普登 (UNM) 2003 Q1 法說會逐字稿

Please stand by. We're about to begin. Good day, and welcome to the UNUMProvident Corporation first quarter 2003 earnings conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Tom Watjen. Please go ahead, sir.

Thank you, Peter, and good morning everybody. We appreciate everyone joining us this morning on such short notice, and frankly, we understand there was some difficulties getting our release out this morning, which compounded things. So, again, very much appreciate everybody taking time this morning to give us a chance to talk about the release that we put forward this morning.

We hope, over the course of our discussions today, plus some of the follow up discussions we know we're going to have to have, that we can help you through today's two very significant announcement for our company.

The first announcement was our first quarter 2003 results, which released early, and the second is an announcement regarding our long-awaited capital raising plan. With me this morning is Tom White, Vice President of Investor Relations, who will share the speaking responsibilities with me. We also have Dean Copeland, our Senior Executive Vice President and Chief Administrative Officer, Bob Greven, our Chief Financial Officer, Joe Foley, our Senior Vice President of Marketing, Ralph Monay and George Shell from our Customer Care Operation, and Todd Pettis (ph) from our Investment Operation.

But 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 risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statement. These forward-looking statements are made based upon management's current expectations and beliefs as of the date of this conference call, but there can be no assurance that future developments affecting the company will be those anticipated by management.

For a discussion of the risks and uncertainties that could affect actual results, see the sections entitled Cautionary Statement Regarding Forward-looking Statements and the Risk Factors in the company's Form 10-K for the fiscal year ended December 31st, 2002, and the subsequently filed 10-Qs. The company expressly disclaims any duty to update any forward-looking statements.

Now, with that behind us, I'm anxious to get on with our discussion of today's announcement, with respect to, which we believe have had some significant implications for our company going forward - very positive implications, I may add.

The release of our long awaited capital plan, which I have a great deal of confidence we can execute in this quarter, achieves all the capital and financial strength objectives that we set forth including lowering our leverage, improving our regulatory capital, reducing our inter-company loans, reducing business and financial risk including investment risk, and strengthens generally our balance sheet.

Secondly, the actions announced help us truly put certain challenges we've had in the past behind us both with respect to our balance sheet, but also we have used this opportunity to set out a more appropriate financial plan which we believe is very achievable. The decision to strengthen group LTD reserves, which was part of our first quarter release (ph) , positions us well for the future.

I'm going to come back in a few moments to make some additional comments on our reserve strengthening decision and capital plans, but before Tom White reviews the first quarter results, I'd like to make several comments on the quarter.

First, we saw some very strong things emerge in the quarter. Premium income grew almost seven percent; investment income grew almost seven percent, as well; persistency improved in our - in our disability lines of business; and earnings in several key products and divisions were strong - group life and accident, Colonial, Canada, and our UK operation all generally met or exceeded our expectations. And despite all the adverse publicity we have experienced over the past nine months, we continue to see signs that we have maintained a strong presence in our key markets. Industry studies, customer and producer satisfaction studies, and our persistency results all indicate that we have maintained a very strong presence in our markets.

Now, there were two areas which were below our expectations. Investment losses have continued to run higher than in the past but close to our internal plan expectations. Although we have seen some improvement in the credit quality of our portfolio, this remains a challenging credit environment. We expect the general outlook to remain difficult for much of this year. I am encouraged, though, that our net unrealized gain in the portfolio increased from $1.8 billion at the end of the year to $2.2 billion at the end of the first quarter.

The other area which was below our expectations was our - was our claims experience. This is a challenging claims environment, particularly for claim recoveries in both IDI and LTD. We felt that - we felt that with the weak economy and recent lower than expected results prior to the finalization of our capital plan, it was appropriate to update our reserve analysis. As I mentioned earlier, based on this analysis, we strengthened our group - I'm sorry, our GAAP group LTD reserves by $454 million pretax in the quarter. As disappointed as I am with the need to take this action, I believe it is an enormously positive step for the future, reducing the risk in our business plan and positioning us to generate more predictable future results.

Now I will turn the call over to Tom White, who will cover our first quarter results. Then I'll make some additional comments on our reserve strengthening and reviewing in depth our capital plans. Tom?

Thank you, Tom, and good morning, everyone.

For the first quarter of 2003, UNUMProvident reported a net loss of $246.4 million, or $1.02 per diluted share, compared to net income of 87.9 million, or 36 cents per diluted common share, for the first quarter of 2002. Included in the net loss for the quarter was an increase in the company's group long-term income protection GAAP reserves of $454 million pretax or 295 million - excuse me, $295.1 million after tax. This represents $1.22 per diluted share.

Also included in the net income or loss for the first quarter are net realized investment losses of $57.6 million, which is 24 cents per diluted share, and 56.1 million, or 23 cents per diluted share, for 2003 and 2002 respectively.

The first quarter of 2003 results also included severance and pension benefits related to the previously announced management change totaling $9.8 million after tax, which is four cents per diluted share. So excluding the impact of the reserve increase and the net realized investment losses, after tax operating income for the first quarter totaled $106.3 million, or 44 cents per diluted share, compared to 151.1 million or 62 cents per diluted share for the first quarter of 2002. Additionally, the net income for the first quarter of 2002 contained a goodwill write-down of $7.1 million after tax, or three cents per diluted share.

Now let me provide some color on the results by segment, and you will note that we have adjusted our reporting segment to more closely reflect the manner in which we manage our business internally.

First, the income protection segment contains the results of group income protection which is both group long and short-term income protection, the individual income protection, and all of the long-term care and disability services business which was formerly the managed disability line. This segment reported an operating loss before net realized investment gains and losses and taxes of 353.8 million, and this includes the reserve increase of 454 million. And this compares to 163.5 million in the first quarter of 2002.

Within this segment, the group income protection line reported an operating loss - again, it's before net realized investment gains and losses and taxes - of 423.7 million versus income of 87 million for the first quarter of 2002. This year's loss includes the previously mentioned $454 million addition to our long-term income protections reserves. Excluding this reserve addition, operating income was 30.3 million.

The decline in earnings versus one year ago was primarily driven by the lower recovery rates seen in the long-term income protection line. In this line, [Inaudible] and paid incidence were down slightly versus the fourth quarter of 2002, but higher compared to the first quarter of 2002. In the short-term line, STD (ph) , increase in the paid benefits ratio compared to one year ago was driven by higher claims and an increase in the average weekly indemnity on these claims.

Our total group income protection sales for the first quarter of 2003 declined by nine percent to 118.8 million from 129.9 million one year ago. This was driven by a 15 percent decline in group long-term income protection which was partially offset by a two percent increase in short-term income protection sales. For this quarter, sales premiums for long-term income protection totaled 69.3 million, and short-term income protection totaled 49.5 million.

Premium income increased by 6.4 percent to 762.1 million in the first quarter from 716.4 million in the first quarter of '02. Our premium persistency improved in both lines of coverage. Persistency in the - in our long-term income protection block improved to 87 percent in the first quarter of '03 compared to 86.6 percent in the first quarter of 2002 and also premium per life increased by six percent versus one year ago.

Persistency in our short-term income protection line of business was 85.2 percent this quarter versus 83.4 percent in the first quarter of 2002. And here again, premium per life was up 6.1 percent compared to a year ago.

Moving to the individual income protection line, which is the old individual disability line, this line reported operating income of $60.2 million compared to 67.5 million in the first quarter of 2002. You will not that beginning with this quarter, we are reporting the individual business on two levels - the closed block, which is about 61 percent of premium income, and the recently block, which is 39 percent of premiums.

The earnings decline was driven by a decline in the closed block of business. The recently issued business continues to perform within our expectations, and you'll note that the interest-adjusted loss ration for the recently issued block was 46.9 percent in the first quarter while the interest-adjusted loss ratio on the closed block was 78.9 percent. And this is very consistent with the trends that we've been discussing with you over the last year.

The lower earnings over all were primarily due to a decline in net claim recoveries in the quarter. Submitted incidence did increase slightly versus the fourth quarter as was expected because of the usual seasonal patterns. Paid incidence increased slightly versus the fourth quarter as well, but was lower than one year ago.

Our new annualized sales, which is on a pay-for basis, for individual income protection increased 17.7 percent to 41.2 million from $35 million a year ago. Multi-life business increased to 73 percent of total individual sales, which is up from 68 percent one year ago. And premium income in this line was up 4.1 percent to $437.8 million and persistency remained strong at 93 percent.

Next, the long-term care earnings, which include both the group and individual long-term care lines, reported operating income of $5.8 million compared to $4.8 million one year ago. Paid incidence in both lines is down compared to one year ago. Long-term care sales are up 12 percent over a year ago, and persistency remains strong, as well.

And finally, the disability services line of business reported income of $3.9 million in the first quarter compared to 4.2 million a year ago.

Now I'd like to move to the life and accident segment, which includes all of our group life, AD&D, and voluntary - excuse me, the brokerage voluntary life and other product lines which were formerly included in our voluntary benefits segment. This segment reported operating income of $63.8 million in the first quarter compared to 44.4 million in the year-ago quarter. The earnings improvement is primarily driven by an improved experience in the group life line where incidence was flat versus one year ago in the average size of claim declined.

New annualized sales for this segment increased 15 percent to 95.5 million compared to a year ago. This was driven by an increase in our brokerage voluntary life business. This line produced sales premiums of $34.9 million, or a 70 percent increase over one year ago. Group life sales were up two percent to $54.3 million, and AD&D sales declined by 32 percent to $6.8 million. The premium income in the life and accident segment increased by 6.4 percent. Premiums persistency in the group life line of business improved to 83.1 percent for the first quarter, compared to 81.4 percent in the first quarter last year.

And finally, the Colonial segment reported operating income of $35.2 million in the first quarter of 2003, compared to $33 million in the first quarter of 2002. Premium income was up 9.1 percent to $170.6 million, driven by stronger sales and persistency throughout 2002. Sales in the first quarter of 2003 were $59.6 million, which is an increase of 8.8 percent.

The other segment, which is the same as under our previous format, reported operating income of $11.7 million, compared to $9.5 million a year ago. And again, this segment contains the results of products that are no longer actively marketed by the company.

And the corporate segment, which is also the same as under the previous reporting format, reported a loss of $54.2 million, compared to a loss $29 million last year. Now, this year's loss includes the $15 million pretax severance and pension benefits related to the management change.

The net realized after-tax investment losses in the first quarter were $57.6 million. This is comprised of gross realized before-tax investment losses and write-downs of $140.6 million and gross realized before-tax investment gains of $54.2 million, which would be an $88.2 million net on a pretax basis.

I'd also like to point out that the net unrealized gain, as Tom mentioned, on the portfolio expanded by $417 million in the quarter to $2.2 billion, while the gross unrealized loss declined by $265.5 million from year-end 2002. As of March 31, 2003, the book value was $27.09 per share. Book value excluding the net unrealized gains and losses on securities was $23.15 per share.

And finally, we're establishing, as we've outlined in the press release, our 2003 guidance within a range of $1.70 to $1.80 for common share. This is on a basis excluding the impact of the reserve strengthening and net realized investment gains and losses. This guidance takes into account the expected dilution from the common stock offering, lower net investment income due to the reduction of the high-yield portfolio, the impact of lower discount rates on new claim incurrals, as well as our view of a continuation of a challenging business environment and the resulting impact that that has on our claims incidence and net recovery trends.

And so with that, let me turn the call back to Tom Watjen.

Thank you, Tom. And before I discuss our capital rating plans, which frankly is something as I said earlier we're very excited about, I'd like to come back to our decision to strengthen GAAP LTD reserves in the first quarter.

Over the past several quarters, our claim recoveries have been below our expectations for both IDI and group LTD. This has become [Inaudible] an issue for our group LTD business where, although we still continue to perform above the industry averages and pre-merger levels, our results were below our long-term expectations. We managed Group LTD claims in three locations, and two of our locations are generally performing at levels very close to our expectations, while the third is below our expectations. We have a similar process in place at each location, so, it's certainly not an issue of the process, but instead, the consistent execution of the process.

The drop-off in net claim recoveries accounts for the bulk of the earnings shortfall in the quarter. Based on this performance, and with our intention to raise capital, we felt it was an appropriate time to update our analysis of our reserving assumptions. From this analysis, it was clear that we should revise the claim recovery assumptions used in setting reserves on existing claims.

Again, it's important to keep in mind that our current claims recovery experience at all locations remain above industry averages and pre-merger levels, but is below the levels we have historically achieved. Although we believe that, over time, we will restore the level of performance closer to historic levels, we felt that, in this environment, it was appropriate to bring our long-term assumption closer to our current experience.

This change in our claims recovery assumption is what is driving the pretax reserve strengthening of $454 million, which is about 2.6 percent of our U.S. LTD balance. We are committed to retaining appropriate reserves for all of our products, and I feel very comfortable that our reserves for all products, including now LTD and IDI are now at levels, which support our business over the long term. Now, I'm sure you're asking, what is driving the lower level of claim recoveries. We believe that there are a variety of factors that are driving this performance, including the economy. The economy especially impacts our longer duration claims experience, and unfortunately, the economy is something that is outside of our control.

There are also a number of factors in our control, and we have in place, or will have in place shortly, plans to address these issues. Next to the successful execution of our capital plan, there is no more important priority to the company for me than to work through these issues.

Frequently many of you raise questions about the interest rate assumptions we use in establishing our reserves. Now that we have completed our analysis of our GAAP group LTD reserves and updated that analysis, I'm more confident than ever that we have very limited interest rate risk in our business. By consistently lowering our interest rate assumptions on new claims, we have maintained a solid interest rate reserve margin in our reserves.

Let me close this discussion by saying again that I firmly believe that this is the time to address this issue, a time when we're looking to build back flexibility in our balance sheet and undertake an important capital-raising initiative. We have spoken often about our desire to reduce risk in our business and produce more predictable and consistent results for our shareholders. Putting this issue behind us today is a huge step in that direction.

Now I'd like to turn to the long-awaited capital issues we announced today. As you know, since the fall of last year it has been our intention to strengthen our capital position. Unfortunately, discussions with the SEC precluded us from coming to market earlier than this. We're obviously very pleased to have the SEC issues resolved and be in a position to proceed with this critically important initiative.

As we have discussed with you in the past, our objectives were quite simple, return the risk-based capital levels in our insurance subsidiaries to at least the levels we enjoyed in 2001, which was approximately 250 percent, lower our leverage ratios with the holding company, reduce our inner-company loans, lower the risk profile of our investment portfolio, and lower the execution risk in our business plan. The plan we announced this morning does all of that, and very importantly, most, if not all, of these actions that we announced this morning will be completed in the second quarter, and therefore, have an immediate impact on our results.

The elements of the plan are as follows: we are issuing up to $900 million of common stock and manatorially (ph) convertible securities, and we're highly confident in our ability to place these securities, and fully expect to have that offering completed in May. The proceeds of the offering will be used to reduce debt, including $535 million of inter-company loans, and increase the capitalization of the company's insurance company subsidiaries by $195 million. The remaining $170 million will be retained as a holding company for general corporate purposes, which will eliminate the need to take dividends from the insurance subsidiaries for the remainder of this year.

The second aspect of the plan is to lower our common dividends by about half to $0.30 annually from $0.59. This will bring our dividend yield into line with our peers and will also help in the pricing of the convertible security, which is priced off the common dividend yields.

Additionally we will retain over $80 million of capital annually in our insurance subsidiaries to, again, help further build future capital to support our policyholder obligations. Thirdly, as Tom mentioned, consistent with our investment strategy in the first quarter, we reduced our exposure to low investment grade bonds to the sale of $760 million of high-yield securities. This sale brings our exposure down to 8.4 percent of invested assets from 10 percent at year-end. And we intend to look for opportunities to further reduce our exposure as market conditions allow.

With the strong rally in the high-yield market, our net unrealized GAAP gain was $2.2 billion at the end of the first quarter, up from $1.8 billion at year-end. And lastly, beyond the capital we've contributed from the offering, we are further strengthening our statutory capital through the contribution of assets presently owned at the holding company, valued at approximately $285 million, to our insurance subsidiaries. And we're also taking other business actions to improve our productivity and our cross structure.

These actions will substantially change our financial position. Our risk-based capital ratios will be restored to approximately 250 percent, our debt-to-total capital ratios with partial equity treatment for the new mandatory convertible stock will decline from 28 percent to 24 percent. Inter-company loans will drop from almost $700 million at the end of the year to less than $200 million. The risk profile or investment portfolio has been substantially reduced, and with our revised outlook for the future we have significantly improved our ability to deliver more consistent, predictable results.

No doubt these actions come at a cost. We feel this cost is justified, as it helps us to put some of these issues behind us and allow the focus to shift back to leveraging our unique franchise, expanding the market for our products and services and serving our customers well. In doing so, we expect to generate predictable, improving returns for our shareholders.

Frankly, I would have hoped for a somewhat better response than I think we'll be getting from certain [Inaudible] agencies. We feel that our plan addresses the issues of capital, leverage and investment portfolio risk. Their focus now appears to center on the execution of our business plan and operating earnings performance. We are confident in our ability to deliver on our plan and believe that as we achieve our plan results we will see stronger support emerge from this important constituent.

Many of you have [Inaudible] customers and employees are holding up with the challenges we face today. The short answer is very well, but I don't take any of that for granted. We're working very hard to be sure that we keep our people and customers well-informed of the events and facts surrounding our company. I believe today's announcement will have a very positive impact on these groups, who can now see closure near on the capital issue.

I would also add that one of the key reasons our customer relationships have remained strong through this challenging period is the strong relationships our people have maintained in the marketplace. We are continuing to focus a great deal of attention on assuring that we continue to have, not just the highest quality products and services in the marketplace, but also retain the absolute best people in the industry. I'm proud to say we're doing both.

Now let me conclude by saying that we're very pleased to finally be in a position to proceed with our capital-raising plan. Although I'm very disappointed with certain aspects of the results for the quarter, I am confident that, through the steps we are taking, we are much better positioned for the future. I'm also very confident in our ability to successfully complete the actions we've announced today. In doing so, we are immediately stronger financially, and have positioned ourselves to deliver consistent, predictable results in the future, and over time, improve the returns in our business.

Peter (ph) , this completes our prepared comments, and we'd like to go to the question-and-answer session.

Thank you. Today's question-and-answer session will be conducted electronically. If you'd like to ask a question, please press the star key, followed by the digit one on your touch-tone telephone.

Once again, it is star-one if you would like to ask a question.

And we'll take our first questions from Michelle Giordano with JP Morgan.

Good morning.

Morning Michelle.

I was hoping Tom that you could give us some more details on the plans to improve the recovery. You said you had a couple things in place. You're talking about the economy driving that. I think last quarter we talked about the fact that the employees were disrupted. So if we could get into that first, that would be helpful

Yes, I'll make a few comments and certainly ask two of my colleagues, George Shell (ph) and Ralph Monay to add to that. But I think, again I come back to saying that we're still very proud of the fact of the fact that, as an organization, we're still producing results that are better than industry averages, and we're still producing results that are better than the pre-merger results.

But as I said in my comments, we certainly do have room for improvement. We've seen some slippage. And I think part of that we can attribute to the economy. Part of that we need to focus on some things that we can do. There's some process improvements we've made to, again position our people to be able to make decisions more decisively in terms of reducing of the sign-offs and things that maybe we're getting in the way of people making some timely decisions. I say we're also very actively focused on being sure that we're, you know, enhancing the quality of the training to our people. Again, we added a lot of resources in this area of our company. Perhaps there's some opportunity there for continued improvements in the training of our people, having brought a lot of new people into those functions. I'd also say frankly there's some opportunities for strengthening some of the management teams that support certain parts of those businesses.

So again, those are the sorts of things we're working on. We're improving, I think the quality of our people each and every day. We're very proud of the things we do there, but there are opportunities for improvement, but I would look, maybe Ralph if you've got anything you could add to that in terms of some things that we're working on.

Sure Tom. I think you've covered many of them, but one of the key factors I believe in the falloff in recovery rates has to do with you know, not being able to appropriately match resources to higher than expected volumes. You know, Tom mentioned one site in particular, and that's in the area where we saw that in most pronounced way.

The staffing plans to bring those two back into line have been developed and implemented and we do see an impact, favorable impact as we move forward.

Another factor that I would mention, just has to do with maintaining a very sharp operational focus around that business, and actually Tom we have supplemented some of the management focus with George Shell (ph) joining our Return to Work Services area, really with a focus around the operation, while I will be focusing primarily around the continued development of our absence management capabilities.

But with that, maybe I'll ask George to see if he has any additional comments.

I think both of you covered the key points that we're focused on. I don't know that I have an additional comment.

It's a good question Michelle, and again I hope that was helpful. Again, I think the thing I would come back to is that the performance really is at level, very consistent with our expectations in one location. So I think we're very confident in the process, but we are speaking about things that are around the execution of that process and we take that as a challenge to improve there.

Tom, a couple of years ago, we went through all these series of rounds of reserve strengthening. How could we, you know, get some confidence that this might be the last reserve strengthening, or is it the last reserve strengthening?

It's a good question, Michelle, and again I think as I made my comments I feel very strongly as we look at all of our reserve balances at this point, very strongly that these reserve balances are adequate and where they should be. Again, I think the actions we took this quarter I think exemplify a view that says, listen when you've done analysis and you find that there's some issues that you need to address, address them openly and upfront. And I think we've, we certainly have taken that approach. So again I know there's been a history there that I know for you and others, you've got to look through, but again, I'm just saying I look at this, and I look at the situation, look at the work we've gone through at the end of the year and the first quarter in anticipation of a capital plan, which puts even greater rigor around those key processes and looks at your reserves, I feel very confident the positions we've established right now.

OK, and then lastly, what do you expect for loss ratio in a normalized basis, in the groups' disability business?

I'll ask Bob Greven to speak to that Michelle.

I think, Michelle, generally we wind up in the 80 to 85 percent type of range, and I think depending upon the mix of business with large case versus small case, we would anticipate that it would be in that range.

Thank you.

We'll take our next question from Liz Werner with Sandler O'Neal.

Good morning.

Morning Liz.

Hi. I just had a couple questions. First, I just wanted to make sure that the decision to add reserves to group LTD, but not to do anything on the individual side, just because you did make a point of saying that the claims recovery issue was really both an IDIN end-group issue.

And then secondly I was hoping you might be able to elaborate a bit on you know, what the rating agencies are saying, and your response given that, you didn't sound real happy with it right now.

And then lastly, I'm wondering if you have any target ROEs for 2003 and longer term?

That's it guys.

Those are good questions. Let me start with the reserve one and I'll ask Bob Greven to supplement.

I think again I did make the point that we didn't, we haven't had a recoveries in the IDIN business, either performing exactly where we'd like to see them, but again, I think we've, Bob gone through the process of assessing all of our reserves and all of our assumptions, I think we still feel good as we look at the reserve levels and those assumptions that the IDI reserves are very adequate.

So again, I think we have been through that process very recently Liz, and feel good about that. I think again, though, as we went through the assessment of those assumptions in relationship to current experience and future experience and LTD, as I said earlier, that's where I think we felt there was a need to modify those assumptions downward and again that's what lead to the strengthening in the quarter.

But Bob, would you like to add to that?

Tom, I think, you know, the lower recoveries that we did experience in the quarter are reflected in the earnings and we actually did, actually experience a little bit lower overall earnings in that segment of the business as a result.

I, you know, in examining the overall reserves we do feel comfortable that the reserves that are there and the assumptions that are being used there are appropriate for that line of business, and so we did look at it in the quarter, obviously as a result of you know, ideas is experiencing some similar patterns, particularly economic. The offsetting element of that is that incidence has been very stable in that line of business as well.

So we're seeing a very stable line, stable incidence in our ID line while we continue to see some pressure, particularly on the economically sensitive sectors in our LTD business.

That's very helpful.

Maybe to the rating response, anytime you could just give an assessment as to what you think the rating response will be and the perhaps just some commentary on some of the points as to why?

Sure, Liz, you know, I think it's important that we keep all of the financial strengths rating in that A category and I don't know what, you know, agencies have said publicly at this point this morning, but we're confident that all of the financial strength ratings for our subsidiaries will remain in the A category, which is very important to us from a marketing point of view.

I guess the frustration we have there is the fact that, you know, if you look at what the rating agencies were looking for over the last year, it was a higher level of capitalization in the insurance subsidiaries, a reduction in the overall leverage, and it's an improvement in the risk profile of the investment portfolio. And we are confident that this financial plan that Tom outlined addresses those issues.

I think the issues with the agency for the most part have moved from some of those balance sheet issues over towards, you know, earnings growth, and overall profitability of the business. And you know, I think that somewhat, you know, kind of focuses in on the net recovery issues that we've had over the fourth quarter of last year, and first quarter.

So, you know, as Tom said, you know, we got plans in place to address that. We're confident that that will be moving back in a positive direction and will lead to better results in the future. And we would anticipate, you know, better ratings in the future, because we've addressed some of the, you know, the critical balance sheet issues that have been out there for about a year.

OK. Good.

The third point Liz, on target ROEs, I think when you push the numbers around based on the guidance we've given and look at the new capital coming into the company, you'll see that we've, unfortunately the ROEs dropped just slightly below eight percent in terms of just those, the current ROE. As I said earlier, we paid a price basically to put this capital issue behind us and it certainly has an adverse impact on the consolidated ROE.

I think when you move back up to the products, I'd say that, again, we're still seeing, you know, sort or 11 to 13, 14 percent ROEs on some of our key products, like our group line, like our new IDI business.

So I think those areas we still are seeing returns that are, you know, certainly in the double digits, but there is certainly ample room for improvement there. But really I think the big message is, because of the capital raising, the diluted impact of that, you're going to see the consolidated ROE down just slight below eight percent.

OK, thanks a lot.

Thank you.

We'll take our next question from David Lewis with Sun Trust Robinson Humphrey.

Morning David.

Morning. You talked about, I guess some strategy changes, or are there going to be some strategy changes to help the long-term profitability of the business. And I'm really talking less on the claims side. Are there certain areas you're going to kind of move away from? It sounds like you're having still some difficulty in the LTD area and I think last quarter you indicated that only 30 percent of your book was economically sensitive. So it sounds like that business might be losing money, while the other business is doing fairly well. So maybe comment on that, if you pull back in the IDI area or any other factors.

And then second, following on Liz's question, what would the ROE be on the close block of IDI business?

OK, two good questions David. Let me, let me take a stab and again ask that Bob and Tom to add to this. First off, again, I think even with the perhaps, more appropriate outlook for LTD that that line of business with even appropriate outlooks and the pricing that we're doing, we still think that's going to be in the low double digits in terms of an ROE.

I think the bigger question you're raising is certainly an important one for everyone and that is, you know, are there other things that we're thinking about. And I think at this point we're, all we're prepared to say is that we're going to continue to look at our business plan and our strategy. There are certain products in areas that frankly you know, I think as we look to the future, it may not sit with that future. But I think at this point, we're sort of, it would be premature to get into that kind of discussion, but I would put it in the area of fine tuning our focus around places where again, we can have, where we have significant market leadership position, where we think those positions can be leveraged into good growth and good return, and that they are meaningful to our company.

So again, you could find ourselves finding smaller product lines with smaller little pockets of business that frankly just might not fit with the future. So I think there will be more to come there David, but I wouldn't want to get into that at this point, because I think that's premature.

We're also trying to keep our announcement today very simple around things that can be done in a very rapid period of time, so that no one puts any, I'd say, degree of uncertainty around that as they think about how to look at the things that we announced today. But I wouldn't want to give anyone the impression that there won't be some additional refinements and things that we do, including using some reinsurance transactions to continue to find ways to arbitrage and build additional capital strength. But we wanted to keep today's very simple in one where I think everybody could see this is imminently doable in a short period of time.

Now with respect to the close block, Bob, would you like to speak to the return on the close block?

Sure. Hi David. The first quarter of the year is always the toughest for our ID line of business, and this quarter is no different and normally it's the lowest overall return for the business.

So I wouldn't annualize the first quarter, but I think if you take a look at the 2002 and as you get your statistical supplement, we actually have a separate page on this, I think you'll find that the you know, when you consider that we've got over $2 billion of equity that basically supports this business, you'll find that the ROE on an annualized basis is going to be in the low single digits, probably in the three to four percent type of range of our ROE for 2002, and I think you know, within the foreseeable future for that block of business, it's stable right now. The capital continues to be relatively stable as do the overall earnings on that block of business, on an annualized basis anyway. And I think we'll continue to see that low single digit type or ROE in there, in probably in that three to four percent type of range.

Thank you. One final question. You talked about guidance of $1.70 to $1.80, can you give us some of your assumptions? Do you assume that we have kind of flat loss ratios moving forward and what kind of conversion price do you assume on the preferred?

Yes, we've, I think we've used some general terms David, and I think you know, people would tell you that the convert is probably going to have a coupon of between seven-and-a-half and eight-and-a-half percent, that's the conversion premium of between 18 and 22, so I think Bob, those are the sorts of things that when we tried to give guidance with most other assumptions, we tried to use terms and conditions that we thought were, you know, going to be right in the center of what should happen in the marketplace.

As it relates to, Bob do you want to?

Other plan assumptions David, I think, you know, basically we're anticipating that our overall incidence will have a slight improvement in LTD by the end of the year, not as good as 2001, and not as probably quite as bad as 2002. Recovery rates will be lower than what we had seen in 2002, reflecting this environment that we have observed particularly as it looks in the first quarter.

I think overall, you know, persistency seems to be remain strong. We've continued to project that. We've also factored in our renewal program. We're about three-quarters of the way through as far as financial impact of placing rates in the already. We're seeing a very strong year comparable to what we had experienced in 2002 from our renewal program. So that's coming in very nicely.

And I think on our individual disability, we've basically experienced relatively stable incidence on our individual experience. So we're continuing to project that we'll see a stable incidence in our ID line of business, which we have actually seen in the last three years, and that line of business, but our, we are projecting a bit lower recovery rates, again reflecting the environment that we've experienced and are anticipating for the remainder of the year.

I think in summary it's really a cautious environment of not particularly better incidence levels, certainly not particularly better than we saw in the first quarter recovery rates and the discount rate piece Tom may want to speak to.

Yes, I was just going to speak to the discount rate and the overall impact of lower interest rates. Certainly with the investment portfolio repositioning we've done, we're giving up roughly 300 basis points, you know, moving from you know, high-yield bonds to a mixture of like two-thirds single A to one-third B AA securities, and that's on $760 million. So we factored that in. Plus we lowered the discount rate assumptions on new claim incurrals (ph) , not on the enforce reserves there, but on new claim incurrals (ph) , and so that's going to have a several cent per share impact as well.

And what is that change in the discount rate on the new claims?

New LTD claims are coming in at 5.34 percent.

And that was what before?

It was about 40 basis points higher than that, Tad (ph) do you remember it's like 5.8 percent.

Yes sir.

It was about 50 basis points higher than that David.

So we brought those down pretty dramatically David. We're very, we think that's the right thing, we have the chance now to reset some expectations, and again, if we see some improvement in the environment, whether it's economic in the effect the incidence, whether it's operational in terms of things we've talked about, or whether it's interest rate movements, that's certainly going to be on the upside, but I think we've chosen to use this chime, as best uses were about to go up on a capital rates to reset those expectations.

Great. Thank you.

Thank you David.

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

Morning Vanessa.

Morning. Looking at your $1.70 to $1.80, do we take the first quarter, the 44 cents and back it out so that's an actual for this year? Or is that a pro forma?

No that's an actual for the first quarter. We would expect kind of on a quarterly trend going forward that you know, there will some improvement in the operating results, which will in effect by offset by some of these factors we talked about. And quarterly earnings, we would estimate to be in kind of the mid 40's per share.

OK, so there's quite a nice improvement, because essentially the fundamental improvements offset the dilution?

That's right. I think the two things in the first quarter that sort of Tom, you talked about in your comments, it was a particularly difficult LTD quarter, and I don't think we expect to have that, continue to happen over the course of the year. Secondly, I think that number Tom included some of the severance charges, which are specific to that quarter.

Right.

And that's four cents?

Yes, that was four cents Vanessa.

OK, so just I guess looking at, looking at, you've given us the facts that you have three claims operations, one of them is experiencing recoveries that are disappointing. If all three claims operations were operating in line, what would we expect to see in the loss ratio? Is it a significant magnitude in the loss ratio? Greven: I'm not going to quantify that probably Vanessa, because I'd have to probably go through some significant calculations to do that, but understand that you know, that operating probably, you know, is, has command over about 40 percent of our LTD claims, so pretty significant impact. It needs to improve about, oh, about 10 percent I think to get more in line with the other operations.

OK, Bob, can this quarter, I don't know if I did this right. I backed out the reserve charge and I calculated a loss ratio in the LTD business of 91.4 percent.

That's correct.

And that's up from fourth quarter of 86.7. Bob you helped us with sort of a run rate earlier in this call, which I've now lost, significantly lower than that. What ...

Yes, I think Vanessa, if we could get, what we've got is, we've got an economic element here that is not in our control, but I think if we can get, you know, our operational control back and see stable you know, even at the current higher rates of incidence, again I still think that that mid-80 percent type of range, 80 to 85 percent type of range is an achievable range.

Bob, I think Vanessa's looking to, we don't publish these numbers externally, but we use the natural recovery rate against 95 A as a table.

Right.

What's the point of recovery rate worth in terms of earnings per share, that's maybe what you're getting to a little bit Vanessa. I think it's worth about three for four cents a share.

Yes, I'd have to go back and take a look at it, but as I recall, when we were looking at the plans ...

So I guess to your point, there is leverage Vanessa to improving recoveries.

Is that annually or quarterly?

That would ...

Annual.

That would be annual, OK.

I think that's the direction you're trying to go with some of your questions.

It is. I think the loss ratio is helpful for us to model, as well.

Yes.

If the 91.4 comes down to 85, I think you're, is that what's in your $1.70 to $1.80 guidance you're giving us?

I think Bob gave more of a longer term view. Our loss, I don't believe are coming down that far in the plan Bob.

Not that far in the plan immediately.

No. So I think ...

We're, I think we get back on track right around the fourth quarter, not in the interim quarters Vanessa.

And Bob, if you gave this, I didn't hear it, the capital committed to three to four percent ROE close block?

It's a little over $2 billion. I think I'd have to go back and take a look at where it's at right now, but it's about $2.1 billion.

OK, and Tom Watjen, if you've done a lot of work on what you think needed to happen here in terms of both the capital raising, but also in terms of putting the company in the position that is comfortable to operate from. If you were coming in from the outside, you know, new to the company, running the company for the first time, and would have done all these studies, is there anything else you think an outsider would have looked at, such as you know, DAK on DI, DAK on LTD, you know, we've already asked you about reserves on DI. Any other areas you think that you would have wanted to look at or did look at and made decisions on?

It's a good question Vanessa and to believe or not, I actually tried to put that perspective on, you know, on this whole process actually, and I can't, I don't think there are anything. I do think again, what I was alluding to earlier, I do think if someone were coming in fresh, there are some pockets where we've got some business and products and things where I think we have a chance to pull back out of those parts of the business, because the returns aren't what they should be, the, you know, they aren't material for our business.

So I think that was what I was trying to talk about earlier, in terms of some business refinement. I think somebody would certainly come in and probably have that on their agenda. But hopefully you heard it from me, it's on my agenda as well.

And just to ask it in a more direct way, would there be any big bass charge that you think they would look at, that you haven't looked at?

You'd have to bring a very incredibly different perspective to this. I think we've tried to, you know, especially in anticipation of the offering, Vanessa, is be sure that we've done all that searching and looking and probing and prodding for those sorts of things, and I say Bob we don't see things like that. So we have worked very hard to be sure that when we have, I looked at this as a one chance to sort of clean the slate as we head into an offering, and so we've gone through that process. And so someone would have to bring a very different perspective to find anything that we didn't find, we didn't already isolate on.

And finally, Tom White, S&P does have a press release out, taking you down to the claims paying of A minus. They're going to keep a negative outlook until after the offering and they're saying they'll take it off once the offering is done, the restructuring is done and earnings are within target ranges over the next two quarters. Is their target range of earnings the same as yours?

Yes, just a consistent target and again, yes, that is a consistent level of earnings that we shared with the rating agencies that we shared with you this morning.

Thank you very much. Good luck.

Thanks Vanessa.

We'll go next to Caitlin Long with Credit Suisse First Boston.

Morning Caitlin. Morning.

Miss Long, please go ahead.

Caitlin?

Please check your mute button or pick up your handset.

Can you hear me?

We can now Caitlin.

Sorry about that.

That's OK.

I'm not in the office. Sorry about that.

That's all right.

I just want to follow up on Vanessa's question, specifically relating to DAK, given that in the group disability business, it looks like the profitability going forward is not going to be as high. Why wasn't there a revision to the group disability DAK in this quarter in conjunction with the reserve charge?

And then secondly in terms of the statutory results, I looked through the 2002 statutory filings for all the subsidiaries and added up the line that would included your group disability business, and it showed $171 million pre-tax loss versus GAAP reported earnings in group disabilities of 330 million last year for $500 million difference. Can you give some more color on that, and give some guidance as to what the statutory results should look like in group disability this year?

Let me speak to the DAK Caitlin and then I'll, Tom I'll ask you and Bob to speak to the stat results, but we have, back to Vanessa's point, we have scoured every part of our balance sheet in our business to be certain that there aren't other issues that could emerge there, and I think we're about very, very comfortable with our DAK balances. I think Bob said in his comments and Tom in his as well, that actually our persistency is actually performing better than expected. And so as you know there is a strong connection between the way we manage DAK and the persistent leads to the amortization of DAK accelerated. There's a very disciplined process for doing that and again, the good news is frankly we're having better than expected results from a persistency point of view, particularly on a disability related lines.

So again, we did look at that, saw no reason to make any adjustments and continue to feel very confident the process we have in place is pay as you go and is working very effectively.

Tom or Bob, you want to pick up on the stat to GAAP.

I guess, the one, I guess one big element Caitlin that was missing in that analysis is the UK operation, you know, that does product statutory profits and it is not included in the U.S. operations that you see when you add up all of our subsidiaries and then compare it to a GAAP consolidated number.

So you got the UK operation that's missing, and then the other big element is just different reserving assumptions between statutory and GAAP, and I don't know that I can fully describe what those are, but maybe Bob could give just a few highlights on that.

Well, as you can see the reserve strengthening for this period was focused on GAAP, the statutory reserve formulas are very, very conservative. In fact, in many cases considered generally redundant. But overall the, you know, the statutory reserves are much more, much more stringent, and so, you know, basically use up earnings, particularly if you've got a growing block of business.

So I think you've got a reserve differential, you've got a deferral of deferred acquisition cost differential, you've got - and you've got, basically, within our GAAP earnings, you've also got earnings from non-insurance elements as well, like our GENEX organization and others that actually have operational earnings that are not reflected when you add up just this extra (ph) numbers. So you really need to do a separate reconciliation of all the - all the organizations.

But even still, I'm a little surprised that, isolating the U.S. business, that it had such a big statutory loss last year. Are we looking at a statutory loss again this year for that line?

I think we'll have a statutory loss in the quarter. I think a lot of it will depend upon where the remainder of the year is, on a statutory basis, as to whether or not the last three quarters of the year will offset that.

Yes. I think the quarter - the first quarter, Bob, is always our most challenging from a statutory basis, but I think last year we saw consecutive second, third and fourth quarter improvement, frankly. But the improvement wasn't as good as it needed to be to offset the deterioration in the first quarter. So I think the trends that we've seen in the last couple of years is very poor first quarter results and continually improving results second, third and fourth quarter.

OK. Thanks.

Thank you.

We'll go next to Robert Glasspiegel, Langen and McAlenney.

Good morning, Robert.

Good morning. Just a question on first quarter pricing. At what point did you factor in A - the claims incident trends and B - the lower discount rate? Was this a January 1 knowledge factor? To what extent did we go into January renewals with a sort of underpriced matrix in play? I've got a couple follow-ups.

Joe Foley, do you want to talk to that because it's really on the renewal plan and the fact is, actually, Robert, the reserve adjustment, I think, as you know, was related to in-force claims. I think there's been a - there's a very tight connection to current experience and how we adjust pricing and make those decisions on a real time basis on new pricing and renewals. But maybe, Joe, you could add a little to that.

It's - we've factored in, in our renewal plan, actually back in the fourth quarter as we went to the prime renewal season, higher incidence rates we were seeing, the lower interest rate environment. You know, our targets - we're very comfortable with our targets on renewal pricing. We're pricing in the high single digits, which we think reflects, you know, the change in the environment. And we're having, as Tom noted earlier, we're having excellent success in placing renewals. It's been a strong season for us.

I guess, Robert, I wouldn't - I wouldn't necessarily connect the reserve decision to concerns that we've been sort of underpricing current business. I think that the reserve issue, I think, Bob, is more of an in-force claim inventory issue as opposed to the fact is we're using, we think, some very appropriate and realistic assumptions on new business pricing.

Actually, the reserve change focuses mostly on the longer duration ...

Right.

... claims so that we're, probably 1999 and prior claims. And basically, it's just a slower way of getting those longer term disabilities back to - back to a productive lifestyle.

So my concerns that companies that under reserve in the business often underprice is invalid in your - in your eyes?

foley It could be an industry issue. I'd say the way we're set up, Robert, it doesn't - that is - that is not a concern. We've been pretty aggressive. I think as we've shared with you before, actually, about taking renewal actions in the marketplace did actually start though probably three or four years ago. So, in fact, we're even planning now for our 2004 program. So there's a lot - there's a probably real time process in place to be sure that we are - we're using real information about the current incidence and recoveries and interest rates environment each time we make a pricing decision.

Two other quick smaller points. On the long-term care business, one company's exited the business saying that persistency's been too good versus pricing assumptions. When you - when you mentioned that you had favorable persistency in long-term care, did you mean good lapses or low lapses? What is favorable persistency in your eyes?

Favorable persistency is that the level of persistency was staying at a stable level. Now, I think from a, you know, again, keep in mind, you know, what we're reporting now is the combination of our group and our individual long-term care business. We are still seeing some profitability pressure in that individual long-term care which, you know, we used to report as a separate line. And that is driven by the fact that persistency is a bit higher than we would have, you know, priced into it. Now, we're making some product adjustments, we're making some pricing adjustments on the individual long-term care. But the bulk of the earnings, you know, are coming out of the group side in that - in that operating monitor (ph) .

Bob, maybe to - maybe to help you out with the pricing side of things, JHA (ph) just released a 2002 U.S. group disability survey and, you know, one of the things that they measure in there is a premium for life on disability. And for UNUMProvident when we submitted our premium for life information to that particular survey, our premium for life was up about 10 percent in 2002. We continue to strengthen that overall.

So, and I think that's probably pretty much in line with what we're seeing in the industry in response to, you know, what the industry has experience in economic trends as well. So I think we're pretty much in line with that and, like you say, an increase of 10 percent overall in your premium for life is, I think, a pretty strong indication of pricing.

The last question, Tom, once you gave us an ROE sort of goal or outlook for '03. We could use that to project sort of what the book value might be after the offering?

Yes. I think - I think people - I don't know if they can - I think you can calculate that - or Bob, I don't know if you want to share that.

No, we don't want to put you through a lot of maturations there, Robert. We ...

I was - I was capable of calculating it. But I just wanted to make sure that's what you were ...

I wouldn't suggest that you weren't.

OK.

But I think we can make it easier if you don't have to do that, Bob.

Yes, Bob, I think, and you know, and again, you know, we're using the assumptions of dilution that we're anticipating, you know, given the $400 million of common offering that's related to it. But the GAAP book value per share, including the unrealized gains on investments, using the $400 million offering is about $25.75 a share. And the GAAP book value, excluding unrealized gains, on a pro forma basis, is about $22.28.

That's the one you were using for ROE (ph) .

Right.

That's right.

OK. Thank you.

Thank you.

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

Good morning, Eric.

Good morning and good morning to everyone else. Tom Watjen, two questions for you. First, admittedly, some of the claims recovery issues that you've - that you've discussed relate uniquely to UNUM - to this claims processing center that is not performing in line with your expectation. But you've also said that some of the claims issues are clearly of a broader nature. Why aren't we hearing about claims issues of a similar type, growing recovery problems from others - from Hartford, from Met, from Standard, from, you know, from other big companies? No one else seems to be talking about this issue, which is curious. That's my first question.

And my second question is one that is - I hope you don't think it's provocative. It's genuinely meant to evoke a serious answer. And my question is this. You're going to go in front of portfolio managers who may not have a lot of detailed knowledge, certainly not as much as full-time analysts (ph) of this sector of the disability business. They won't know about, you know, paid this and submitted that, but they will know that the company has had a pretty, you know, pretty rocky history in terms of repeatedly disappointing in terms of their earnings and basically doing the same thing this morning.

What would be your response to a portfolio manager who might say why should we participate in your transactions if you've disappointed us so many times before?

And that's a provocative and appropriate question.

I don't - I don't mean to be provocative, but ...

No, no, no. But it's one - it'll inevitably come up when we're in the marketplace.

Right.

... thought about it. So you're good to raise it.

I hope you think it's a fair question.

No, no, no, it is. Absolutely. I do. And let's come back to your first one and in terms of why you're not hearing other companies talk to these issues. And I think, frankly, some of us scratch our head a little bit on that, too, because we're all in the same business. I think, frankly, as you know, there's a degree of our business that we take from them and they take from us. And so, it's - it is, I think, something we scratch our heads on. Bob, I don't - I ask you and maybe even Joe to answer because I think you and your people go to industry functions and you may find that actually at industry functions there's maybe a somewhat different view of people of here. But maybe, Joe, I'll ask you to share a little bit on that.

Well, I think that's very true, Tom. I mean, when you do get people aside kind of on an industry basis, people are talking about some kind of things that we're seeing. They may not be as public about it and they may not be often as asked about it as frequently as we are. I also think, you know, we have such a large block that we're able to segment our block and understand the trends, sometimes better than others are.

For example, you know, we're clearly seeing recovery issues in the long-duration claims and that makes a lot of sense because those are the people that have to go back into kind of the general job market as opposed to short-duration claims who tend to go back to the employer that they just left. We're also seeing recovery issues and incidence issues in economically sensitive industries because, again, we're able to segment the business, because it's so large, into smaller segments and we can see, because of that, that it is the economy that's driving it. So I'm not going to speak for, you know, other competitors, but I think there's probably some things going along in a similar nature in their blocks, you know, whether they say that or not.

Bob?

Yes. I think one thing to kind of put it in perspective is, you know, we basically have, you know, 25 percent of the marketplace and about 30 percent, probably, of the in-force. So we're kind of like an index fund, from that standpoint, that if we're experiencing it, it's not unique to UNUMProvident. And I think Joe is correct. As we go to various industry meetings and we're talking to the - to the individuals that are from some of those competitors, they're not necessarily indicating that they're not seeing these things. In fact, quite to the contrary.

The one thing that I would point out is, you know, one of the things that we really do focus on, as Joe indicates, is a strong segmentation of our business. And, quite frankly, we've got a large enough block of business. And when we do that segmentation, you know, we actually have some statistical significance to the size of the analysis blocks that we can - that we can break out. And when we talk about our economically sensitive sectors and we focus on that, you know, we actually do see a significant pattern.

For example, in our manufacturing, wholesale and retail, if we look at our incidence that we've actually experienced in just those sectors and they make up, as - I think, as it was indicated earlier on the call - they make up almost 30 percent of our business. So it's almost 30 percent of 30 percent of the industry. You know, we're seeing that the incidence in those sectors, looking at the two years prior to the recession and then look at the two years since the recession started, we've seen about a 24 percent increase in that incidence.

Now, you know, I don't think that we're unique, and we're not selecting the - you know, the worst of the - of those - of those economically sensitive sectors. So, I think quite frankly, either some of the other individuals may not have the ability to do that kind of an analysis or they're just not seeing the - seeing the effect or able to identify the effect to just the economic conditions.

Eric, if I go to your second point about just why people should buy into our offering - and, again, I can't pre-sell the offering, but I can speak to maybe just a couple points about how I ask people to think about it and start with, as you're saying, that we do have a history in the company over the last four or five years of having a series of issues that certainly have surprised people.

But I think that with the changes in management, the way we've put some things in place within the last month or two, I think it's provided an opportunity and I think [Inaudible] behind some of Vanessa's question to really take a very hard look at certain parts of our business that when you have those changes that you have the luxury of being able to do so. And I hope as people look at the plan that we released this morning, they'll see that it was a pretty bold plan. It was designed to deal with what we thought to be not just the obvious issues, but anything that might come up as an issue down the road that would prevent us from being able to produce consistent, predictable results, which is what we need - know we need to do for us to restore investor confidence and get to the valuation that we think a unique franchise like this should have.

So, I think, Eric, it's no more difficult and I think people looking at today's announcement and saying that that has the boldness and the aggressiveness of a group that frankly is really taking this opportunity by the - bull by the horns and is prepared to really do the things that are there to position the company for value down the road and get a feel that, frankly, we've - we have looked everywhere to be sure that we don't find ourselves [Inaudible] coming back later with a future surprise.

That's why it was important enough not to answer the capital question, but we certainly actually also have the reserve issue properly assessed and then also provide guidance that we think is quite achievable.

Tom, one final question. In your guidance for 2003, this $1.79 area or range, have you assumed that incidence and recovery rates will remain stable - that is to say at the same level as in '01 and, you know, give or take - or will get worse from here?

From a year, it's actually a little worse. I think what we're really doing is picking up a little bit more [Inaudible] I'd say the first quarter I'd say, Bob, as we've built the plan.

Right. And it'll be a gradual improvement from first quarter, but it's still going to be a lower recovery than what we had obviously last year.

Thank you.

I think that's again, Eric, an intent to just be sure that we start on a basis that we think is imminently achievable, and that's important as we go through the process of selling securities.

Thank you.

Thank you.

We'll go next to Gail Golightly (ph) with Wachovia Securities.

Thank you. I have three questions. Did I miss it? Did you talk about what the two assets are that are being contributed to the insurance company?

We didn't go into that, but we can certainly do that, Gail (ph) . Bob, do you want to speak to that?

One of them - and understand that one of the things that we're trying to address in this whole thing is that we hold a fair number of assets at the parent company that could be and are considered solid assets for the subsidiary companies. We just have previously preferred to hold them as direct assets at the insurance - or at the holding company level. One of those assets is GENEX, which basically complements our case management of our group long-term disability and short-term disability functions in the company. So, one of them will be - the GENEX organization will be one of the assets that is being contributed down.

And the other - the other is a COLI asset. It's a corporate-owned life insurance or (ph) program that we've got in place basically for our employee obligations, and that will be donated down as well. We actually used inter-company loans to purchase the COLI in the first place, which helped or which actually increased, you know, inter-company loans. So, you know, contributing that back down to the subsidiary in the form of capital I think is an appropriate move for that.

And Gail (ph) , I'd add, too, I think there were other reasons - you were saying, Bob - we used to historically hold things at the holding company, but now with the increased focus around inter-company loans, I think obviously we're adjusting our strategy around what even needs to be a holding company asset. The two things Bob talked about are naturally insurance company assets, so ...

Right.

... it's not as if we tried to move something down there that doesn't make sense.

For example, GENEX - GENEX provides services to our claim operation particularly around the LTD side. So, again, it's a - it's a very nature thing to have contributed that - brought that closer to the business.

Right. It's a solid earning organization, good solid profits, good return, and we have not looked at it historically for any dividend or revenue stream at the parent company level. It's just been a held asset at the parent company. So, it isn't like we're moving anything, you know, that we were looking to for cash flows at the parent company down to the sub.

And lastly, just because I know there are different people on the line, it will not change the operating strategy for GENEX one bit. GENEX will continue to run independently, continue to operate the way it has, so this is just purely something that I think [Inaudible] from a capital management point of view is something we were proposing to do. Thanks, Gail (ph) .

And in terms of the statutory reserve number, because statutory reserves would have been set differently than your GAAP reserves, was there an adjustment down at the statutory company?

No, there was not. No.

OK.

The statutory reserves, as Bob alluded to earlier, are quite strong, and you know, Bob, we'll continue to build strong margin in that.

Right.

So all the capital going down was basically just free and clear capital and not to support a reserve adjustment?

Right.

That's correct.

That's right.

OK, great. Thank you.

Thank you.

We'll go next to Ira Zuckerman with Natmag Securities.

Yes, just a couple of questions - what is the restructuring of the investment portfolio going to do to the portfolio yield going forward? And where is that now in relation to the average discount on the old book?

It's a good question, Ira, and we'll (ph) get those numbers for you. I think, Tom, do you want to ...

As far as the overall portfolio yield at year-end was at 776 and at the end of the quarter was at 759. Now, what we do is internally, obviously we have to look at this by block of business and manage those individual portfolio yields relative to the discount rate assumptions that we're using. And when we look at, for example, our LTD line of business, we still have a 50 basis point spread, and that has been kind of in the 50 to mid - to mid-60 basis point spread. So, you know, we've come down a little bit, but with the adjustments that we have announced and that we're making with new claim incurrals, you will see that imbedded - the discount rate continued to decline, so that that margin will stay intact.

That's the same on the individual disability. So, there's not question that the overall portfolio yields are going to continue to work their way down not only because of the restructuring, but also because of the yield environment that we're in right now. But as we make those adjustments, those spreads and those margins are going to be maintained. That's the important thing.

And I think, Tom, that's why the guidance was brought down because we're using lower rates in the - in new incurrals just for that very reason. That's a big source of what the guidance reduction is all about.

Yes, and Ira, think about it. On $760 million of high yield bond, you know, giving up about 300 basis points and it think that's, you know, $22 million pretax on an annual basis.

Right. The overall yield declined just from that particular activity. It was about 10 basis points.

Yes, the other question I've got is your indication was that part of the proceeds from the planned offering going to be left at parent company levels to be able to pay the dividends for this year. What happens next year? Do you think you're going to have enough, you know, cash on hand and dividend payable from the subs to support not only the common dividend, but the dividend on the convert?

Yes, absolutely, Ira. I think what we're trying to do is in this environment, it's the abundance of caution continually to be sure we're building steps toward capital. That's why the contributions are in there taking the pressure off of [Inaudible] bringing capital out but (ph) assures that that capital continues to grow. And so actually, over the next several years, our risk-based capital grows very nicely.

The other thing I think, Bob Greven, our dividend capacity probably for 2004 is probably well over $300 million. And so it's the fact that we're - you know, the capacity is obviously a part of the equation, but how much we take out of it is a different part of it. But, again, we have - the capacity is there to fulfill that whole - that - you know, to meet that need as it goes on.

Yes, and I don't - I don't think we're looking to increase the dividends going forward from our insurance companies. In fact, the reduction in the common dividend will actually keep that pressure off from having to have that additional cash flow at the parent (ph) .

Yes, I [Inaudible] put a couple of numbers around it. If you go back to 2002, the uses of cash at the holding company are common stock dividends and net interest expense. And those totaled $250 million. OK, once we get to a full year under the new dividends with the new number of shares and the new convert, that number is 220 million. So, the cash uses at the holding company, you know, despite everything that's going on, is actually decreasing by $30 million. And that's primarily driven by the dividend reduction.

Yes, and just one other question - with the new reporting and the fact we basically got two to three years of numbers, is there any chance of getting further back numbers so we can get a more efficient model?

Sure, Ira, we'll work on that. Obviously we had to move [Inaudible] ...

Yes, I realize that ...

... other report ...

... everybody here is a little rushed, including us.

Yes. No, I understand. And I understand what all the analysts go through in terms of reworking their models. And we'll be more than happy to work with them and get the - you know, the back - historic information that you need.

Appreciate it. Thanks, gentlemen.

Thanks, Ira.

We'll go next to Jim Wolf (ph) with RBC Capital Markets.

Good morning, Jim (ph) .

Good morning. I was just wondering on the - on the - how your bond sales in the first quarter - what was the statutory gain or loss on the - on that portfolio?

The GAAP gain was $2 million. The - I guess the way to answer that is the gross losses on that were - ...

$21 million.

... were $21 million, so we had gross gains of about $23 million to get to a $2 million ...

Loss.

... gain.

Roughly break even.

Yes.

Right.

Yes, it's roughly break even. [Inaudible]

Exactly. After all that's done, yes, exactly.

Although, remember, Jim, on a - on a statutory basis, you kind of - you kind of get the worst of both worlds. You get hit with the losses and you don't get credit for the gains because they get spread out. So on a statutory basis, it will be reflected as probably something in that $15 to $20 million after we - after the adjustment for the valuation reserve adjustments.

And the gains get amortized through the IMR over - ...

That's right.

... over how many years, do you think?

Well, it's over whatever the projected life of that particular instrument is. So, if it was five-year bond, it'd be over that five-year period. If it's a ten-year bond, it'd be over that ten-year period. So, those are all factored in - individual one.

OK. And the change in stat capital from year-end to end of March was roughly what?

Stat capital ...

If you can get that ...

We were down about [Inaudible] down about $140 million.

And that's across the six companies?

Yes.

Yes, exactly.

OK. Thank you very much.

You know, operator, I know we don't want to hold the - go too long. We didn't want to miss any questions, but I think we could take one more question, please, and I think, Tom, you and Linnea and all of us will be around to answer future questions. But if we could just go to one more question, please.

We'll take our final question from Colin Devine with Smith Barney.

Morning, Colin. Hello?

Please go [Inaudible] and please check your mute button.

Hello, Colin?

We'll continue on with Joan Zief with Goldman Sachs.

Morning, Joan.

Morning. I - actually a lot was covered. I'll ask just one little question, and that is, "What are you - how are you reinvesting your cash proceeds now?" It's - I'm assuming you're not buying any more below investment grade bonds. So where's the new money going and how comfortable do you feel about your ability to sort of match durations and things like that?

Sure, Joan. You're exactly right. We are not making any new purchases of high-yield securities. It's kind of been our investment mix right now in terms of the new dollars we're putting towards kind of a two-thirds A, one-third BAA mix. And I guess the challenge that we have is [Inaudible] getting that money to work. You know, we are very long duration buyers. And, you know, the opportunities are, you know, a little challenging for us to [Inaudible] those securities.

Are you thinking about increasing your mortgage exposure?

No. Unfortunately, Joan, that asset is too short for our portfolio - or for our liabilities, so we found that those don't work well for the kind of products that we sell. Certainly very - they can be very high quality assets, but again, it's just - it creates an asset liability mismatch for us.

OK, and my last question has to do with your goodwill balance. I recognize that you've been asked numerous times about scrubbing the balance sheet, but what quarter does your goodwill get revisited again?

We generally do an updated review on a quarterly basis, but it - we do a full scrub basically in the fourth quarter.

OK.

And Bob, the principal assets that we have goodwill on now is ...

Paul Revere.

... Paul Revere acquisition.

Right.

So we had a series of smaller pieces of our - of our company that I think had been - certainly been written off.

Right.

OK, thank you very much.

Thank you, Joan.

Maybe I'll just make one closing comment and just say we recognize there was a great deal of information in today's announcement. And again, I want to - I want to thank everybody for taking the time to participate in this long call on such short notice. Hopefully you got a sense that this is - that we view this as a very important day for our company and I'm confident that we'll execute on the actions we've announced today and will produce the more - the more consistent predictable results I think that you expect of us.

So thank you again for taking the time, and operator, that completes our first quarter call.

Thank you. This does conclude today's conference.