The underlying assumptions of the - of the plan, you know, as far as retirement and then employment assumptions are unchanged. The one assumption that does change is the discount rate. Obviously the current environment for investments is much lower than it was a year ago, and so we will be seeing a decrease in the - in the assumed discount rate.

Bob, you may want to comment also about the annuity purchase and how that's tinted (ph) to some of the impact.

Right, as you recall, we actually purchased an annuity a couple of years ago for our retired lines at that point in time. Essentially low (ph) gains (ph) that we had built into the portfolio at that point. Had we not done that, our change in cost would be substantially higher, you know, going into 2003.

Great. And just one follow up, with regards to where you stand with rating agencies, can you just discuss what the latest discussions have been? It seems like rating agencies are generally taking a very negative view on the industry. Does that mean that any capital raising you do may actually involve some equity in today's environment?

Nigel, this is Tom White. I guess the best way to answer that, yes, I prefer the rating agencies speak for themselves on some of those issues. But, yes, well, obviously, we have had some discussions around quarter end results as (INAUDIBLE) of the shelf. Two of the rating agencies have already gave - given indicative ratings that are line with the current ratings, and we would expect a third rating agency to do essentially the same.

As you know, we are under review with Moody's and we will continue to have discussions with them around their issues. I would expect that those discussions would conclude over the next couple of weeks.

I guess my question is, how important is it for you to maintain your ratings? If you do so, your ratings coming onto further pressure. Does that force you to have to raise equity in order to take your ratings or could you withstand a couple of downgrades from some of the rating agencies?

Maybe - Nigel, this is Tom. Maybe I'll start the piece - maybe Tom, you can stop on that.

I think first off, in terms of importance of ratings, I think in our business, Nigel, having a very strong financial position is important, but perhaps not as important as it is in - from a ratings point of view as from other - from perhaps (ph) the investment product kinds of businesses. And so our current ratings are very adequate for us to do the kind of business that we want to do. You raised a good question which is how far we're prepared to let them go before you do some things like raise capital and raise equity. And (INAUDIBLE) again, we feel pretty good about where things stand.

On the other hand, we also know this is an environment where we also don't want to give people any reason not to because then they feel confident in the direction of our company. So, if that means that we need to look at equity options down the road, I think we're propose to do so. But I think it goes back to our pattern in the past. We've been very hesitant to issue anything equity related.

And if you think back to the early part of 2000, for example, following the merger of Provident and UNUM, where we had to go through some very dramatic restructuring. As you know, we were very stingy about going out and raising excess - outside capital.

You said it well, Tom. Tom White, would you like to add anything?

Nigel, this is an abundance of caution (INAUDIBLE) this is very traditional for us and for reasons we've stated in other press releases.

Nigel, the only thing I'd add is if you look at our lines of business, pretty much the only one that we get a lot of questions around ratings is with the individual long-term care, which represents, you know, maybe two percent of our - of our premiums. But as Tom Watjen said, in our employee benefits lines, you know, the ratings that we have, you know, particularly the A ratings, stable outlook with (INAUDIBLE) is - it is very, very adequate. And, you know, given what some of our competitors are going through with ratings adjustments, probably related to annuity lines and life lines, you know, ratings in the Employee Benefit market just have not been an issue for us.

That's great. Thanks.

We'll take our next question from Angela Grassey (ph) - Angelo Grassey (ph) with Merrill Lynch.

Hi, I have a quick question regarding the investment portfolio. In particular, can you provide some details on potential - not, potential, on CDO positions? How large they are, if you had any impairments done in the quarter?

Yes, coming into the quarter, the exposure was $142 million. We did have some continued write-downs, and in fact, for the last three quarters, we've had write-downs. I don't have the total. It looks like, you know, just looking at my list of write-downs, probably in the eight to $10 million range. So, you know, again, about $140 million of exposure. This again, is on a $25 billion portfolio. And it looks like it's somewhere between eight and $10 million of write-downs this quarter.

This quarter, OK. And, just to give us kind of an idea how much has this portfolio shrunk over the past year or so?

It's peak was probably in the 180 to $190 million range. So, we've had, you know, (INAUDIBLE) taken (ph) in the first quarter kind of in the 15 to $20 million range, a little bit less than that in the second quarter. And again, this quarter, it looks like we were kind of in the eight to $10 million range.

So, you know, it was never a big investment category for us. Obviously, we've had some write-downs, you know, on that. But again, you know, on the, you know, the overall 25, $26 billion portfolio, it's in a very manageable asset climb (ph).

I saw during the quarter that the concentration in high yield securities fell slightly. Is there a - is there more of a trend there? Do you have a target concentration that you would like to have and below investment grade securities?

Yes, Angelo - again, this is Tom White, the - you know, the target is to keep the high yield exposure to somewhere less than, you know, 10 or 11 percent of the - of the total invested assets. We have done very little new purchases of high yield actually for probably three or four years at this point. I think, you know, most companies that you follow are experiencing, you know, we have obviously downgrades from investment securities. So the increase that we have seen over the last couple of years, has really come from those kinds of fallen angels.

So, again, there's really no intentional purchases of high yield. When we do, it's more of a, you know, kind of a trading situation. But it's, you know, dealing with the fallen angels out of the investment grade category.

Great. Thank you.

Thank you, Angelo.

We'll take our next question from Jason Walker (ph) with Bank of America Securities.

Good morning, thanks.

Good morning.

Good morning, Jason.

A couple of questions. One, could you go through your target debt to capital ratio? And then maybe a follow up from there. I'm wondering whether or not it's changed or perhaps it needs to change in the future? And then the second question is, do you have enough capital to grow eight to 10 percent sales if you wanted to? And also in the same vein, in the low interest rate environment we're thinking about LTD, could you pass on all the higher costs to your customers?

Jason, this is Tom. Let me start with the leverage one and work my way through. And I think when we get to the interest rate and the market, maybe Harold can pick up a little bit on that trip to the market sort of data (ph) point.

But, I think, Jason, as you know just watching us historically, we probably peaked out at the debt to total capitalization ratio probably two-and-a-half, three years ago, at 33 percent. I think at the time that happened, we certainly mentioned to all of our audiences that we were not uncomfortable at that level, but our goal was to bring it down. And as you know, we brought that down to the mid-29ish (ph) percent range right now.

As you can sense from my comments regarding de-leveraging, we want to continue to bring that down because frankly, we do think the environment is one where all the constituents are looking for people to, I think, lower some of their leverage. And I think certainly we want to be an active participant in that.

I think we've always targeted somewhere in the 25 to 26 percent level for total debt to capital. And frankly, I think we're pretty comfortable still keeping that as a target. I think, though, in this environment again, it's just a matter of how, you know, our people looking for a little accelerated effort to get to that level.

The second point had to deal with the, I guess, the statutory capital availability to support an eight to 10 percent growth scenario. And I think, you know, Bob, if we have a good financial environment, you know, we probably have the capital very much to support that.

I think, as I mentioned in my comments, the first half of the year, we did see an erosion of statutory surplus, just as everybody else in the industry did. We're building that back up through both - through the earnings growth that we've seen in the last couple of quarters, as well as I said earlier, some re-insurance transactions to bring those levels up closer to where they were at the end of - end of 2000, which is quite adequate. So I guess at this point, I guess we don't see a need that's going to be created at that level that would require us to find additional capital to support the growth aspect of the story.

Clearly with interest rates, you're right - interest rates are an important part of the pricing dynamic. They certainly, as I mentioned again in my comments and Kevin support (ph) of some of the things he talked about earlier, we have been putting price increases into the market. Certainly, a part of that price increase can be directly attributable to lower level of interest rates. And there are --there were some resistance from time to time.

And maybe with that, though, maybe we can stop and just give a brief update in terms of the status of the market, and, you know, where we are seeing, you know, challenges from a competitive point of view, pricing wise. And (INAUDIBLE) segments that we don't see, you know, quite those issues.

What you're suggesting, Tom, is of course, in a conference call or even in press releases, we don't - we don't drill down into segments of sales that we actively manage within the company. But let me re-emphasize Jason, what Tom just said, that the capital had certainly at the (INAUDIBLE) top line sales growth.

As you've even recognized in some of your research (ph) notes, we're moving more toward block growth or premium growth, not just top line sales. That is, continuing to sell more to existing customers. Those are customers who we knew - we know well, have a better feel for their risk profile, and we're serving them better when we do this through our integrated sales.

So at this point, we've not used capital in any form of top line governor (ph). I'd say in terms of the market, what we try to do is be very selective in key categories. For example, large case sales whether it be life insurance or disability risk products, we're just simply being very selective. On the other hand, we're getting that 56 percent growth in voluntary supplemental products as a result of having that very robust large - environment to sell into together with our individual products, for which, I think, Tom, you covered well what our loss ratios are.

So there's a very important strategy embedded in the numbers we give you for top line growth. And I'd say going forward, we would have to signal to you that although we see some firming in certain areas, we still see the Group life to be the most competitive commodity type product. And therefore, you'll see us continuing to manage top line growth there. And it will therefore, impact our overall reported top line numbers. We do have a big Group life portfolio. We're around third or fourth in the country in that category.

But I say there and in the way we do the mixture of STD sales around fully insured ASOs is going to have the bigger impact on what we're signaling with top line, Jason. So it's much more strategy implementation.

I would say in the marketplace, Tom, you made reference to this, is that our offering is becoming even more unique. We are positioning ourselves and have been for the last probably year-and-a-half as an absence (ph) management company. And therefore, claims management is a very important part of that because there's only one component, in getting people back to work. We're emphasizing in getting substantial growth by a more sophisticated buyer who's looking for productivity in absence management programs. And that's an area that we're making substantial investments and will continue to in the days ahead.

So our product is not as - to competitive pressures in the LTD area quite frankly, as it was even a year-and-a-half ago. Group life will continue to be competitive because we do not differentiate (INAUDIBLE) there.

So Harold, on the bottom line then, in a sense, can I think of all the higher prices passing through - higher prices are going to mean that ROEs on new business in this type of environment, can remain stable or do they go down because you can't get as higher prices in the market? And really just LTD's is, I think, where I was interested.

You know, that's true, because that's our key engine. And I think what we're trying to say, Jason, is we are - we are actually ahead of plan in placing price increases into the market. Tom made comments around that. And we're gaining not only confidence with experience around how to do that without being disrupted.

But what we're also trying to say is even though we continue to make gains in those areas, in many respects, it is being offset by what we consider to be cost which are more environmentally driven. So we would - we would caution about showing, even in our leads (ph) line, our LTD line, expansion in the margins there at least in the - in the close following quarters. Because we want to make sure that we are managing that total portfolio - and also expense ratios in a way that it is appropriate in our guidance to you.

So, at this point, we would not want to suggest to you that you show any kind of exaggerated expansion even though we're placing good increases into the market.

Great, thank you.

We'll take our next question from Ed Spar (ph) with Merrill Lynch.

Good morning, everyone.

Hi, Ed.

I guess I want to talk a little bit about the individual disability line. I thought last quarter the increase and the loss ratio, you talked about the disruption from the claims management reorganization. But I think that the expectation at the time was that, that was - that was going away. And I'm curious to know sort of what really is going on in terms of that impact this quarter verses just some other underlying issues that you're going to need to address on the loss ratio. Thanks.

Yes, this is - this is Bob Greving. If you look at that very closely and you look at the numbers that make that up, you'll see that the benefit line, the actual benefits only went up about $1.3 million or about two-tenths of a percent. What's really happening in that formula for the - for the interest adjusted loss ratio is that our net investment income in that line of business actually grew substantially by about 5.3 percent from quarter to quarter.

So when you go through that calculation, what that results in is you get more of an offset from your net investment income than your benefit change (ph). So it's not being driven by a benefit change in this particular quarter. The primary reason for that is a FASB91 adjustment that actually helped out the net investment income in the individual disability line of business in this particular quarter.

If you look at the gross loss ratio however, it actually went down from about 116.7 to 115.5. So it actually dropped a little bit.

And Ed, this is Tom, if I could add just a small piece to Bob's comment, I think if you just step back and look at the fundamentals, I think as I've said in my comments, actually, the incidence trends while submitted and paid are actually, you know, flat to slightly improving. I also mentioned, though, that our recovery has certainly been consistent throughout this year and really not at the level that we saw it last year. So I think those are the couple of other dimensions when you look operationally at the business. I think we feel that the business is being managed as well as it can be in this environment.

If I could just follow up, I guess I'm still a little confused, because I thought the whole purpose of sort of drawing attention to an interest adjusted loss ratio was to get a better picture of the underlying loss performance of the book. And it would help adjust for, sort of age of the book, and (INAUDIBLE) income is, et cetera. But I guess it's still - it's still seems - it's a little - still a little confusing about sort of what's driving it, I guess.

And I know we've talked about the vergence (ph) between returns on new business and old business. But it seems like at this point, if the loss ratios are half of the old business on the new business, and this has been a story now for a number of years in terms of putting on higher margin business, why is that we haven't seen any impact from that to the bottom line?

I think what we're seeing to some extent in there, is that the economic environment over the last couple of years has basically pushed the overall loss ratio, particularly on that old business a bit higher than what it would've otherwise been. So what you're seeing in the deterioration, I think, are the change in the loss ratio from the - from the, you know, the lower 60's to the upper 60's is a result of the economic environment over the last couple of years effecting predominantly that over block of business.

And the overall mix, Bob, is still related heavily toward the old block.

It certainly is.

And that's why I think we've been so diligent or try to be so diligent in terms of trying to get out a more supplemental disclosures, so it's a little more obvious for you and others to see. And I think again, we still intend to do that, but we just wanted to be sure we work without any reinsurance potential transactions before we actually begin that supplemental disclosure. Because that could influence the supplemental disclosure.

I think when that information is available, I think it will help paint a picture, I think, along the lines as what Harold and Bob just described. Because we understand it's a little more difficult right now to see the results in aggregate.

We'll take our next question from Vanessa Wilson from Deutsche Bank.

Good morning. I guess where I'm stumbling here is I'm trying to really get my arms around your comments on issuing equity. You know, you've told us about issuing the shelf, and when that will be available to use. You've mentioned that your being still reviewed by one rating agency. You've mentioned your debt to capital is 29, and you'd like to get it down to 25 to 26 over time.

Maybe you could give us some more of the pieces, how quickly do you want to get it down? It seems to me that each point on the debt to capital is $250 million. You have the reinsurance opportunities close at hand. Your statutory earnings have turned positive. Are they going to stay positive? And how much of the statutory pressures from the realized losses verses the higher incidence? Could you just package this whole - all these issues that you're facing in terms of raising equity and help us get a better sense of how close that could be, how much pressure you're under, and the magnitude?

Let me start. I appreciate you raising the question and I can also appreciate the difficulty maybe sort of sizing (ph) up the things that we've said. Let me say this to maybe take a little different cut at it, maybe to put things - re-ask the question if we don't touch on it, but...

Thank you, Tom.

I don't believe that we would be raising equity if it were - or even considered raising equity if it was so innovative (ph) of our outlook for the operations. Again, I think we believe besides the operations issues (ph) pretty well going forward. Operations, by that, I mean the impact of the continued soft economy, the impact of lower interest rates, and the impact of what's likely to continue to unusually high level of credit losses in the industry.

So I think we feel very good as we put that piece out going forward, and feel good about the capital position and we have to support that. Again, my only comment around that would be that I think like every company, there's a little more pressure these days to de-leverage than there was in the past. But frankly, again, we think that's very manageable if you just look at the fundamentals of the operations of the business.

The second part you raise, though, is the other part, which is we have certain constituents and we need to continue to be sure that we are being sensitive to their needs. And obviously, the rating agencies is one constituent that we need to be very sensitive to their needs. And so that part of it would be one if we ever thought about raising any equity.

And we should use the word - let's face it, the perform of equity that's been raised by others in Europe and in the US is largely just some form of convertible. If we were to do anything, it would be largely in the back of some of some of the business decisions we've got to make around to make sure that that constituent, the rating agencies feel good about our business just as hopefully our shareholders and our customers do as well.

So, it's a business judgment call to be made. But again, I want to come back to say that I don't feel at this point that that business judgment call would be so much a basis of kind of - on the operations and the business side, I think, as it would be to be sure that we're sensitive to that very important constituent, the rating agency.

OK, so given everything you know about your business now, you have plenty of capital to fund the growth, you have plenty capital for your outlook on credit losses, and rising incidence, and low interest rates. So all the metric in the business that you're seeing, you're OK on your capital.

Very much so. Again, everybody would like to have a little more in this environment, but frankly, again, as we've said in our comments, the trends have been good. As we've gone through this year, our outlook for the fourth quarter is pretty positive.

OK. Just another forward look, you have had sort of a swirling negative public relations campaign recently. Has that had any effect on the numbers of claims that are in litigation or any effect on our sales pipeline?

Vanessa, let me ask that our General Counsel comment on that. I will come back in a moment because we've had - we've had the opportunity to be in front of our most significant producers since this episode unfolded. I'll give you some comments around what we're learning. We're not trying to just color code this, but at this point, we certainly wouldn't never welcome this, but it has not had any kind of negative impact on our intermediaries, quite frankly, or our - or our key customers.

But let me let Dean Copeland comment on some of the litigation trends.

Vanessa, you asked about increased in litigation, and I think the answer to that is no. In fact, with regards to LTD, we saw a fight decline in third quarter against second quarter. So we have not seen it add as a result of what we've seen in the media.

Vanessa, it would be wrong to conclude that this is not a well organized, well funded group of people. A very determined group of people. But we have not, at this point in time, had this to be a distraction to our fundamental thrust in achieving our business plan. Admittedly, I and others are spending more time with our key customers to make sure that they understand our position on these things. But we think that is (INAUDIBLE). Many of us have been out probably more actively involved in the marketplace in the last two months than might have been the case otherwise. And we have communicated in a more deliberate way with them.

I think we all know that they have good open communication. So, again, we would never have wished this on ourselves or our constituents. But if there's any way to make a positive out of this, our plan has that as part of this objective as well. People are listening more to our value proposition and our return to work programs, I can assure you of that.

Harold, I ask you, please don't give them any more funding, and can you address the sales pipeline?

Yes. The sales pipeline, we believe in the select areas that we want to grow is where we need for it to be. I have Rick Walt (ph) sitting with me. Rick, I think again, we have to be cautious when we try to give a (INAUDIBLE) number because this is a, you know, a very granular sales plan around our key engine being LTD. I'd like to only suggest that our investors judge us predominantly by that lead engine, because that's what pulls through the buy up customized individual product. We really don't sell the old individual disability products any longer. It's the customized group product that fills a certain sub-population of that plan that aren't well covered. And then we sell off of that - of that LTD portfolio, of course, supplemental, employee paid plans.

A very, very great company out there, AFLAC, has a great deal of success. But their strategy is different. They don't sell products predominantly that are attached to the employer paid product. Our strategy is to leverage the employer paid products without (ph) supplementing disability and life insurance increasingly long-term care. So again, Rick, you may just want to comment on the law (ph), but - is what we're after.

Harold, specifically, the question is, has the negative publicity weakened your sales pipeline?

It has not.

Thank you.

We'll take our next question from Colin DeVane (ph) with Salomon Smith Barney.

Good morning, gentlemen.

Good morning.

Good morning.

You know, as we go through call, after call, after call and you're talking about how the business is doing, and yet I step back and I look for the improvements in the bottom line. And if I go back to the third quarter of '99, after the merger, I think your pre-taxed earnings were 251 million. And we're only back to 239 today.

The guidance you gave this morning with the pension fund and, you know, this year's it's the pension plan, it seems to be something every year. We're into another year with no earnings growth. And for a company that, in theory, I guess, per your marketing literature, provide insurance on one in every four Americans, what is it about your business model that is not working and can't appear to generate much better than a 10 percent return? Because it certainly doesn't seem to the problem for companies such as Hartford Life, for MET or PRU.

Colin, let me see if I can answer that, because it's a fair question. I first would say that comparisons are very important, but let's make sure they're accurate comparisons.

Hartford, I would think our businesses - and their company and maybe - 10 percent of the Hartford business. And so if we're going to make comparisons, let's make sure we're making comparisons with the divisions that are in (INAUDIBLE) we're in.

Absolutely. We're just talking their disability business.

Right.

Secondly, and not to overstate this, but it would only be a point of reality for us to talk about ultimately the split between our business that would not involve some of the Legacy low priced, low return products that we have. If we're - if we're truly trying to look at whether we were making progress, we have to separate those things out and look at the business going forward since let's say, '96, since we merged the three companies. And although we're not providing that as yet to our disposers (ph), Tom, we do look forward to giving that kind of information so that you and others can truly see the results of the strategy. We know it's vague and more difficult to today.

And then thirdly, certainly all we're trying to say to those that wish to invest in a market leader like ours is that realities in the marketplace around interest rates, around the absences (ph) from work and so forth that lead to high interest rates, those things we don't totally control. And therefore, we would - we are an economically sensitive company and do think that has some impact on current results.

But it would be - it would be those three categories that I might just simply remind us of, realizing that management still has a target to get this company into a higher level return. We think that's very possible. We think it's being achieved today. It's not showing in the mix of the co-mingled ROE that deals with that old Legacy block of business.

Tom, you or the financial people might want to comment further if there's anything you think we need to remind our constituents of.

No, I guess all I would add, Harold, to your comments is that and if you just look at the, Colin, that the going forward business, it's worth noting that quite frankly, when you look at many of our products, we actually do have a premium price for our products. And frankly, we think we deserve a premium price for our products.

What other people do in terms of how they - with the assumptions they make about instance (ph) recoveries and so forth, you know, we can't speculate on that. As you know, all those are factors, which ultimately lead to people's loss (ph) ratios and to their reporting earnings. We think we're using a set of assumptions which are - which are accurate, appropriate in this kind of environment, and time will tell whether or not in fact others find it in fact perhaps some of those assumptions aren't exactly what they should've been.

Well, I got to tell you, Harold, it's still (INAUDIBLE) to sort of fully buy this argument, because you know, we can talk about the old IVI (ph) pieces of (INAUDIBLE) well, PRU's got one, Met's got one, Hancock's got one. You know, maybe Hancock's not in the DI business, but it's certainly hasn't slowed down, you know (INAUDIBLE) at MET, and taking his ROE up a couple of hundred basis points in the last few years.

And you keeping talking about the economics but at what point does it hit the bottom line? And, or are you saying you're in a - business, the trends are against you, earnings aren't really going anywhere, but there's no really no compelling reason to buy your stock today verses, you know, sitting on the sidelines for another 12 to 18 months, 24 months until the trends turn around. Is that really what you're getting at?

Colin, I will let people draw the conclusions that you just drew on their own. We're not here to do anything but report the recent results as best we can. We think the factors (ph) to look forward and that's essentially what we've done.

I don't' think all investors will conclude what you just did, but that's their independent choice. And, they vote that every day when the market opens. And our hope is that we're not trying to deliver a message of growing earnings, expanding market margins. We don't think that's believable in this kind of market. And therefore, you'll see us continue to try to make sure that we represent what we think is a sense of reality and believability. Beyond that it's up to the individual investors to make their decisions.

But until then, your best case today is we're looking at flat earnings from now through to at least early part of 2004? Is that correct? And perhaps a capital transaction that could be dilutive in there as well?

I don't know that we're trying to step out that far. You're suggesting into 2004. What we're saying is that it's both public and private predictors of economic trends are correct, then we will not be advising owners of our stock, for those that might be considering owning our stock, to buy it based on the fact that we'll have expansion of our economic - of our financial variables in that kind of marketplace. We just simply will not do that.

If it lasts until 2006, then maybe it goes to 2006. If it's something that starts to see recovery earlier in 2003, then we're suggesting that that will benefit this company. But we are not - we are not market timers when it comes to predicting whether this economy will become stronger. But that is a factor in anyone's ownership of our stock. They will be wrong not to include that.

OK.

I think what Harold is saying, though, that I think with the things we've talked about in this call and certainly released - with our release last night, we are working very diligently to improve our expense structure, to re-engineer our business (INAUDIBLE) market - renewals in the market. And I think if that happens, certainly we hope that we sort of find ways to counteract with (INAUDIBLE) increased cost of doing business as we move into 2003.

So I don't think we would want to suggest for a minute that we not - we're not taking and will continue to take fairly aggressive actions to offset where there's some increased cost of doing business.

OK. I guess I heard you saying that for the last three-and-a-half years, and I'm just not seeing it at the bottom line. But I do appreciate your candor.

Good. Thank you, Tom.

We'll take our next question from Eric Berch (ph) with Lehman Brothers.

Thanks very much and good morning - good morning. I actually have two questions. One relates to the question that Ed asked. I just want to clarify, putting aside the FASB91 (ph) adjustment which I'm going to presu7me relates to prepayment on CMO's, let me just ask Bob Greving the question directly.

If the old - while I realize that there are cross currents (ph) going on, you're adding new more profitable business to older underperforming business and that has been the case for some time, is the reason that the interest adjusted loss ratio continues to get worse is the reason that the old business is in fact deteriorating?

I mean, if we - if we look at this from a big picture point of view, what's happening to send that (INAUDIBLE) loss ratio higher?

... a couple of things going on, Eric. We are in - I wouldn't say that it's deteriorating any more than what you would anticipate in the environment that it's in. What we're seeing is an elevated - an incidence rate over the last couple of years, since the recession started in about the second quarter of 2000. Consumer confidence has been down, and so we have seen an increase in incidence.

It's also been more difficult to get people to go back to work and the works not there. And so, you know, we're seeing probably a little bit lower recoveries, you know, coming from - from our enforced book of business than what we were probably seeing in the same type of timeframe.

So we've really got a couple of things that are probably more economically driven with regard to, you know, the deterioration of that loss ratio than what I would say is inherently within the business.

We are not seeing any patterns in any specific sector of business, or whether it's geographic, or occupational, or any other sector that would indicate that we've got a sector or trend occurring within that business in any of it's particular sectors.

But I do think what we've seen over that same period of time is that we have seen some pressure, and I believe that that block of business is more conducive to someone utilizing the disability policy because o fit's policy features. You know, for a purpose of basically staying off of work due to minor disabilities where it would not necessarily be that way had we have had a more robust economy where people would either stay on the job even though their lower back might be bothering them, or they would go back to work if there was a more robust in the economy.

OK. My - here's my follow up question, and again, it goes to the sort of broader issue of the outlook for the earnings. I'm trying to put the pieces together that - and to reconcile those pieces to your earnings guidance in the following sense. You have a growing company. Your premiums are growing. You're adding customers. You're expecting to raise prices. You're becoming more efficient. You're projecting a stable benefit ratio in your flagship business, not deteriorating margins but stable margins. And yet there's not going to be earnings growth. Help me understand how you could have a growing company with stable margins and improving efficiency, but no earnings growth. What's the missing link? Thank you.

Certainly, Eric, this is Tom. One of the things, as you know we've talked about even on this call, was the pension cost. So again, what we're projecting forward some additional cost of doing business is frankly, even though we could claim they're environmental are ones that we have to find offsets for.

Right.

As I mentioned in my comments, that was a, you know, 12 to 17 cents per share kind of cost based on the range of estimates we have now. And again, our whole business, we get to the back end of the year, we refine those estimates, you know, our hope is that number is at the bottom end of that (INAUDIBLE). But frankly, all we are trying to do, I think, with this guidance was to acknowledge some things that were of a cost nature that impact our results next year, which we've got to certainly try to find some offsets for. And that's a pretty big one to offset.

I think you're just - the picture on the macro level is accurate. I mean, again, we're fighting an uphill battle in this economy, but frankly, we're basically offsetting much of that with our price actions and our renewal actions. I think what we are seeing, though, is that even though it's peddling very fast and there's some additional things that we see on the horizon.

And I think just in the - it's in the spirit of cautiousness, I think we're trying to give the group on this call, and in some of the discussions we've had outside this call, just some sense that those are some things pending out there that have some significant changes that could, you know, could put some pressure on our budget growth (ph) earnings next year.

Thank you.

We'll take our next question from Caitlin Lum (ph) with Credit Suisse First Boston.

Good morning. I'd just like to follow up on that capital question.

If I look over the last few years, you know, you sold your annuity block, you pulled excess funding out of your pension plan, which had tax consequences, you looked at some strategic options with respect to Colonial, and looked to a big reinsurance transaction. And now we're openly discussing the possibility of raising equity, which I know is not a certainty. But I'm just wondering when we're going to be able to put the whole capital question behind the company and what we should be looking for in terms of your ability to do that?

OK, Caitlin, this is Tom. I think the capital issue, again, as I tried to say earlier. If we just looked at the fundamentals of the business, and the operations, and the outlook, frankly, we wouldn't even be talking about a capital issue, because I think we believe that the source of --some internal funds, we've got the ability to support the growth on the business going forward.

I think Dean and everybody else, I think, are actually looking at the environment, however, where we have multiple, you know, constituents (ph) to manage towards. And probably this environment does constituent many looking for a little more de-leveraged balance sheet these days than they were six months or a year ago.

So, again, that's the only reason we raised even the issue of - equity (INAUDIBLE) held more of an environmental point around those issues. Again, if it was a pure operational matter, we feel very strongly that we wouldn't have a capital issue behind us. Because even though we all faced a very difficult first half of the year, we've weathered that well and we're seeing good progression at the back of this year in terms of the statutory results and the improvement in risk-based capital.

So the emergence of this issue, if you want to call it that, really is more, I would say of an environmental issue. And again, we understand why it exists. This is a day and age where I think people are looking for, all things being equal, probably more capitalized rather than less. And I guess that's the only context, I think, we've been raising on this call.

Sure.

Is there - what kind of capital release might you be able to get from the reinsurance transactions that you're looking at right now?

Bob?

Caitlin, we've got - we've got several different reinsurance transactions that we're working on now to either generate capital or reduce the risk base capital requirement that, you know, the companies withhold. We would anticipate that those would generate a couple of hundred million dollars to $250 million worth of either reduce required capital or increased new capital within the insurance companies.

And do you think that that might be enough - I realize I'm asking you to speculate on something that's impossible to answer, but, is that possibly enough to keep the rating agencies at bay?

... by itself it's hard to tell. I think from the general rating agencies, yes. I think there's some that are probably a bit more conservative in this current environment than others are that are maybe asking for a bit more on the corporate balance sheet, not so much on the insurance companies balance sheet.

The insurance companies balance sheets, as you are aware, the, you know, the statutory capital losses are the predominant factor there, you know, in the reduction of statutory capital at those - at those entities. Statutory accounting is also the most imputive (ph) for write-downs for investment losses as well.

So we are seeing probably more of an effect on our statutory balance sheet, which gets to the claim paying ratings of the companies. And the rating agencies are obviously sensitive to it. I will point out that we're not, you know, we're not going any further backwards - and I'll call it backwards - backwards this year in 2002 than where we were at year-end 2000.

And so, you know, while we've lost maybe a year on our - on our growth in capital in our insurance companies, we're looking forward to 2003. And with our current projections of 2003, we basically recover back to where we were at the beginning of this year, which was, you know, fairly substantial and strong position with regard to the capital in those companies.

So we're, you know, optimistic that through the operations and with a little bit of benefit from the credit markets, you know, without any, you know, significant additional write-downs, we can get back to where we need to be by year end 2003, without any additional effort on our part of - from capital raising, you know, in the insurance companies.

OK, thank you.

Thank you, Caitlin .

We'll take our next question from Ron Kumar (ph) with JPMorgan.

Good morning. Just to continue on the - on the same vein on the capital issue, earlier in the call, you mentioned some of your goals and expectations towards ratings. I just wanted to specifically hone on, on the fact that Moody's have you on BW2 (ph) negative (ph), I mean, first watch negative on your senior debt rating, and BW3 (ph) on your preferred - trust preferred ratings. And they mentioned on several of their reports that capital is an issue and they're looking at that.

Now I just wanted to be clear that you're not going to be issuing any debt part of the shelf, because I would expect that would be detrimental to your current rating. And the second is, could you let us know what your statutory risk-based capital is as of September 30th, if you have that number?

We don't calculate that on a quarterly basis. That's generally only calculated on an annual basis. We are projecting that our - and we've done some projections to year end, Ron, and we're projecting that it looks like we'll be at about 210 percent overall RBC at year end.

And again, Ron, on the holding company leverage, again, our - we've been bringing the holding company leverage down. I think, as Bob said, we don't need any capital - insurance subsidiary companies. So again, there would really be no reason to issue debt at the holding company in order to - it wouldn't actually achieve anything. It would just increase leverage, obviously. So that's not something we're looking to do.

OK.

The other question I had relates to the potential reinsurance transaction. Could you comment on what the delay is on getting such a transaction executed or what are the issues that they're facing in that whole strategic move that you may be considering?

Let me start and pass the ball, if I could please. Again, just as a step back, I think what we said three or four quarters ago, was the fact that as you look at our results and we talked about this morning, there's some pretty big difference in performance between the old business and the new business. And I think what we did around a year ago this time was to acknowledge that we're going to continue to work as diligently as we can to see if there's some alternatives for how to better manage that whole block of business.

I think, frankly, though we (INAUDIBLE) the time, you know, given a sense of proportion, (INAUDIBLE) substantial block of business. So as you think about looking at alternatives and options, it represents a fairly significant portion of the total industry. So it's not a small transaction.

I think as we've gone through time, I think what we've recognized is as it shouldn't be a surprise, is that probably are a few of any options to deal with the entire block, given the size. There's very few people, obviously, that could accommodate something of that size.

So as we've gone through time, we migrated the tings that I would put almost in the more traditional sense of reinsurance, which maybe - as I said in my comments, could provide some stock loss (ph) protection and other kinds of things. But again, frankly, this is not an environment - we had a lot - have a lot of risk takers. And so, we don't want - we don't - we don't feel and we never have felt that we have to do something. We don't feel we have a gun at our head. We want to do something that's good from a business and economic standpoint.

And I think again, what I said earlier is at this point, it maybe doubtful whether there's anything that makes economic and business sense for us. And Bob, you may want to answer that.

Yes, I think you know, first of all, you need to understand, you know, the complexity and the size of the transaction dealing with that block of business. That's a billion dollar premium portfolio of business. Just so, you know, obviously there aren't a lot of, you know, large international players that obviously could handle a deal with - of that size.

The second thing is, you know, it is a very complexed block of business. It's in five of our statutory companies. And so trying to deal with, you know, with a transaction that transcends that and tries to, tries to come with a structure that can satisfy their need as well as our needs is very difficult.

And I think lastly, Tom, you know, we've have had, and our conversations have been going on with numerous players that are potential players, but their environment is changing as well. And so one of the things that we're finding is that, you know, at least a couple of those players, you know, are not in significant potential partners, have had their own difficulties with their balance sheets and their own business.

And so, you know, we've been dealing with that problem as well. And if we're going to get significant capital relief, or we're going to transfer significant risk to those individuals many of those individual companies, there is a concern that this is a very large transaction. And quite frankly, during the same period of time, there's a lot of other opportunities that are coming out of the woodwork as well from other companies that are wanting to do transaction that are maybe a bit more traditional or a bit more close to their core businesses.

And so, we're encountering a number of different issues that we're having to work our way through and that's what causing a lot of the delay is just, you know, getting the responsiveness from those companies, and an understanding of the complexity of a potential transaction.

Are you still sticking with the original statements a couple of quarters ago that you won't be doing anything that's going to be materially impacting the performance of your company or anything that's going to be material in nature from a cost perspective?

Yes.

Yes.

Yes.

That would be right, Ron.

And lastly, on the Moody's rating, actually, I know they've had you under review for awhile now and it's clearly that's having a fairly significant impact on your spreads on the secondary level. Do you have any indication from them as to when they could be coming up some kind of resolution on this?

Ron, we continue to have discussions with them and hope to have that cleared up in the next couple of weeks.

OK. Great. Thank you.

Thanks, Ron.

Operator, we'll take one remaining question, please.

We'll take our next question from Joan Nazaffe (ph) with Goldman Sachs. Ms. Nazaffe, your line is open. Please check your mute button.

We'll take our next question from Al Karpasino (ph) with Columbia Management Group.

Good morning. Two unrelated questions. I believe the figure mentions that the premiums for life and LTD were up six percent. If you correct for the industry mix or seniority mix amongst your customers or wage inflation to the extent that there is any, can you give us a better sense as to, on an apples to apples basis, what sort of price increases you're getting on LTD?

Kevin, why don't you answer those questions for Al, please?

OK, Harold - good morning, Al.

Good morning.

In terms of price increases, six percent premium to life changes reflects sort of an average. Our renewal program places increases in the - probably (ph) sort of eight percent average range. And those increases range from decreases on our best performing customers all the way up to increases that are - that are very, very significant for larger cases.

OK. Great. Thank you.

And my second and last question then is, the Georgia Commissioner obviously has - well, I'll just put it politely, he seems to be sometimes (ph) - in some situations. I'm wondering if you've - if there are issues with other state commissioners as a result of some of the negative media attention from the plaintiff's attorneys.

Al, let me turn to our General Counsel, because we do have, of course, other (INAUDIBLE) like oil (ph) companies, and those don't tend to get the attention that this one did. So let me let our General Counsel comment on that holistic (ph) question.

Hello, this is Dean Copeland - at least put in a little bit of a context. (INAUDIBLE) examinations from your primary states or something that's simply a fact of life. We get something out of them when the examiners come in. They go through a process (INAUDIBLE) relates to procedures. The Georgia (ph) exam has been in process for some period of time. We are still working with the department with regard to that. We anticipate getting that resolved by the end of the year. If they have suggestions with regard to our procedures that we can improve them, we'll make those changes.

So we anticipate working this out with the Georgia Commissioner and his department, and we'll work through any other market exams, which are very much a routine part of our business. But we do not anticipate any problem with regard to the Georgia exam or any other exams we have.

OK. Great. Thank you.

Thank you very much, Al, and for all of you who attended today and who's provided questions for management. We do appreciate it. It gives us an idea of the - of the areas that you have your primary interest or concerns. We hope we answered your questions adequately. If not, we invite you to follow up with us later today.

With that, Operator, the call is adjourned. Thank you.

This does conclude today's conference call. At this time, you may disconnect.