普登 (UNM) 2002 Q4 法說會逐字稿

Thank you for standing by. Good morning, welcome to the UNUMProvident fourth quarter earnings conference call. This call is being recorded. At this time, for opening remarks and introductions I would like to turn the call to Mr. Harold Chandler. Please go ahead, sir.

Good morning and welcome. With me are Tom Watjen and Tom White who along with me will give comments on yesterday's fourth quarter earnings release. In addition other 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. A safe harbor is provided for our forward looking statements under the private security Litigation Reform Act of 1995. Statements in this conference call regard regarding the business of UNUM Provident Corporation which are not historical facts are forward-looking statements that include risk and uncertainty that could cause actual results to differ materially from those contained in the forward-looking statements. These forward-looking statements are made based upon current expectations and belief 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 that could affect actual results, see the sections entitled cautionary statements regarding forward looking statements and risk factors in the companies Form 10-K for the fiscal year ended 12/31/01 and subsequently filed 10-Qs. The company expressly disclaims any duty to update any forward-looking statements.

Yesterday afternoon, we reported fourth quarter operating earnings of $.64 per share compared to $.62 per share last year. For the full year of 2002, we reported operating earnings of $2.53, compared to $2.44 last year. These fourth quarter results were in line with consensus estimates. We are pleased to produce these overall results in a period when as all of you are well aware, the economy remained weak and a difficult credit market persisted.

With that said, let me highlight the key outcomes from the quarter. First, we produced strong overall results in our employee benefits segment, driven by significant improvements in the group life, AD&D and group long term care businesses. The decline in our more economically sensitive group disability lines reflects lower energies STD during this quarter. And flat performance in our LTD profitability, driven by a primarily by lower net recovers and higher claim incidence levels.

Second, while net realized investment losses were higher this quarter than in the previous quarter, they were lower than the either the first or second quarter and we expect to see a resumption in the improving trend of credit losses as we move into 2003. Importantly, our statutory capital and surplus position improved in the fourth quarter, benefiting from an improved level of statutory earnings.

As you are now aware, our press release included a paragraph on our discussion with the SEC, relative to their standard review of our periodic filings. As one of you noted in your notes this morning, our including this update was somewhat untypical, however, we feel in this environment that increased disclosure of this type is appropriate. And that, simply put, is why we included it.

Importantly, our net realized game in our portfolio is $1.8b at year end and all bonds have been marked to market on the BS. Third, we continued our disciplined management of total company sales during the fourth quarter. As you will recall from prior conference calls, we have chosen to manage sales growth selectively, placing more emphasis during this certain economic -- uncertain economic period on premium expansion. Accordingly, persistency and renewal success are equally as important as new sales. Perhaps a much more cautious approach but prudent we believe in market and product segments during these less certain economic times. For example, in 2001, there were 9 group cases sold in the fourth quarter with annual premium exceeding $4m. In 2002, there were only 2. Therefore, for the quarter, group disability sales were flat, but premium, including premium equivalents grew 8% for the quarter and 9% for the full year. Premium per life in our LTD and STD lines were up 6.5% and 4.5% respectively over 2001. Group life sales declined across all segments except a small market as we continued to stay on the sidelines, except when there is a comprehensive relationship involved and rational pricing.

Now, let me just make a few brief comments on our other two segments, individual and voluntary. In the individual segment, sales were up 7% for the quarter and 5% for the full year. These results were driven by double digit increases in both our UK, individual disability and our U.S., individual long- long-term care businesses. These increases offset flat sales in our North American individual disability line where multi-life sales continued to be our primary strategy versus a single policy approach. Total voluntary sales were up 5% for the quarter and 13% for the full year. This quarter's results were driven by a 7% increase at Colonial, whereas the full year results were driven by a 6% increase at Colonial and a 48% increase in our brokerage integrated sale program. Premium grew 7% on an annual basis in this segment. Lastly, fee revenue and our managed disability segment, led by GENEX continued to be strong, up 16% for the quarter and full year.

Two additional brief but important points. First, during the quarter, our UK operation, known as UNUMLimited announced plans to acquire SunLife of Canada’s block of group income protection and group life insurance in the UK. Thisacquisition expand our market presence and our core group disability and life markets in the UK. Thereby continuing to achieve geographic diversification, although modest in this case, but we still pursue it when it is possible and financially attractive.

Secondly, we remain cautious in our forecasting and guidance for 2003, due to the less accommodating environmental indicators that influence our business. Our expectations and business plan for 2003 do not anticipate any significant relief relative to interest rates incident trends and certain elevated costs such as pension and insurance expenses. Now, I'd like Tom White to provide an overview of the fourth quarter results, followed then by Tom Watjen who will cover in more detail our results of our primary business lines. As usual, after that, we will be glad to take your questions. Tom?

Thank you, Harold. Good morning, everyone.

Yesterday afternoon, UNUM Provident reported fourth quarter 2002 after tax operating income, before net realized investment losses of $.64 per diluted common share, up 3.2% from the $.62 recorded in the fourth quarter of 2001. Again, that's excluding special items and the extraordinary loss loss. The consensus estimate was $.64 within a range of $.63 to $.66. Total revenue excluding net realized investment losses grew 7.2% in the fourth quarter to $2.51b dollars and earned premium grew 6.3% to $1.88 b dollars. Fourth quarter net investment losses at -- fourth quarter net investment income of $538m represents a 9.1% increase over last year. Net realized after tax investment losses in the quarter were $60.8m, compared to $18.6m in the year ago quarter. Tom Watjen will cover investment results in more detail in his comments.

I'd like to turn now to a brief review of our operating segment starting with the employee benefits segment. The employee benefits segment reported income -- and this is before net realized investment losses and federal income taxes -- of $165.1m in the fourth quarter of 2002. This is up 12% from the $147.4m in the year-ago quarter. Within the employee benefits segment, group disability line reported income of $75.6m dollars in the fourth quarter compared to $80.8m a year ago. These results were driven by a slight increase in our LTD line of business, but offset by lower earnings in our STD operations. In the group life AD&D and group long-term Caroline, we reported a significant improvement in income to $83.9m in the fourth quarter, compared to $63m reported a year ago, driven by a reduced group life loss ratio and favorable AD&D risk results. Finally, managed disability continued its strong performance with income of $5.6m, compared to $3.6m one year ago.

Moving to the individual segment, income totaled $66.9m in the fourth quarter, down slightly from the $67.3m in the year ago quarter. Within this segment in individual disability, income increased to $67.3m in the fourth quarter 2002 from $61m a year ago. In the individual long-term Caroline, income declined to a loss of $400,000 in the fourth quarter from income of $6.3m in the year-ago quarter reflecting a higher benefit ratio. In the voluntary benefit segment, income was $43.4m in the fourth quarter, compared to $43m a year ago. The other segment reported income of $8.5m in the fourth quarter of 2002, compared to $12.5m in the year-ago quarter, reflecting the usual line down of these lines of business. And finally, the corporate segment had a loss of $50.9m in the fourth quarter, compared to a loss of $40.5m in the year-ago quarter, excluding the special items.

And a few additional notes, items to note, statutory net income from operations, this is after tax, improved in the fourth fourth quarter to $103.3m from $80.3m in the third quarter but, did decline from the $135.6m we reported in the year-ago quarter. Statutory net income, which includes after-tax net realized investment losses, was $50m, compared to $41.4m in the third quarter, and net losses in the first two quarters of the year. Our book value was $28.33 at the end of 2002, compared to $24.52 a year ago, excluding the net unrealized gains and losses, book value was $24.37 compared to $23.95 a year ago. Also, we recorded a $145m non-cash additional minimum pension liability adjustment, net of deferred taxes and this is recorded as a reduction to accumulated other comprehensive income, with stockholders' equity. Our debt and total capital was $29.5m at quarter end and when allotting 50% equity credit for our $300m trust preferred issue. The debt to total capital ratio was 27.5%. Finally, return on equity in the fourth quarter was 10.5% and also 10.5% for the full year. Now, Tom Watjen will provide more color on the trends in our key business lines.

Thank you, Tom. As Harold and Tom noted the business financial environment in the fourth quarter continued to place pressure on our ability to operate at levels with our long term financial targets. We're able to report results in-line. With the consensus estimate and show a slight improvement over year to-ago quarter. As Harold noted, we're continuing to maintain a cautious outlook until we see tangible evidence of a business and financial recovery. Before I discuss each of our key business segments, let me start with a few overall comments to start with growth. As Harold noted earlier, profitable growth is the primary focus of our company. We want to continue to profitably grow sales but pricing and renewal action are perhaps important in this environment. I’m very pleased that premium growth was up 6.3% with group disability up 6.1%. I'll have more to a on that in a moment.

Secondly, expense management remains a critically important as well. In the quarter our expense ratio on a premium equivalent basis which reflects greater amounts of business on a fee basis as opposed to a premium basis, declined slightly to 21.8% from 21.9% in the fourth quarter of last year. Through growth in the business, and expense initiatives we have in place, we expect our expense ratio to continue to move gradually downward as we move through 2003, even though we have a much higher pension expense this year.

Lastly, just generally make a comment about recoveries. As we have said in the past, a critical component of our strategy is to maintain the industry's leading return to work expertise. This continues to be a priority and we're pleased that we have continued to deliver superior value to our customers even in this environment. In the quarter, our recovery results for both our individual disability line and group disability line were somewhat below our historically results but we feel will improve in 2003.

I would like to move to a discussion on our primary business segments, including the group disability segment, group life, AD&D, long term care, individual disability and voluntary benefits. I'll also discuss the investment trends in the quarter and our capital position at year end along with thoughts on the outlook for 2003 before we go to your questions. Starting with group disability, earnings in that line of business declined in the fourth quarter to $75.6m from $80.8m in the year ago quarter. Results were driven by continued weaker than expected STD earnings which were offset by a small improvement in our LTD results which was largely driven by the 7% increase by revenue we saw in the quarter for that line. The loss ratio was 86.7% in the fourth quarter, up from 83.9% in the third quarter, and 84.8% reported in the year- year-ago quarter. We continue to experience higher claim incidents levels in this line both on a year over year basis and relative to the third quarter of 2002. This continues to be driven in part by economic trends, including lower consumer confidence. Our manufacturing and wholesale retail blocks of business, which represent approximately 30% of our overall block, have shown the most significant increases in incidents, while other 70% of the block has shown a more modest increase in incidents over the past several quarters. The incidents increase was experienced across all case size segments for small and mid-sized segments experiencing the largest increase relative to the third quarter. Also, as I noted earlier, the loss ratio in this line was adversely impacted in the quarter by our lower level of net claim recoveries. Again, as I said earlier we, expect this to improve as we move through 2003. One final point on this line of business is that persistency continues to improve which is a positive sign for future premium growth. This trend has resulted in no accelerated amortization of DAK in the quarter compared to $7m in the year ago quarter. I think as both Tom and Harold said this continues to be a challenging group disability environment. We're encouraged though, by the 6.5% increase in our LTD premium per life over the year ago quarter. We will, however, continue to implement needing pricing changes and take the necessary renewal action required in this environment.

Now I'll move to our group life, AD&D and group long term care line of business. Income was $83.9m in the fourth quarter of 2002, compared to $59.2m last year and $63m a year ago. Each of the lines of business in this segment had improved results in the quarter. The benefit ratio in our group life line declined in the quarter driven by lower claim incidents. We saw indications that the actions we have taken over the past several quarters to improve profitability, such as de deemphasizing large case is stand alone group life sales, tightening underwriting standards and continuing to take appropriate renewal action actions have had a positive impact on our results. Our group AD&D results improved significantly driven by favorable claims experience. As you may recall, our AD&D results were well below expectations in the third quarter but have reversed themselves in the fourth quarter. This line continues to be volatile quarter to quarter and we'll be working to create more consistency in our AD&D results this year.

Finally group long term care had an excellent quarter. We saw lower level of claims incidence. In addition, we had lower expense ratio. Again, this is a smaller line of business and we can see pretty wide swings in our results from quarter to quarter. For our group life, AD&D an long-term care segment, persistently continued to be below our results in the group disability segment but still generally in line with expectations. We had no additional expenses related to accelerated amortization to DAC in the quarter compared to $5.7m in the year ago quarter. These strong overall results in this segment offset softer group disability results that we experienced in the fourth quarter, however, I would cautious you that maintaining earnings at these levels will be a challenge.

I would like to turn your attention to the individual disability line of business. Where income was $63.7m in the fourth quarter compared to $68.8m last year and much improved over the $61m in the fourth quarter of last year. Revenue grew 5.7% due to strong net investment income growth and higher premium income. Additionally, our expenses in this line were down slightly in the quarter. Our experience was somewhat mixed however in the quarter. Our interest adjusted loss ratio continues to increase reflecting a higher level of cash benefits. Our incidence levels were slightly improved over a year ago and were stable relative to the third quarter. As I noted earlier, our recoveries were somewhat lower. While we believe this is temporary, we are continuing to increase our resources and focus in this area and expect recovery to improve as we move to 2003.

The older pre-1996 business continues to drive the higher loss ratios, while the experience on the newer business remains well within our pricing expectations. Our intention is that in the first half of this year, we will be modifying our financial reporting disclosure to include more detailed information on our IDR results including old versus new business. Although this has been delayed somewhat from our original plans, we feel this time was well spent in looking at all of our reporting and disclosure, with the objective of better aligning it with how we manage the business. This has given us time to better segment the old versus new block and the allocations of key financial components before these blocks of business. We're confident this will help you clearly see the trends we have been discussing over the past couple of years.

Finally, our voluntary benefits segment produced earnings of $43.4m in the fourth quarter, compared to $41.7m last quarter and $43m in the year-ago quarter. Total revenues grew 6% with an 8.5% premium increase helping to offset a slight decline in net investment income. Our risk results in this line were generally favorable. We experienced a slight decline in the loss ratio as improved results in the life line offset disability results which were adversely affected by higher than expected claims in the quarter.

Overall, our brokerage, voluntary benefits operation and Colonial operations are performing well. The management changes at Colonial last summer have been well received and we're beginning to see positive momentum develop and expect sales growth to build as we move through 2003.

Clearly in today's environment investment results are a significant area of emphasis for all of you and let me turn to those now. In short, the financial markets conditions remain challenging. The lower level of interest rates and the limited supply of attractive long duration assets are putting pressure on our investments operations while the credit environment remains difficult. Resulting in higher credit losses than we have experienced in the past. As we have discussed with you on prior calls, interest rate management is a critically important part of our business. In the fourth quarter, the portfolio yield was 7.76% a decline of 10 basis points from the prior quarter, reflecting lower yields on new investments and the impact of default. Our priority is to closely manage the relationship between our portfolio yield and discount discounts we use in setting reserves. The difference between these two or our margin and that's obviously something we closely monitor. Overall our margins held up well in the quarter due to the reductions we have made in our reserve discount rate over the past several quarters. All of our core products continue to have healthy interest margins and we remain confident that we can maintain the adequate margins regardless of the direction of interest rates. We have taken the necessary steps to ensure that our pricing assumptions closely track with the new money rates in the market. Over the past 12 months, our pricing assumptions have declined 100 basis points for both individual disability and our group long-term disability products. We will continue to maintain a disciplined approach in our interest rate management, making it tough but necessary adjustments in the pricing and discount rates as needed.

Moving next to our net realized investment losses, our net losses totaled $60.8m after tax in the fourth quarter. This was elevated somewhat from the third quarter level of $45.8m reflecting the write-down of two positions totaling almost $14m on the last day of the year. One of these credits subsequently made its interest payment is no long longer nonperforming, although it was written down in the quarter. As was case in much of the year, in the fourth quarter, we elected not to take significant gains to offset loss was only $16.7m of gains realized in the quarter.

Our gross losses or losses prior to any offsetting gains over the past four quarters have gone from $225.8m in the first quarter of last year to all the way down to the fourth quarter where we had $109.9m. There is a general declining trend that we think is very positive. I'd add that the net unrealized gain in our portfolio was $1.8b at year end which consists $2.9b of gross unrealized gains and $1.1b of gross unrealized losses. This net gain has grown significantly throughout the year from $579m at the end of 2001. Our strategy has been to selectively recognize capital gains to offset losses, but generally choosing to retain higher yielding securities to maintain the portfolio yield.

Finally, our total non-current investment declined to $205.8m from a peak of $244.9m two quarters ago. We're expecting the present challenging credit environment to continue this year which will result in continued higher than average credit losses and slower investment income growth though at improved levels than those experienced in 2002. We remain very confident that the investment and portfolio management strategies we have followed in the past will continue to serve us well in this difficult period.

As both Harold referred to in his comments, as you saw from our release, we're continuing to have discussion was the SEC regarding our investment disclosure and processes. We believe we have made great progress since these discussions began. I might add that the kinds of issues raised have been raised with other companies in the past past. In this environment, we felt that adding this disclosure was important but we are confident that we are making good progress to addressing the questions that they have raised.

The last area I'd like to comment on is our capital position. As we have said before, maintaining a strong BS remains an important priority of our company. The first half of 2002 was challenging for us, as it was for the industry. As Tom noted, we have shown steady progress in our statutory results over the lastly last three quarters and our year-end consolidated statutory capital and surplus, including IMR and AVR, totaled $3.6b. This is a 6% decline from year ago levels which we believe is in line with the over all life insurance industry. At year end our results were 6.6% better than they were at mid-year, as we experienced improving statutory results and lower investment losses in the second half of the year. We have not yet completed our 2002 risk based capital analysis but we expect that analysis will lead us to being -- to having a risk based capital ratio in the range of 205% to 210% which is be below our together but above our 2002 year-end levels. Our goal is to move back to a level of 250% which is where we ended 2001.

Additionally, our holding company leverage held steady standing at 29.5% at the end of the fourth quarter or 27.7% when allowing for partial equity treatment for our capital securities. A year -- last year, those levels were 29.8% and 28% respectively. We remain comfortable with our present position but we will work towards a target of 25% to 27%. Maintaining a solid financial base and appropriate ratings for this business remains a priority. We continue to be comfortable with our capital position but now that we have closed year-end we are undertaking a full review of capital needs and our options to supplement our capital position. These options include external financing and additional business actions including reinsurance and investment strategy changes. Any plan we would pursue, we will be conscious of the importance of balancing the business and financial issues along with the needs of our constituents.

Now let me close with a few additional comments include our outlook for 2003. The economic and financial market environment remains extremely challenging impacting our investment results as well as incident trends in economically sensitive sectors of the economy. This environment has persisted longer than we expected and, frankly, see little improvement in the areas important to our business. In light of this, we feel it's appropriate to continue to guide earnings estimates to a flat pattern. We believe we are well position positioned to grow earnings and improve returns as 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 pricing and renewal actions required in today's market and strengthening our competitive position within our businesses.

One factor we noted last quarter was the additional pension expense we will be incurring this year. Our estimate is that the impact of lower interest rates and the stock market returns will add $46m to our pension expenses in 2003 relative to 2002. This additional cost is reflect reflected in the guidance I gave earlier. Other actions including operating expense initiatives within the company will partially offset this additional cost of doing business in 2003. In closing, although our consolidated results continue to be below corporate targets, we are continuing to take the actions necessary to operate as effectively as possible in this environment. We believe that our expanded disclosure will provide a better view of our business and validate the strategic and financial course we have set for our business.

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

The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch tone telephone. If you are on a speaker phone, please be sure your mute function is turned off to allow your signal to reach our equipment. Please press star, 1 to ask a question.

We'll take our first question from Vanessa Wilson with Deutsche Banc.

Thank you, good morning. I understand you are just embarking on a capital study, but could you give us a sense of how much additional capital you would need to satisfy all constituencies? You've given us a 250% risk based capital target. Is that a target for year-end 2003? And assuming you’re telling us that this difficult environment will continue to be difficult, how much additional flexibility do you have to think about in your capital target?

That's a very good question, let me reiterate two important targets as we think about capital plans. Number one, we're trying to move ourselves back to a risk based capital position of 250%, ideally by the end of this year. I say that's a goal we set in concert with certainly observing the rating agency requirements but some of our own business requirements so that's one part of our goal. Second part of the goal, which is clearly secondary, though, is continuing to lower our holding company leverage. We were at 29.5% at the end of the year we really hope to get down to something close to 25% to 27%, but frankly that's nothing we have to feel a sense of urgency on. That's something we can move to over the next couple of, three years.

The capital plan is driven by risk based capital considerations. Some of the guidance we've given before in terms of the amount of capital we would need to raise about [inaudible] to get to that level is still applicable. One of the things we are trying to do after we've completed the year end, though, is determine whether or not part of the solution of raising capital isn't just some reinsurance transactions that may have investment strategy changes that is might actually help the risk side of the capital equation. So, again, I think we're pretty confident that we have a series of internal things we can do to help us move from that roughly 210% where we think we'll be at the end of this past year, move that up fairly nicely with things internally. We may need to look at external sources but I don't think we have a number, Harold that we feel is the right one to shoot for at this point.

For each 10 percentage points of RVC, could you translate that into dollars for us?

Well, there is two -- this is Bob, Vanessa, Bob Greving. There is two sides of that, one is reduction of risk and other is the increase of capital. If you look at a pure increase of capital, I believe 10 basis points is about $100m.

So 10 percentage points is --

10 basis points is about $100m of just pure capital, but you can do that in two different ways. One is minimizing your risk as well, and the other is the increased capital.

Vanessa, if I can add to that, I think what Bob is saying to go from 210% to 250%, each 10 points is about $100m of capital, but what I was trying to say earlier is the other part of this exercise is looking at things we can do to reduce the risk part of this, which is maybe, Bob, in a general way, some of us think that probably the risk part of this can be half of the capital plan and then raising capital is the other half of the plan.

Right.

Thank you. Could you give us the sense of your timing of your revolution with the SEC.

I'll take a stab at that. This is principally the issue we talked about with getting the issues of the investments process and other issues we talked about in our earlier comments. We've been working very diligent with the SEC. They have been working diligent diligently back with us. It's hard to predict when that process is completed but the shelf is hinged upon getting those issues involved with the SEC, Dean Copeland, I don't know if you would add anything further to that.

Dean, let me interrupt. Does the SEC want you to take a large permanent impairment on your portfolio or do they just want you to put more pages in your 10-K?

I don't want to get ahead of where we are in that process let me -- in two parts, it's hard to estimate the timing. The staff is getting ready to be in one of its busiest periods whether one says 30 days or 60 days it's difficult to estimate that. We have given them information. We will give them some more. We're comfortable with our process. We think it applies to the rules if they want more disclosure, then we're happy to comply with that in the 10-K. It's hard to pin down something with regard to timing. And until we get through the issues with them, it's also difficult to know exactly where we end up, whether it's just disclosing or whether there is a timing issue. I don't want to speculate as to where that end up.

Thank you.

Thank you.

We'll take our next question from David O. Lewis with SunTrust Robinson.

Good morning.

Good morning, David.

Can you talk about the discount rate exposure? Do you feel that you are getting that adequate spread? I think you originally talked about kind of keeping a 35 to 45 basis point spread. Sounds like the portfolio yields coming down a little quicker than which you have originally anticipated. So does that provide any potential exposure on the discount rate?

Let me make a very brief comment then ask Bob Greving to supplement. The two principal portfolios that we would be talking about would be the IDI portfolio and the group LTD portfolio. The interest margin in the IDI portfolio increased in the fourth quarter. The actions we have taken to lower the discount rate have actually had the impact of seeing the margin actually improve slightly in the fourth quarter. The LTD went a little against us us, actually, but the margin is still very much in that comfortable zone. I think Bob, if you could add to that, because the actions we have been taking with the discount rate reduction are actually tracking reasonably well with the decline from the portfolio yield.

On the ID portfolio, the overall yield is down 18 basis points for the year but our spread is only down 2 basis points from where it started the year. It's still well within the 40-50 basis point range of spread that we had anticipated on the ID portfolio. We remain within that 50 to 60 basis points at 54 basis points on our LTD portfolio at the end of the year. So again, stay within the ranges that we had pretty much targeted, but and moving much slower on the discount rate change relative to the yield change.

On the investment portfolio side, if you were to write down all the bonds that were below water for say, pick a number whether it's 180 days or 207 days, at one point I believe at the end of the third quarter, the exposure to the company would have been near $400m. Can you tell us where that was at year end?

Yes, David, for those that have the statistical supplement, it's in the back on page 11.1 is the review of where that position would have been at year end. If you go -- if you are picking the amount of bonds over 207 days, that's roughly $460m of total write-downs. What I would say before that is as many no know, we mark the bonds to market every quarter. Our equity already reflects that lower level of valuation. So I think one of the things that really is at the heart of maybe one of the questions that we have a discussion with the SEC on is do bonds shift from at some point from being unrealized to a realized loss. It's important to note that the bonds are already on an unrealized marked to market in the portfolio. It's shifting from one end to the other and would have no impact on book value.

That's a good point there, but let's look at on a statutory basis. If you were to write it down, wouldn't it have a direct impact on your statutory capital that might have to be replenished if some other changes didn't develop?

It could. That's why we're being very cautious to work with the SEC on this issue. Again, there is really no basis for to make that write-down adjustment. That's why I think again, if -- we've looked very carefully at being sure we can help them better understand the nature of this issue and what it is and what it's not. So you're right. The issue isn't a GAAP issue. The issue would be a statutory one. At this point we feel we've helped the SEC better appreciate those connections between GAAP and stat. As Dean said, a lot of the dialogue has gotten away from bond by bond discussions to really a more importantly the set of processes we have in place to mark our bonds to appropriate levels and how that interface and how that connects between realized and unrealized gains and losses. I think that discussions has actually shifted a little bit, which is good.

Thank you.

But you're right. The real issue on this whole top topic, when you get to the bottom line would be that these issues would not necessarily have an impact on GAAP equity, but conceivably could have an issue on statutory equity, but we feel we're on a very strong basis and following processes that other companies are using.

Thank you.

We'll take our next question from Jason Zucker from Bank of America Securities.

Good morning, I had a couple of questions. I was hoping that you could address why you thought recovery slowed and then what gives you confidence that they'll turn around a bit in 2003? And then a couple other things. How long does it take the STD -- well, how long does the STD weakness in earnings, let's say for how long before some of that poor business runs off? And also, Tom, I think you had mentioned that you had lowered the discount rate about 100 basis points over the course of the last 12 months and if that was correct, is there an earnings amount that you can give us that would translate into lost earnings because of the discount rate moving down?

Those are good questions. Let me start with the -- I think certainly recoveries are important to our business. As I said in my comments, I would say each though the recoveries are below where they have been historically, they are at levels consistent with our pricing and some of our reserving assumption. I will put my comment about recovery into perspective. In the quarter we saw some dip in focus around some of the recovery issues and Ralph, do you want to add to that a little bit?

Sure, Tom. Jason, just as we have taken time with our producers and employer customers in helping them have the true facts about our claim operation in light of some recent media attention, we have spent a good bit of time with our employees as well to really equip them with information and also allow them to be able to respond to inquiries from claimants. The time that's been spent on that has detracted from our normal efforts around validating claims and helping people return to work.

On the LTD side, we saw the impact primarily in November. And in addition to that issue, there have been some operational issues relating primarily to new claim levels and associated staffing, and we have taken the appropriate steps to address these such that we're entering the year, we believe, in the proper staffing levels.

Is that going to have a material impact to your expense ratios?

We -- Jason, as I think you know, we have been offsetting in the past increased expenses, particularly around clinical resources through continued re reengineering of our processes, rationalizing the less value- value-added parts of the process and we expect that will largely offset the increase. There will be some increase in expenses over the course of the year, but our unit cost, our claim unit cost, we expect will continue to decrease.

And Jason, let me just add, too, our corporate expenses are growing very small, as a very low growth rate in 2003. The only place where we actually are seeing any meaningful increase in growth and expenses for many of the reasons we just talked about is actually in the return to work services part of our company. So, I think what you are really getting to is how does any increased expenses or commitments roll up in terms of our overall expense ratio. What I would say is I wouldn't just follow on the comment that Ralph said, but also say corporately, there are other areas that are not growing or actually declining, which make up for those commitments of additional resources that we're making to return to work services.

Your second question had to do with STD. Make I'll ask Kevin McCarthy, our chief under underwriter to speak to the trends, including some of the recent pricing and renewal actions we've been taking over the second half of this year.

Thanks, Tom. Good morning, Jason.

Good morning.

It takes probably two years to have the full impact of actions in STD. We started those actions in 2002. Our premium per life is up at 4% to 4.5% year over year. Our renewal program started last year and will be significantly bigger in STD in 2003, both in terms of the volume of business that we're looking at and the average of price increase. And also as you know, we shifted a substantial amount of large case sales mix away from fully insured business during 2002 towards our ASO business. I think you should start to see emerging positive trends in terms of loss ratio over the course of 2003.

And Tom, did I get the last part of it right, about the discount rate moving a little over the last 12 months?

We did. There were two points, I think Jason that I was trying to make. The discount rate has come down but the rates we use in our pricing assumptions have come down. You referenced the 100 basis points that's where my comment came down. We don't have a way to quantify in the way you've suggested but I think my point was really very clear around the intent to continue to reflect the current interest rate environment in both our discount rate assumptions as well as new business pricing assumptions. Tom, I would you if there is anything further we can do to respond to Jason's question.

Jason, we'll have to take a look at that. Obviously when we lower the discount rate on new claims, that does cause us to put up a higher reserve which is going to have a negative impact on the profitability, but we're not able to quantify that for you right now.

Okay.

But it is built into our forecast and estimates and so very much that's built into our plan for the business going forward.

Yeah. Great, thank you.

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

It must be frustrating to feel like you have the right process and right communication of that process with regard to bond impairments and all, but I think was AON Management who said that the SEC becomes right in the end. Why can't -- why wouldn't this management team go ahead and do what the SEC is asking of them, get the shelf registered, raise the capital and put these issues behind them sooner rather than later?

It's a good question. I'd say that we're very early in the process. We only received the first inquiry at the end of the November, early December. One of the things at some point you're right, you have to decide are you prepared to make some of the adjustments that have been requested. At this point, we haven't gotten to that point. They were exploring better understanding the process we have in place, better understand understanding how that process connects, realized and unrealized gains and losses and they've been moving up the learning curve, I'd say very swiftly. So I don't see us being at a point of having to make a decision yet, because they haven't proposed anything at this point. You're right. At some point down the road, do you have to make a decision, do you let this linger out there or decide just to reach a compromise. I will tell you we'll be prepared to do that if appropriate, but at this point it would be premature.

Is there any other item holding up the registration of the shelf?

Nothing.

None.

This issue came up in just part of their regular reviews of our Qs and Ks and some of the disclosures related to that.

Okay, thank you.

This is the only issue. You are good to point that out.

Thank you.

Our next question comes from Colin Devine with Salomon Smith Barney.

A couple of questions, maybe we could spend a little bit more time in the investment portfolio. It was my understanding that when you -- at the time of the merger, the portfolio was flush clean, you rebuilt it and today it's got the highest losses of the industry. I'm trying to reconcile, you know, sort of what's gone wrong. Part of it seems to me that the situation with the SEC on the statutory capital basis, I don't know how you don't raise capital and maybe you can be a bit more specific as to how you are going to get your RBC up, but 25% this year, without some sort of equity issuance given you are maxed on your leverage.

I guess I'll take that. Jason, I'll take all of those. Or Colin, I'll take all of those those.

The what went wrong part, I'm not sure I would use that characterization. As you know, our investment strategy not just since the merger but over the last 5 or 6 years has been consistent around matching assets and liabilities, having interest rate management, as it relates to the composition having bonds as opposed to mortgages and real estate or equities because those don't fit well with the kind of products we offer. There is no doubt the credit losses given the portfolio we have this past 12 months has been unusual. And again, it's obviously a part of the puzzle that's disappointing, but I would say, again, the off-setting piece is how well the portfolio has held up, how that's supported our products in an effective way. I don't think there is anything that's gone wrong. The strategy we followed was a very clear one, it's a very consistent one to what we put in place in 1995, and it has worked very well for us. This has been a protracted difficult credit environment, and we've suffered as a result of that.

Again, we're not trying to be you fork about 2003. We've been cautious about the outlook. One of the good things playing out is it looks as though the peak in the gross losses with the first quarter of last year and we've seen a generally declining curve over that period of time. We saw a spike up in the fourth quarter but there does seem to be a generally improving credit environment as it relates to our particular portfolio. Again, it's a part of the story that's challenging in this environment, but again, there is also some offsetting parts of the investment strategy that are working very well in this environment, including the interest rate piece of it.

To your point about raising equity, again, I don't think we're saying at this point that there is not a possibility we may raise some equity. We're saying, though that in order to be sure that we're looking at all of the alternatives effectively, let's look at business adjustments that we can make, whether it's reinsurance, whether it's adjustments to the portfolio strategy that can have the impact of reducing the risk side of a risk based capital equation equation. So, again, we will -- we certainly want to be sure we've exhausted those options before we consider raising any external capital. Again, we may find ourselves raising external capital but all of our shareholders would like to know we have exhausted the internal options before the external ones.

Can I get the figure again for what your gross realized gains were? You gave us the losses. I want to make sure I understand the gains. I thought that increased a lot in 2002, but I may be mistaken. And maybe we can explore where you stand on the IDI transaction. You indicated before that you are maybe now thinking it may go in a series of pieces. That's been the big hang-up here where do we stand on that, that was something we were on this call 12 months ago, you under undertook to have resolved last year.

Let me work the investment piece. I apologize for giving the complete picture, but what I would do is just go almost quarter by quarter. The first quarter of last year, the gross losses were $226m, the gain was $108m. So the net figure is $118m. The second quarter gross losses were $149m. The gain was $63m. The net loss were $86m. The third quarter gross losses were $84m, gain was $14m, net losses were $70m. And in the fourth quarter, the gross losses $110m, the gain was $17m, and the net loss was $93m.

So, again, I think what you see is a pattern where in the first and second quarter of last year, they were somewhat elevated gains to offset a portion of those losses but we've not done that very extensively in the third and fourth quarter. Really what we're weighing every time we make that decision about a gain to offset a loss, is a careful assessment of the implication that is might have on the overall portfolio yield. So obviously, what we're suggesting is there are good opportunities in the first and second quarter to do some pretty easy things from a gain point of view without having a significant impact on the portfolio yield. As we move to the year, it was less and less a situation where you didn't find yourself taking a gain which actually could have a punitive impact on the yield.

But to come back on this, if the SEC requires you to take a couple hundred more write-downs, aren't you going to have to take bond gains to manage your capital position?

No, because on the statutory basis the gain is amortized over the life of the bond, so you don't get the deposited capital impact that you do on a GAAP basis, if you understand what I'm saying. That's one of the reasons we also chose not to take some of the gains as we went through the back half of last year is, yes, it has, you know, theoretically an impact on -- a favorable impact on a GAAP basis, but the reality it doesn't help from you a statutory point of view. You are not only lowering your portfolio yield but you are not happening helping your statutory situation at all through those kinds of actions.

Let me shift to your other question which was the IDI portfolio. There is no doubt that again that remains a huge focal point for our senior management team. I think what we did last year unfortunately was go through a process of a series of dead ends in terms of looking at options that might include that entire block of business. As you know, the environment wasn't particularly attractive last year for any transactional activity whether it's MNA or reinsurance in light of the difficult environment we talked about earlier.

Even though we have nothing to show for, it I need to assure all of our -- those that follow us that we've pursued a number of avenues to look for options that made economic sense for us as a company for that entire block, just didn't find any that actually worked. I think you're right. What we're doing, Colin is shifting to a strategy that looks for piece of it. When you look to pieces of it, there is a much more viable marketplace to look for those kinds of alternatives. Some of it may be simple as looking as long duration claims, things that are no actually disability risk but looks like a life risk, because it has a mortality risk more than anything else. So those are the kind of things we're going through right now. That's why I said when we talk about capital, it's not just the capital we raise, but what can we do to lower the risk quotient of our company and certainly reinsurance can be a part of that.

I don't want to pick a time that we shoot for a deal being done, but I think when you move from looking for a solution for the entire block to something where you're looking for a series of smaller things, the probability of success goes up significantly.

You are undertaking now by mid-year to have your disclosure re-tooled so we can put some figures to this issue?

Absolutely. We appreciate everybody's patience. There is more to it than may meet the eye in terms of being sure you have segmented properly and that you've got the proper allocation. We're very, very interested in getting it out just as you're interested in seeing it because it will validate things that are important to us going forward.

Thank you.

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

I had a couple of questions. I wanted to drill down in what's going on in sales. You talked about in the LTD area that you had nine fairly large cases last year and only two this year. What's really driving that? If you're talking about a slowdown in claims resolutions due to some disruption in, internal disruption related to the negative media attention, I've got to think that sales are being affected by the negative media attention also. Can you address that?

And secondly, what's going on with the core predicament, it's given such a weak environment for such a business, it absolutely stuns me. So can you just address what's going on there?

Michele, this is Harold. The primary reason for the shift away from the large case is simply as Tom said earlier, it's movement towards selected growth with emphasis more on the margin and the profitability, clearly margins as we all know in this industry are thinner and in the larger case business. It was a very concerted effort to move selectively away from the large case LTD. In the example you referenced from my comments earlier is accurate, but it was very much planned and in no way was driven by any part of this negative media. In fact, I would say that the mid-market and the large case market, if anything, is making sure that we don't pull back on our commitments to return to work which is the original reason that they have asked us to come in and assist their company.

I would not say that -- however, that we did not have some [inaudible] distractions that's common sense just as Ralph indicated we have spent time with employees in our home office environments, we have done the same thing with people in our field operation. So there is -- it is factual to say that there has been distractions in field operations operations. I would say, however, it was not reflected in the fourth quarter. Most of our business that we brought into the company in the fourth quarter was in the process of being enrolled. There were a few occasions where we had to shore up those enroll enrollments with more information providing facts, but again, I would kiss count that in any way having an impact in the fourth quarter. Joe Folly(ph), who manages our market development activities might comment further.

Harold, I would echo that on two points. Michele, we wrote almost exactly the same number of cases in the fourth quarter this year as we wrote a year ago. And actually, that was with putting higher pricing in the marketplace. So, if we were going to see some negative media impact, we would have seen it in our case comps falling off and we did not see that. The other thing we do, we do do some extensive customer satisfaction and producer surveying, which we did after we had the negative media attention attention. One of the questions we asked is is -- to producers is relative their degree of intent to put business with us in the future. We saw no drop-off in those statistics at all

In fact, our customer satisfaction ratings in the fourth quarter were as high as they have been since the merger. So we're encouraged by that.

Thanks, Joe. I guess since you brought up our research, I might end our comments to Michele by saying that that research did indicate that where there was some in inflexion point, it was more in the individual product intermediaries. People who sell single policy IDI to which we're doing little of, and as you know, that's in transition to multi-life for us. And then secondarily, it would be in the individual long-term care. Those places in all candor is where the research did say that there is going to be a need for us to continue to shore up that intermediary, but to a certain extent, our individual business not sold at the work site is part of the business that's in transition nevertheless.

You mentioned corporate expenses. I might go back to Tom White to give comment there. Tom?

As Thomas R. Watjen said in his comments, we're pleased with where we are in the expense ratios and we are down a little bit in the year over year basis. There is a little bit of noise between segments, and see more of that being picked up in the corporate segment. If you look at that historically historically, it does move around quite a bit, clearly the expense level in this quarter were a little bit higher, and I think that reflects more some kind of year-end expenses, some additional hiring that's going on to build up for some of the growth that we're seeing in our business around, you know, some of the ASO business, some of the managed disability pieces, the SMLA ramping up that we're doing right now.

Anything you wish to add?

Michele, other questions?

No, that's it, thank you.

We'll go next to Nigel Dalley with Morgan Stanley.

A question -- what's the risk to the rating agencies regarding your announcement regarding the SEC questions and also don't we face the risk if the shelf continues to be held up that'll they'll lose their patience with potential capital raising and your ratings may be at risk?

Nigel, on the rating agencies, I think the agencies are aware of the issues and are aware that, you know, the SEC is looking at this as more of an industry issue and not a UNUMProvident issue and that with any filing that's in front of the SEC, you know, they are going to look at these kinds of disclosures. And obviously, we provide a lot of additional information to the rating agency, you know, more than, you know, what we would have and what is a pretty comprehensive statistical supplement. There is a lot of quarterly information that's shared with the rating agencies on what's going on with the write-downs, what's going on with unrealized losses, what specific bonds are, so there is a very high level of exposure of this information with the rating agencies.

Maybe, Nigel, the only thing I would add as we complete the year end work that I've referenced in my comments which include, again, we'll find some very solid risk based initiatives that we can take to reduce the -- to help that risk based capital relationship. We're going be sharing that with them as well. So I think you're right. In this environment we obviously need to be sensitive to be sure that all of our constituents are well informed about the pieces relating to capital adequacy and BS strength. And so we're going to be working hard with that group to be sure that even if things get delayed from the possibility of using the shelf, there is a high degree of awareness on their part to be sure that we're taking fairly significant action actions inside the company as well.

Do you have an opportunity of doing capital raising outside of the shelf like a private transaction at all?

We sure did do. We have a menu of options. That menu is pretty extensive in terms of things we can look at. Every one has a cost and benefit attached to it. So that's why I don't know that we feel particularly limited except for the public piece as we look at capital raising alternatives.

Great. One other question goes to other than temporary impairments. Do you have a level as to the amount of other than temporary impairments you talked throughout last year?

Nigel, you are referring to actual write downs that were taken?

Right, exactly, yes.

Yeah, I'll need to give you the four quarters of that. Bear with me half a second here.

As distinct from the actual total level of net realized losses the portion of those net realized losses which came from other than temporary impairments rather than a default or sale.

In the first quarter the $226m that Tom referenced was all write-down. There were no capital losses from sales. In the second quarter, the write write-downs were $104.7m. The capital losses from sales were about $44m. Third quarter write-downs were $71.8m. The capital losses from sales were $12.1m. And in the fourth quarter, the write-downs were $90.3m and the capital losses from sales were $19.6m. So those numbers will add up to the numbers that Tom provided earlier.

Okay. Great, thanks you.

Thanks, Nigel.

We'll go next to Edward Spehar with Merrill Lynch.

I had a couple of questions. I guess on the discount rate, could you talk about what impact, if any, we might see on the discount rate for the in-force book? Because if we think about credit losses, I mean, that's a return that's gone away that's related to the bond portfolio, which is, you know, matched up with the book of business, not just new sales. So, do we have an issue about revisiting the discount rate for the entire book, because of credit? And how would that change if we had a permanent impairment versus just the market to market under GAAP?

And then the second question is is -- which forgive me if I'm really missing something obvious here, but if we're saying that we would like to get the risk based capital ratio up, let's assume it's 210% and we want to get it to 250%, that's a 19% increase, why wouldn't I think that the amount of capital to get there, assuming that the denominator does not change, would not be more than the number you've suggested? Why can't I just take 119% and multiply it by your $3.4b of stat capital surplus in AVR and come up with a number that's more like, you know, $600m something of capital? Thanks.

I'll let you do first one on the discount rate.

Yeah, I was just looking at, on a year-to-date basis, the beginning of the year, the portfolio yield was an 802. At year end, it was a 771. As we look at the different components of that, the effect of just the lower interest rate, the new money effect, if you will, was about 17 basis points. The gains effect, in other words, where earlier in the year we were taking gains to offset some losses and then reinvesting those dollars, that cost is about 8 basis points and then the impact from the write-downs was about 4 basis points. And there are a couple other little impacts in there, but those were the primary drivers. So to summarize that, it was really -- the biggest driver was the impact of just investing at lower interest rates. The new money effect, if you will.

The other piece, and if I could say, it let me just -- what you expressed is probably what a lot of us expressed even sometimes when we look at the calculations. As I mentioned, our surplus declined 6% or 7% last year, but when you look at where our RBC went from 250 to -- let's assume it goes to 210, that's a 20% reduction. My only reason for giving you that illustration, it's not linear, as you were using in your analysis. When you talked about the capital, roughly a 10 point piece is worth $100m. That's what we're trying to caution is that presumes you don't do anything from the risk side, which would be a bad assumption. I think we can work on the risk side, but my reason for giving you the illustration from last year, it shows how it isn't linear the way you would think, because again in our case, we saw surplus reduced 6% or 7% yet we saw risked base capital decline 20%.

I understand that, but when you are looking over a period of 12 months, there is stuff that’s going on that's going to affect the denominator. I guess the question is that if we say it's 210 today, why wouldn't we need to raise $650m theoretically, if all we're doing is saying the risk of the book is what it is and that's the denominator, and if I need to get to 250, I need to go up 20%. I mean, I could look back last year and say, well perhaps the decline in RBC was greater than the actual capital decline because you have more bonds categorized in risky categories, you have a higher capital charges. There is shifts in the book of business. A lot of things could have gone on, but why not a point in time today we would say that it's just a 20% increase in the capital base?

And in a very simplistic world, it would be. This is Bob Greving. In a very simplistic world it would be, but that formula as you are aware, if you've studied it all is extremely complex formula with a lot of elements including could variance calculations. The dynamics of all those components make a straight line or a linear type of a projection relatively in inconsistent with reality.

I'm sorry, one last thing, could you maybe -- I don't under stand it well enough. Is the co-variance adjustment going to change for your book of business if you simply put another dollar of capital into the company?

In that, again in, that very simplistic example, no, the co- co-variance does not make any adjustment to the total adjusted capital in the calculation, but it does on the liability side. So, there is a lot of components in there, but like I say, if you follow a very simplistic view of of, you know, everything remain remaining static on the liability side, and just do a straight extrapolation of one point in time in a very simplistic way, then you're more linear view would be applicable. Unfortunately, that's not what occurs in reality.

And it might be most helpful, when we finish the year-end work work, we'll arrange a time to work through that with you or anybody else that would have an interest in that, because I understand the nature of your question. Again, as you can sense by my math I delivered back to you, some of us have done that similar math. It really isn't linear. Beyond that, you have to dig into the detail and let us do that with you when we complete our year-end work.

Thank you.

Sure.

We'll go next to David Nelson with Credit Suisse First Boston.

Yes, hello, could you please discuss your ability now that you have the -- the year end statutory results to dividend from all of these subsidiaries and in that light, how that's buffered by cash at the holding company and how you're going to meet your interest payments and dividend payments this year?

Thank you.

This is Tom Watjen. There are multiple sources of correspondent tall that come to the holding company. Insurance company dividends are only one piece of it actually. As we look at our cash flow plans for this year, we feel -- we have very solid cash flow capabilities to draw dividends from our insurance companies and even they are not using anything close to the dividend and capacity of those insurance subsidiaries, but we also continue to have other sources of cash at the holding company, including our investment operations and other pieces which bring cash to the holding company which is a long way of saying that we bring very -- we feel very comfortable with the ability to generate cash and continue to build capital in our subsidiaries during the course of this upcoming year.

Do you have a quantity? I guess -- I'm always trying to get all of these pieces together. Do you actually have an amount that you could give us or arrange that -- of the dividend ability?

David, this Tom White. I don't have the exact numbers in front of me. The dividend capacity for 2003 is going to be about $370m, $360m to $370m. We would project probably about $150m of actual dividends coming out of the insurance subsidiaries and paid up to the holding company. Now, in addition, there are some other sources of cash up to the holding company that include things like a general services agreement, a dividend from the investment LLP, the way it's set up, and also some surplus notes that we have that provides some cash up to the holding company. So, through the dividends which is, again, about $150m and these other source that is add up to roughly $100m, that is enough to meet the common stock dividend requirements as well as the interest payments, which is right around on an after-tax basis, right around $250m. So, again, the bottom line is, if you are looking at insurance company dividends, that's going to be about $150m, and again, there are other sources to meet this external needs. This is very consistent with what we did in 2002, 2001 and prior years.

We don't pull out all of the dividend capacity. We basically, you know, we've got these other sources and we will take out enough dividends to meet that. Now, we typically don't hold much in the way of cash at the holding company level, that's just a strategy that we have never really implemented. It's a fairly small investment portfolio there. It's a fairly small amount of cash, because we want to keep the cash and the capital down in the insurance subsidiary and on a quarterly basis pay up the dividend in order to meet the external obligations.

Tom, we could follow-up with David. We recently had a piece of analyst presentation that had several pages in there that help provided a clearer sense of those different cash flows, and I think that the punch line was that we were very comfortable with the ability to draw appropriate amounts of cash to the holding company to service those obligations and have it come close to exhausting the capacity of subsidiaries to provide the capital for the holding company if necessary.

Thank you, that's helpful.

We'll go another to Eric Berg with Lehman Brothers.

I have three questions. Number one, in the individual disability area, there is at least to my perspective to, my mind, a pretty troubling trend in the interest adjusted loss ratio. Once again I'll ask Bob Greving if he could give me a sense of why this continues to increase and when it will stop? That's question one.

Question two is, UNUM is one of the largest participants in the long-term care area. It’s a business that receives extraordinary amount of publicity in the general media for obvious demographic reasons. You're not making money in the business, at least not last year. It was break-even. Why can't you make money in such a prominent and promising business?

And number three, I'm surprised no one has asked about the fact that the percentage of the bond portfolio that is below investment grade has risen to 14.5%. What's the implications of that if any to your capital and ratings? Thank you.

On the first one, Eric, the increase in the gross loss ratio is more of a pattern of the aging of the block of business. As I've said before, we anticipate that the overall gross loss ratio moves up, but there is a fair amount of reserves that generates investment income. This year we've seen up-tick in the interest adjusted loss ratio. Over all our incidences remained relatively on target with that line of business, we have seen a decrease in the overall recovery rate in that block of business, particularly in this last quarter or so. So I think really it's more one of focusing the resources on the recovery and moving that, but it's not necessarily -- you can't watch that gross loss ratio and follow the trends on that. We did see, admittedly, a tick up in the interest adjusted loss ratio which does indicate some of the risk factor elements have deteriorated and that's mostly driven by recovery activity.

Bob, it's very much the old block is driving that.

Predominantly the old block, yes.

Why are you -- I was referring all along, Bob to the interest adjusted loss ratio. Why can't -- why is your ability to getting -- to get these professionals back to work seemingly deteriorating?

Well, I think in the most recent period, Eric, I think we're seeing a little bit of a parallel between our group side as well as our individual side. I think a number of our professionals have been somewhat diverted with a lot of activity in dealing with answering questions and dealing with some of the inquiries that have resulted from some of the attention in the most recent periods.

Okay. Thank you. With respect to long-term care?

Eric, maybe we would like Ralph add a comment to Bob's on that particular question, right?

Sure. Eric, in addition to the impact on incidence of down economic time, it does affect our recovery rates as well. What we find is that as jobs are in jeopardy as positions are changing, it is more difficult to work with individuals in a way that rapidly returns them to work. And so I think that that's one factor. I don't think it's a large factor, but I do think it is a factor in our results here.

Let's shift to your question around individual long-term care care. I think we certainly share a point that's embedded in your question around the profit profitability of that product. It's an important part of our strategy. On the other hand it's not meeting our profit or growth objectives. Maybe I'll ask Joe Folly to talk about the new product because we did file a new product and embedded in that is not just a set of contractual difference but also some price adjustments as well. Joe?

Tom, yes, we did introduce a new product, actually the 1st of February, which has both product features as well as fairly significantly higher pricing. That pricing does hit our full margin targets for the product. The product is approved in about 80% of the states we do business in. And so that should begin to drive some profitable results, you know, going forward.

Just a quick follow-up. Is the issue in long-term care that you suffered last year, which eroded profitability and left you basically break even, is that the number of nursing home stays? The length of stays? Is it too much customer retention, which I realize is a perverse thing to say is good, but was that a problem? What hurt the results, the recent results?

It's the latter. It's the persistency of that that.

Okay.

Eric, this is Tom White. It has not been an incident issue for the individual long-term care. Its more a fact of the persistency as been longer. Therefore, we are having to put up more in the way of reserves for those claims. It's important to note we have a new product filing and we're addressing the profitability and we'll be raising the rates on the new businesses as we grow it going forward.

And our position in the market on individual long-term care different than group long-term care where we are clearly the leader, I don't think that we would consider ourselves at the top of the pack in terms of position of the market. We would be what, 6th or so?

Yeah, we rank from number 5 to number 6 in that market. The other thing I would add, we're shifting to just as we did with the individual disability business, is we're increasingly focused on multi-life lifelong-term care business. That's been a shift that's taken place really over the last 12 to 18 months and we'll accelerate that going forward.

And as for the 14 percentage of the bond in the investment grade?

We look at that on a market value basis. On that basis, we are at 10.5% that's high yield relative to fixed maturities. We were 9.6% in the third quarter, about 10.2% in the second quarter. So there are a couple of things going on in there. One is, yeah, we continue to get some downgrades of investment grade from fallen angels into that and that'll have a negative impact on it. Also what happens ironically, some of the evaluations of the existing high yields is going up up. You saw in the fourth quarter and a little bit into this year, that some of those spreads have come in, so the valuations of those high yields have gone up, so the market value has gone up. So it's a good thing that is going on within that. Now, you know, obviously, we try to manage that to right around a 10% exposure on a market value basis. We do that by selling off security as we do get downgrades and see the value situation moving up. We buy very, very little net new below investment grade bonds and have not done so for three or four years at this point.

Thank you. Can you connect that, Eric to your comment about capital, that would be one of the issues on our list in terms of whether other flight refinement to our strategy around that class of as assets that can be a source of capital.

Thank you.

We'll go next to Joan Zief with Goldman Sachs.

Just a few questions. When you think about the need to review, as you say, capital positions, et cetera, et cetera, are you rethinking commitment to any of your businesses? I know you talk about the opportunities related to reinsurance and raising capital, but is there any potential for restructuring the company, the selling off pieces of the business, anything like that, that might be considered things that take a lot of time and effort from management, take a lot of capital, but don't really provide the necessary incremental growth and returns? So, that's my first question.

My second question is, is there any additional litigation activity that is taking place that we should be thinking of when we think about the corporate expense line?

And then, the last question I have is, is there any indication that -- in any studies about your market share in the group employee benefit business?

Joan, this is Harold. Let's start by maybe looking back in the history of our company. I think that we've always been willing to be totally open minded about issues that are not core assets of the company, and that will be a continued focus as we move forward. Tom's earlier comments about looking to all of the appropriate internal sources, we want to make sure that we do that obviously in this line. That is part of our analysis. If you go back to last three to five years, you'll see that we've been willing to take non-core tragic strategic assets and consider that to be a very important part of our strategic positioning. We should not take any of those off the table.

As far as additional litigation and how that might affect our corporate expense, Dean, you might want to give your sense of that, and Joe Folly, I might come to you on the market share question which was Jones third question. Dean?

Yeah, with regard to -- if you are talking about something specific, big ticket item litigation, no. If you are talking about sort of a general litigation with regard to claim litigation, there is some increase there that I would not already it as remarkable or out of the ordinary.

One trend that we are watching closely, which I think is a positive trend is the percentage of new litigation that's coming from the individual type case, which tends to be the bigger ticket item is actually declining and that's a trend we will watch, but that's a trend that's been going on for a year, so that tends to substantiate that. But I think in answer to your first question, no, there is not a big ticket item that's likely to impact corporate expense this year.

And Joan?

Harold, in terms of market share, Joan, our market share will stay relatively flat, we believe, when you look at the end results for 2002. If you went back from a time of the merger, we were growing market share a bit as our sales were growing a bit faster than the marketplace. That was probably appropriate at the time because we were continued kind of regaining grip in the marketplace. We'll settle the year in 2002 with about 7% total disability sales growth. The industry is going to be in the 4% to 6% range. It's probably appropriate that we stay about where the industry is and not have major market share gains, but we'll be steady steady.

Okay, thank you.

We'll take our next question from Jeff Schuman of Keefe, Bruyette and Woods.

First of all, I was wondering if we could drill in a little bit on the group life loss ratio, the big decline there. Was this strictly a paid claim phenomenon or were there some reserve adjustments in the quarter?

Secondly, with regard to investment income, it was a bit higher sequentially in some segments, including group disability. I was wondering if there was some contribution from mortgage prepays, and lastly, going back to individual long-term care, you know, the earnings have been in a slump now for several quarters, and I think you've consistently described the fixed as being kind of a new business fix. I'm wondering why you are still apparently reluctant to pursue rate increases on this business which I believe is guaranteed renewable?

Tom, would you like to take that?

With regard to group life, it is seasonal. Fourth quarter is our best quarter historically, and it is a fairly seasonable quarter. We actually got a contribution from both the group life as well as the AD&D. AD&D, as you recall, had a poor quarter in the third quarter, so we had a fairly substantial turnaround in the AD&D. Normally we see a bit more even claims between the third and fourth quarter on AD&D, particularly auto claims, but for whatever reason, the fourth quarter actually came in very favorable on that. We did make some minor adjustments on some reserve elements that they were not material to the line of business business, to bring some of our reserving more in line with the approach that we're using on our group life waiver in the quarter.

We actually are manage managing our group life waiver claims actively with our group disability claims. So, that change did make some -- make for some adjustments, but that was relatively minor in the quarter. The bulk of everything really came as a result of the of just having a very favorable fourth quarter in our claims result.

Jeff, this is Tom White on your question on the net investment income and the mortgage back prepays, there was a little bit of a benefit towards the end of the year on some of that. I think for the full year, the mortgage backed prepays, the bond call premiums, the payments on tenders, things like that, was very consistent with what we saw in 2001 with that actually, the early part of 2002, those were those kind of miscellaneous investment income items were running below plan and did catch up a little bit towards the end of the year. I think you see that in, for example, in the individual disability line of business where we do have a little bit of the mortgage backed, some of the Z trawn(ph) of that to get some extra duration there and you did see a little bit a move-up in the investment income which would be primarily driven by some of those prepays.

Can you quantify the fourth quarter impact?

I don't have that with me right here, Jeff. We can get that to you.

Jeff, your last question was with respect to ILTC pricing and certainly I think we're well aware of that contract having a renewable element and pricing becomes an effective tool that can help enhance profitability in the future. I will say there is a lot of things you have to take into account before you actually implement pricing adjustments and maybe Joe Folly you can spend time showing where we were with that because we're not doing that for a good number of reasons, but certainly we know that can be an opportunity down the road at some point.

Yeah, Tom, we've looked hard at it, and decided at this point in time that that's not an avenue we think is worth pursuing. We think it would have negative marketplace implications in light of the fact that we are introducing a new product and want to have traction in that new product and that product is adequately priced. That would not be an appropriate thing to do.

There are regulatory issues, in terms of getting approves in 50 states, with 50 states having different standards of profitability and loss ratio requirements and so we took a look at it and made a decision that the risk return was not there right now to make that movement.

I'm not sure I understand that. If you can't get sort of in force business profitable, why is it so important to get growth. And I guess secondly, given your enormous resources, the rate filing process isn’t fun or glamorous but it is certainly do-able, I would think.

It's certainly do-able, although I would suggest that there are in different states that might make it difficult not it terms of process but in terms of willingness of regulators to allow you to raise price in certain places. It is -- even though it is a guaranteed renewable contract, it is more limiting than one would expect when you deal with the regulators. But in terms of the -- you know, the marketplace, you can't just look at long-term care I think in isolation. You have to look at what the impact of those pricing or changes might be on not only your long-term -- new long-term care product going fourth but on our other business and where we stand with our overall marketplace image and reputation and we just need to balance all of that.

Maybe, if I could add to Joe's comments. From a practical point of view, if we have discomfort and I’m sure other insurance companies feel the same way, if we were to have sold a product a week ago, two weeks ago and then file for a rate increase in the next month, we don't feel comfortable with that that. We would much prefer to take a closed block strategy, meaning that we would close off a block of business, bring in new product to market as properly priced and then over some reasonable period of time, then move toward some pricing decision after that portfolio has had a chance to, shall we say cure, be in place for a period of time, particularly for those who bought more recently the product. So it's just a practical approach that we think is far better and therefore give it some time.

Fortunately, we don't have a particularly large LTC portfolio. If we get tracking with our new product, you will get more of a benefit from a properly price re reintroduced product than for example someone who has a large underperforming portfolio. We have seen the impacts of that on our IDI portfolio. We are not in that same position with LTC.

Okay, thank you.

Thank you, Jeff.

Operator, we'll take one additional question. And then be available the rest of the day for those who would like to follow-up with Tom and myself.

The last question today from [inaudible] with Sinova(ph) Capital.

Thank you. I think my question has been answered.

Thank you for being patient. We know it's been a long hour and a half, but again, we stand ready to follow up as you deem appropriate. Let me say thanks for the -- not only your patience with us this morning for extending slightly longer, but also the depth of your questions and your continued support. We'll we be available as you need us the rest of the day. Thank you very much and have a good morning.

That does conclude today's conference we appreciate your participation. You may now disconnect.