普登 (UNM) 2003 Q2 法說會逐字稿

Please stand by for realtime transcript. UnumProvident Corporation conference call will start momentarily.

Please stand by we are about to begin. Good day, everyone and welcome to the UnumProvident Corporation second quarter 2003 earnings conference call. Today's call is recorded. At this time for opening remarks and introductions I would like to turn the call over to President and Chief Executive Officer, Mr. Tom Watjen. Please go ahead sir.

Thank you Operator and good morning. This past quarter was an important one for our company. We successfully completed our $1.1 billion dollar capital raising during May and this quarter we also saw evidence of some favorable trends emerge. We look forward to discussing these trends with you and responding to your questions at the conclusion of our prepared comments. With me this morning is Tom White, our Director of Investor Relations; Dean Copeland, our Senior Executive Vice President and Chief Administrative Officer; Bob Greving, Chief Financial Officer; Joe Foley, our Head of Marketing, Rick Wolf, our Head of Field Sales; Kevin McCarthy, who has our underwriting operation; and George Schell and Ralph Mohney who head our Return to Work Services function. Before we get started let me read the Safe Habor statement. A 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 the UnumProvident Corporation which are not historical facts are forward looking statements that involve risks and uncertainties that could cause results to differ materially than those contained in the forward-looking statements. These forward looking statements are made based upon management's current expectation and beliefs as of the date of this conference call but there can be no assurance that future developments effecting the company will be those anticipated by management.

For a discussion of risks and uncertainties that could affect actual results see the sections entitled cautionary statement regarding forward looking statement and risk factors in the companies form 10K for the fiscal year ended December 31, 2002, and the subsequently filed 10Qs. The company expressly disclaims any duty to update any forward looking statements. Now with that behind us, before we discuss the results in the quarter I would like to first summarize our capital raising initiative that we successfully completed in May. This is proven to be a significant turning point for our company. We raised over $1.1 billion in proceeds for the sale of both common stock and mandatory convertible units which we have used to increase the capital level on our insurance subsidiaries, lower our inner company loans and reduce our leverage. Specifically, the following objectives have been achieved. Statutory capital including IMR and AVR has been increased to almost $4 billion dollars at June 30, from $3.6 billion dollars at year end 2002 keeping us on plan to hit our risk based capital target of 250% at year end compared to 210% year end 2002. Inner company loans have been reduced from $700 million at year end 2002 to $160 million today - an important measure of the quality of our capital. Leverage is reduced to 24.3% today from 27.7% at year end.

We recognize that this was not an opportune time to be issuing stock but it was a necessary step to protect our franchise which we believe we have done. Moving to our second quarter results which we reported last evening, our operating earnings per share of .42 cents was slightly ahead of consensus estimates in line with our internal plans. Tom White will cover the results in detail, but let me provide a few brief highlights. First investment results in the second quarter were significantly improved with net realized after tax investment losses declining to $17.3 million in the quarter compared to $55 million a year ago and $57.6 million in the prior quarter. Additionally the net unrealized gain in the bond portfolio improved to $3.4 billion from $1.9 billion at year end and growth unrealized losses declined to $506 million from $1.1 billion at year end. Second we experienced some stabilization in our claim trends. So still higher than our 2002 results relative to the first quarter we saw a slight improvement in our paid incidents in our group long-term income protection line and in our individual income protection line, incidents were also slightly better. Our net claim recoveries which declined in late 2002 in the first quarter of 2003 stabilized in the quarter improving slightly in the individual business line while remaining relatively flat for the first quarter in the group disability line.

Finally we experienced solid premium growth with 7.4% growth in the income protection segment, 6.7% growth in the life and accident segment and 9.7% growth at Colonial. These results reflect continued sales growth but more importantly are a sign of a strong persistency in our major lines of business and the successful implementation of the renewal programs we've had in place the past several years. We recognize that our leadership positions have been challenged over the past year and frankly will continue to be challenged but the acceleration of premium growth we are experiencing is an excellent indicator of how we have been able to protect our important customer and producer relationships and our franchise over this period. Although we want to continue to emphasize sales growth, more and more the focus will be on profitable premium growth which takes into account our commitment to improving profitability through discipline pricing and underwriting. That means we are prepared for slower growth if we must step away from business which does not meet our profitability expectations. Now we'll turn the call back over to Tom White who will cover our second quarter results and I will come back and make some additional comments on our investment results, claim trends and several other aspects of the quarter. Tom?

Thank you Tom, and good morning, everyone. For the second quarter of 2003 UnumProvident reported net income of $98.5 million or .36 cents per diluted share compared to net income of $97.7 million or .40 cents per diluted share for the second quarter 2002. Included in the net income for the second quarter our net realized after tax investment losses of $17.3 million or .06 cents per diluted share and $55 million which is .23 cents per diluted share for 2003 and 2002 respectively. Excluding the impact of the net realized investment losses after tax operating income for the second quarter 2003 totaled $115.8 million or .42 cents per diluted share compared to $152.7 million or .63 cents per diluted share for the second quarter of 2002. Consensus estimates for the quarter were .40 cents per share. As a reminder with the common stock offering our weighted average share count assuming dilution increased to an average of 273.8 million shares in the second quarter compared to 243.8 million last year.

At quarter end the actual shares outstanding totaled 296 million and should stay at approximately that level for the remainder of the year. Now let me provide some color on the results by segment. First the income protection segment reported income before realized investment gains and losses and taxes of $109.8 million. This compares to income of $160.9 million for the second quarter of 2002. Within this segment group income protection reported income before net realized investment gains and losses in taxes of $48.3 million versus income of $85 million for the second quarter of 2002. The earnings decline was driven by unfavorable risk results, higher incidence and lower net claim recoveries coupled with the reduction of the discount rate used in setting reserves on new claim referrals. These pressures were partially offset by strong results in the U.K. operation. Income in this line improved relative to the first quarter of 2003 due to stable incidents and net claim recovery trends and continued premium income growth. Total group income protection premium income increased 8.7% to $794.5 million in the second quarter of 2003 from $731.2 million in the second quarter of 2002. Premium persistency improved in both lines of coverage.

Persistency in the long-term income protection block improved to 86.6% for the second quarter of 2003 compared to 85.7% in the same quarter last year. Persistency in the short-term income protection line of business is 85.4% this quarter versus 80.1% in the second quarter of 2002. Sales for the second quarter of 2003 increased 10% to $165 million from $149.6 million one year ago. This was driven by a 21% increase in group long-term income protection sales which were partially offset by an 11% decline in short-term income protection sales. The increase in the long-term income protection sales was driven by strong sales in the U.K. and two large case fully insured cases that we sold in the U.S. ASO sales were down in the quarter when compared to one year ago due to the timing of large case activity. Moving on to the individual income protection - this line reported operating income of $46.1 million compared to $66.8 million in the second quarter of 2002. The earnings decline was driven by lower discount rate used to set new claim reserves as well as higher paid benefits. These higher paid benefits result from the lower net claim recoveries we've experienced in the past several quarters. Incidents and net claim recovery trends were generally improved from the second quarter 2002 experience.

The recently issued block of individual income protection contributed 89% of the earnings in this line with 16% premium growth and an interest adjusted loss ratio of 46.4% in the second quarter while the premium declined 5% on the closed block and the interest adjusted loss ratio with 80%. New annualized sales this is on a paid for basis for individual income protection totaled 37.4 million compared to 43.1 million for the same quarter last year. Persistency remains strong at 93%. The overall sales decline in the individual income protection segment masks a strong 25% increase in the voluntary individual disability sales which are sold through our brokerage distribution channel. Next total long-term care this is both the group and individual long-term care reported operating income of $10.6 million compared to $4.5 million in the second quarter of 2002. This improvement was the result of favorable risk results in a lower expense ratio compared to one year ago. Long-term care sales were down 17% driven by a 24% decline in individual long-term care sales which were only partially offset by a 4% increase on the group line. And finally disability services line of business reported operating income of $4.8 million in the second quarter of 2003 compared to $4.6 million in the same quarter a year ago.

Now I'll move on to the life and accident segment which includes our group life, AD&D and voluntary life products. This segment reported operating income of $63.4 million in the second quarter compared to $62.2 million in the second quarter of 2002. An earnings decline in AD&D was more than offset by stable to improved earnings and all of the other lines in the segment. Premium income in the life and accident segment increased 6.7% to $492.4 million compared to $461.6 million in the second quarter of 2002. Premium persistency in our group life business remains stable at 83.7% this quarter versus 82.8% last year. New annualized sales for the segment increased 31% to $95 million compared to the second quarter of 2002. This increase was driven by a 45% increase in group life sales and a 16% increase in voluntary brokerage products. Finally the Colonial segment reported operating income of $35.4 million in the second quarter of 2003 compared to $33.9 million in the second quarter of 2002. Premium income was up 9.7% to $171.7 million driven by a continuation of steady sales improvement and stable persistency trends. Sales in the quarter were $65.6 million, an increase of 7.9% over one year ago. The other segment which contains the results of products no longer actively marketed by the company reported operating income of $7.1 million this quarter versus $15.4 million a year ago. The corporate segment reported a loss of $45.2 million in the second quarter of 2003 compared to a loss of $40 million last year. Higher interest expense was the primary driver of the variance year over year.

The net realized after tax investment losses in the second quarter of 2003 of $17.3 million were comprised of gross, realized before tax investment losses and write downs of $82.8 million and gross realized before tax investment gains of $56.4 million which produces a $26.4 million net pretax loss. Tom Watjen will provide more detail on the investment portfolio in his comments. And finally a few additional comments. As of June 30, 2003, book value for common share was $26.08 compared to $25.42 June 30, 2002. Book value excluding net unrealized gains and securities was $21.06 as of June 30, 2003, compared to $24.23 a year ago. Statutory income improved in the quarter with statutory net income of $49.6 million in the second quarter compared to a loss of $136.9 million in the first quarter and a loss of $123.5 million in the year ago quarter. Excluding realized investment losses, statutory operating income was $57 million in the second quarter compared to a loss of $55.4 million in the first quarter of 2003, an income of $45.2 million in the year ago quarter. The tax rate was a little lower than normal this quarter due to some tax benefits we received on our U.K. operation this quarter's tax rate of 32.1% on operating income will likely rise to a more normal range of 34-35% in the second half of the year.

Also our debt to total capital ratio was 24.3% at June 30 compared to 27.7% a year ago. And finally we are maintaining the guidance we gave last year and we’re generally pleased with where the consensus estimates have migrated to. This is earnings excluding the impact of the first quarter reserve strengthening and net realized investment gains and losses. This guidance takes into account the delusion from the common stock offering, lower netted investment income due to the reduction of the high yield portfolio, the impact of lower discount rates on new claims (inaudible) as well as our view of the continuation of challenging business environment and the resulting impact that has on our claims incidents and net recovery trends. For the third quarter of 2003, we expect our recorded operating earnings per share to be relatively flat with the second quarter based on the higher share count and our expectation that the tax rate will return to a more normal level. With that I'd like to turn the call back to Tom Watjen.

Thank you Tom, I'll start my comments with just a few brief additional comments in three areas: The improved investment performance, the acceleration of premium growth and the claims trends in our primary lines. Finally I'll wrap up with some summery comments on a variety of topics including the CEO search process, litigation, regulatory update and some of the recent speculation in the market surrounding the sales of subsidiaries. Starting with investments, like all companies with significant corporate bond exposure, the last year and a half has been extremely difficult. Over the past quarter, however, we have seen an improvement in the environment and our results. I would draw your attention to four points. First the level of net realized after tax investment losses declined materially to $17.3 million this quarter after averaging approximately $52 million per quarter for the past five quarters. In the quarter we had some large realized investment gains or recoveries resulting from securities coming out of bankruptcy at values above the written down valuations that we were able to recognize for GAAP and statutory reporting.

The unrealized gain in the bond portfolio grew to $3.4 billion at June 30 from $1.9 billion at year end, a reflection certainly of the lower interest rates but also improved credit quality. Additionally the level of unrealized losses in the bond portfolio has declined to $506 million from over $1 billion at year end. Within that amount of unrealized losses the amount of unrealized losses in our below investment grade bond portfolio declined to $393 million from $856 million at year end. This reflects both the improvement in the market as well as a reduction in our exposure to this asset class. Overall the high yield exposure declined again in the quarter to 7.8% on a market value basis compared to 10% at year end. On a book value basis the exposure has declined to 9.9% from 13.9% at year end. Clearly the de-risking actions we initiated in the first quarter are having a positive impact on our portfolio and risk. So from our perspective the credit environment has improved. Clearly though the low interest rate environment has continued to create some challenges for us.

In the quarter our bond portfolio -- the yield in our bond portfolio dropped 19 basis points to 7.4% primarily due to lower investment returns on the capital we raised during the quarter. In fact this quarter we invested $2.2 billion of new money at a hedge adjusted deal of 5.37%. We now have most of that cash invested so we do not expect to see the same change in our portfolio yield in subsequent quarters. In fact, the recent move up in rates has been very beneficial to our operations as our new money rate in July and thus far in August is up over 60 basis points from last quarter. We have also executed a number of hedging transactions to lock in rates sufficient to meet our longer term pricing and discount rate assumptions and I'll come back to that in a moment. Net investment income growth remains strong with growth of 7.3% in the quarter relative to last year driven primarily by the increase in invested assets that occurred in the quarter. Our invested assets now stand at $34.6 billion, 9% above first quarter and 11.6% above the year ago level. At a lower level of interest rates certainly has impacted profitability particularly in our disability line as we continue to lower the discount rate used on new claim referrals. We remain very comfortable that the actions we have taken are appropriate and are tracking well with our plans. The lower rates cost us approximately $7 million on our individual income protection results and $10 million on our group disability results in the quarter. In total the $17 million pretax amount equates to approximately .04 cents a share.

The interest rate margins on our disability blocks have tightened slightly in this environment but remain at acceptable levels. The adjustments we make to the discount rate tend to have a lagged effect so the change that we made in the first half of 2003 will become more visible in the latter half of the year. As you know we have historically been active users of hedges to minimize interest rate risk. That activity has slowed by the level of rates but the recent move up in rates has enabled us to activate our hedging program in several of our product portfolio. Over the past three weeks we have been able to lock in interest rates in excess of 7% on over $2 billion of future cash flows in our individual long-term care and individual income protection portfolios giving us significant support to our long-term expected portfolio yields and additional cushion to these margins. Next I'd like to spend a minute discussing the improved premium growth we experienced in our primary business segment.

We believe that one of the keys to ultimately generating more consistent predictable profitability is having a tighter focus on maintaining a better balance between pricing and under writing requirements, persistentc, renewals and, of course, sales. I'd like to specifically talk to two areas I am very proud of as we look back at results for the past quarter. Renewal premium thus far in 2003 has been strong and in line with our plans with the average rate increase also in line with our projections. The other is persistency. Persistency trends have also been very favorable with improved levels over last year in all of our employee benefit lines. Importantly, the business that has been terminating continues on average to be the lower margin business. Now as Tom reported our sales growth for the quarter came in slightly ahead of expectations due primarily to several large cases, increased sales of new products to existing customers and growth on our U.K. business which, by the way, continues to perform extremely well and is an area of great opportunity for our company. But back on sales, in the group income protection line, we had one additional large case sale this quarter relative to the 2nd quarter last year which accounted for much of the increase in our fully insured sales. For group life approximately 2/3 of our sales were to existing customers. We are quite pleased with the pricing and risk characteristics of all this business.

We do not want this success however, in the large case market to overshadow the small and mid-sized market which are also very important to us. We are focused on action in these important markets to strengthen our business plan and increase our already significant presence in this very attractive market segment. In summary we are pleased with the premium growth we are generating, importantly the components that are driving that growth. Premium for life is an important indicator for us and for the group long term income protection line of premium for life grew 4% while in the group short-term income protection line the premium for life grew 6%. Let me say again that the business plan we are establishing will be driven more by profitability considerations and we are positioning our company to better navigate through periods of slower topline growth if they occur to protect our return expectations. Next let me turn to the claims trends in our primary lines of business. First in the group income protection line we experienced a slight improvement in paid incidence in the second quarter relative to the first quarter though it does remain at levels higher than we experienced in 2002. Following the changes we made earlier in the year, net claim recovery stabilized in the quarter and I am confident that our management team is focused on the right issues to improve results in the future. In the individual income protection line paid instances as well of net recovery trends were improved over prior periods. The decline in earnings in this line reflected the lower discount rates used for new claim referrals as well as higher paid benefits. The lower results we experienced with net claim recoveries over the past few quarters have produced this increased level of paid benefits. As we see improvements in the net claim recoveries in the future, this should also reduce the level of paid benefits.

For the second half of the year I expect that individual income protection earnings will improve slightly from what we reported in the second quarter. Finally, group life plan experience was generally improved as were the trends in our group and individual long-term care lines. Colonial's benefit ratio was consistent with prior quarters though the benefit ratio and the voluntary long term income protection line at Colonial continue to be slightly above our expectations. Now I know many of you had questions about the progress of the CEO search and John Rowe the member of our board leading that process has provided us with the following statement, and I quote, "The search committee is continuing to work diligently screening potential candidates provided by the recruiting firm engaged to assist us and is interviewing selected candidates for the CEO position. We appreciate the views of stockholders who have communicated with us and we confirm that Tom Watjen remains a prominent candidate for that position. We will be discussing the committee’s progress with the full board at a meeting next week. The committee clearly recognizes that it is not in anyone's interest to have the search process go on any longer than necessary to determine the best person available to service the companies CEO at the time; however, we are not able to provide you with a specific date for being able to make that determination."

Now I want to reiterate that although this process is still ongoing, the management team with the support of our board is continuing to take the actions necessary to better position this company for the future. I believe you saw signs of this in our second quarter results and I expect you will continue to see this as the year progresses. Now let me shift to a comment on the status of some of our regulatory reviews. The coordinated market exam being conducted by our state insurance regulators is progressing well. We believe that Maine, Massachusetts and Tennessee our primary domestic regulators have been joined by more than 25 other states in the coordinated exam. We are very supportive of this coordinated approach and the process that the lead states are using to conduct the review. We believe that it provides a much more efficient and effective exam process than a number of separate state exams. Based on what we now know we expect the review will be concluded in early fall and I am personally very pleased and highly supportive of the steps that our domestic regulators have taken in this important matter for our company.

Related to some of those reviews has certainly been the level of inquiry particularly the complaints that are coming from policy holders. Information on consumer complaints can be difficult to gather and analyze; however, I'd like to call to your attention that the national association of insurance commissioner's website which is www.naic.org as a source of comparable information on the industry. There you will see the complaint index for our primary insurance subsidiaries in our primary lines of business remain below the industry average in 2002 just as they were in 2001. While industry data is not available quarterly, our data suggests that complaints in the 2nd quarter have fallen to their lowest level in three years after peaking in the 4th quarter of last year. This is obviously a very very important trend for our business. Now regarding litigation, the focus remains in two general areas, class action suits and claim litigations. With respect to the class action activity, a hearing for the multi-district litigation was held recently and we expect the panel to decide in the next 30 days if the pretrial proceedings for the various cases included in the motion will be consolidated and transferred to a single district.

Again, this is a procedure that we are highly supportive of as it provides a more efficient process for dealing with the various class actions. I encourage you to review our 10-Q filings for any updates on these cases which are in very early stages. I would also like to point out that in terms of the more routine claim related litigation, we continue to see very favorable trends. In fact the new litigation in our individual income protection line is at its lowest level in four years in the 2nd quarter of 2003 and significantly reduced from the level that we experienced in the second quarter of 2002. Now lastly there has been a great deal of speculation in the market on the sales of our subsidiaries. I certainly can't comment on the speculation. I can say that we are committed to taking the steps needed to continue to enhance our financial and operating position and I am encouraged by the opportunities I see emerging this year to build a momentum established this quarter. Now in closing, we are pleased with the results in the quarter but surely not satisfied. Although we still face challenges, I believe that we have successfully weathered the various allegations and issues this past year well and our franchise remains as strong as ever. It is our challenge going forward to turn the franchise value that our producers and customers recognize into better value for our shareholders. I think you have seen signs of this in the 2nd quarter and I believe that you will continue to see evidence as we move into the 2nd half of the year. Operator this completes our prepared comments and we will now go to the Q-and-A session.

Thank you. 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. And if you are using a speaker phone please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, that's star 1 to pose a question. We will begin with Ed Spehar of Merrill Lynch.

Good morning. I had a couple questions. I guess and maybe you addressed this and I missed it. But in terms of new business, have you lost any – sort of – have you been closed out of any market segments or had to do anything special because of some of the challenges you faced on the ratings front? Maybe just give a little more detail on that. And on individual disability specifically the close block, could you talk at all about what we should be looking for from the outside here in terms of a sign that this business is not going to be something that could be a source of say a future reserve increase. What do you have to consider when you look at the earnings run rate? Clearly it's continued to decline and even if you adjust, I think for the discount rate change, you still had sequential earnings decline and it doesn't sound like you're that optimistic about the second half of that business. So could you just help us a little bit by in terms of what we might need to see before we would be worried about the reserves in that line. Thank you.

Be happy to Ed. And I’ll start with the first question but maybe ask Joe Foley to add to that. Cause Joe has our marketing function and a good source of broader intelligence. On the question around new business, frankly, the majority of our group business is not being affected by that. There is no doubt we have to work harder in certain situations to deal with adverse publicity, ratings issues, some of the things that appear in the press from time to time but frankly, I don't feel that we are being locked out of group situations as a result of those sorts of events.

We have to work harder but, again, we are not being locked out of those kind of business situations. The one place I will say that we do see an impact of some of the things that we have been through is more on the peer individual side of our business. Individual disability, individual long-term care, so I would say those two product areas are one that I think you even see, saw the last couple of quarters, the growth rate, there has not been growth there, it’s been actually a negative comparison. So I think those are places that we are seeing some impact. But I don't think more broadly we are seeing if we have to work more diligently to get ourselves over some of those peripheral issues. But I ask you, Joe, to add a little bit to my comment.

Yeah Tom, I would echo what you said. I mean we are not seeing much evidence at all on the group side that we've been impacted. You know, we’re still averaging something in the neighborhood of 30,000 quotes a month. So that's pretty strong evidence that producers are coming to us as a market and our case sales are holding up comparable to what they've been in the past - we are not seeing any change there. We are seeing, we did see early in the quarter some impact on the individual side. That tends to be more sensitive to ratings. But, as we executed on the capital plan, we began to see quote activity and submit levels come back up. And, actually in June and July we had our strongest submit month for individual coverages. But you know, we would expect to continue to see some lag to the year as the first half of the year in fact kinda plays out.

Now with respect to the question Ed, about the individual close block, I'll just ask Bob Greving to respond to that.

Yeah Ed, the close block of business really is not going to be as you can probably anticipate a source of strong earnings for the organization. Obviously it is going to fluctuate. It doesn't take too much to make a few million dollars in difference in the earnings for that business. It continues to be a large block of business and so the earnings at any given period can bounce around a bit. And the more we get granular with disclosing various pieces of blocks of business, the more that we wind up subjecting ourselves to some of that fluctuation. But the overall block of business, the submitted incidents in that block of business was relatively flat, paid incidence was down a little bit for the period. The primary driver of reserve concerns basically continues to be you know flat and has been for a number of years on that older block of business where we did see some pressure in the period, there was some pressure from the discount rate. As you know that's not the primary driver. The primary driver of the earnings for that block of business was in pay benefits for the period as a carry over of a larger inventory of claims that are in payment status. That is again - the reserves have been established appropriately for that. We are not seeing any pressure on that at this point in time. I think, if you were going to be watching something for the future in any block of business that's closed, of a disability type of that nature of individual disability particularly it's really the incidence that bears watching and we really have not seen that submitted incidence really change very much probably over the last several years. So while earnings will continue to be under pressure, we are simply not seeing any trends that would indicate problems with the reserve levels.

Okay, thank you.

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

Good morning.

Good morning David.

You also indicated in the last quarter or two that you had some problems in some of the claim departments effecting resolutions. I think you said one of the three was under performing. Can you tell us if that's been resolved and whether you see further improvements there, that's one. Two, it appears that you're trying to manage the discount rate on the kind of quarter to quarter basis to make sure you maintain some spread relative to the portfolio yield. Do you feel that is likely to continue and do you anticipate that we might have to eventually have any kind of a one-time charge to kind of set that discount rate?

Good David, this is Tom, I will start with the customer care piece. I think you're absolutely right as we discuss the first quarter results, we were certainly not pleased with the recovery rates and the group disability line of business and more [granularly] it was one location. I’d say that we made some improvement but it is really –I’d say it’s more stabilized. I think we stabilized the situation and I said in my comments I have every confidence that the management team is focused on the right issues to now – to stabilize – to begin to show some gradual improvement over the course of the rest of this year. Now with respect to the discount rate, I don't think that we feel that there is a potential for a onetime charge. I think we have been managing this on a more real-time fluid basis. But Bob, I would ask you again to maybe add a little more to that.

Yeah, David. The discount rate we have been moving the discount rate on new claims on a quarter by quarter basis. As you indicated, we do try to maintain an overall margin on our entire block of business. That's been compressed here in recent quarters. There's a little bit of a lag in our ability to put on the new discount rates relative to the movement and new money being invested so we'll be lagging on the way going down and we’ll lag on the way coming back up out of an interest rate movement change. So I think we'll continue to see probably for the next quarter or so some decreases in the discount rates particularly in the LTD line of business which is, as you know, much more responsive to the new money rates because it does not have a significant active life reserve that helps to support the claim discount rates.

And so on the LTD side, I think you'll see some continued reduction in the discount rates until we can restore our target margins on the other side of the interest rate movement curve. So we will continue that probably for the next couple of quarters, I would think. And we'll keep an eye on it. Obviously this bounce back in interest rates on new money will help mitigate any of that movement and help restore those margins a little bit quicker so we'll keep an eye on that. But we are dynamically moving those discount rates and there is no need for any kind of a single charge as a result of interest rates. We continue to maintain a margin of between our portfolio rates and our discount rates and basically our management strategy which has served us well for, well probably even premerger time frame for the former Provident companies, basically that strategy has worked well through this last four years or so for the combined company. So I think it's working as we anticipated and we'll continue to see that.

Bob, you indicated or someone indicated there was a $17 million pretax earnings as a result of discount rate adjustments. Do you recall what it was if any, in the first quarter?

It was about $5 million I think in the first quarter.

Thank you.

Thank you, David.

We will go next to Liz Werner of Sandler O'Neill.

Good morning, I just want to make sure I understand the implications of some of the changes in discount rates going forward, if I think about it relative to the impact you described for us in this quarters group LTD benefit ratio, is it fair you've given the lag that you describe to assume that the benefit ratio would just naturally increase a bit in future quarters because of subsequent reductions in the discount rate assumption and then just secondly, real quick, I just want to get a feel for where you are putting new money, your new invested assets right now.

Let me start Liz, this is Tom, and I will ask Bob to supplement. I think your point on the loss ratio is worth talking about. I don't think we think the loss ratio is going to continue up because there are other factors at work here, it's expenses, recovery rates, it's incident assumptions so there are other things that go into your loss ratio calculation other than just the interest rate movement. Our overall plan is not to expect the loss ratio to drift up. In fact, again, I want to reiterate that some of the things that Bob talked about in terms of some discount rate adjustments were imbedded in our plans so these are things that are very much planned as we move our way through this year. But again, Bob, I would ask you to maybe add a little bit to that because this is an important point. We don't want to leave the impression that the adjustments we are making in discount rates should lead to a reversal of some of the directions that we've established in the second quarter.

Yeah, Liz, I think Tom indicated there are a number of different factors in play. But if you assume that all other things are equal, in other words, there's no other change in incidents, no other change in recovery rates, no other change in any of the other aspects of the risk side of the business, a change in discount rates does create a higher reserve which would naturally increase the loss ratio because you're obviously setting up higher reserves, all other things being equal. But as Tom noted we built those into our plan and we obviously are anticipating that we'll continue to see improvement in our recovery patterns. We're hoping that the recently high levels of incidents will either stabilize or begin on their downward trend as the economy starts improving. So we are not anticipating that the loss ratio will continue to expand although the discount rates will put a bit of pressure on the offsets to that pattern.

Liz, this is Tom White. Just to your question about the investment returns in the second quarter. The new money yield was a hedge adjusted 5.37%. In July that moved up to a 5.90. In the little bit we've done here in August, has been a little better than 6%.

Great. That's very helpful. Thank you.

Next to Vanessa Wilson with Deutsche Banc.

Hi Tom, good morning. Could you talk a little more about the trends in the closed block. The complexion of the income statement there has several different drivers in it with a large other income line and declining revenues. If we look at a pure loss ratio, I guess its going to misguide us, thinking about the trends there and really the bottom line in my question is how do we monitor that you're not having a further write-down in the closed block?

It's a good question and obviously just I start, Vanessa, by saying as you can imagine some of us spend a lot of time looking at that piece, too. Because it is a big part of us. People look at our company they see that as opposed to perhaps some of the other parts of our company. But I guess Bob, you said in your comments but let me reiterate it and maybe I will ask you to fill in a little bit with what Vanessa said. I think in general we think of the block as behaving pretty much as expected. We have’nt seen deterioration in the block per sayy we have seen some good things in terms of improved recoveries. But I think Bob, maybe you could speak to Vanessa's question because it is important that you can connect those sort of general themes to what goes to our income statement.

Clearly, Vanessa, we are watching most closely with this is our incidence level. And I think that old block of business obviously has a very substantial amount of active life reserves it also has a fairly predictable and stable runoff of the premium. Our persistency on that block of the business is running right around 94% so I think we've got a very stable, and it has been basically at that level for probably the last five or six years. All of the elements of that business are relatively stable. The one element that obviously we keep an eye on is the incidence level. So I think as you go forward, I think that's probably the one lever that I would watch relative to that. The discount rate will move up and down relative to current interest rates. Portfolio rates and everything else so there's going to be some earnings impact there. The real reserve adequately question is going to be whether or not we see significant spikes in incidents in that line.

And your taking the discount rate down there 25 basis points as well?

Actually it was a little bit more than that, it was closer to 50 basis points on the individual disability side.

Okay so when we look at the interest adjusted loss ratio that you give us of 78.9 in the first quarter and then 80.0 in the second quarter, how much of that would be from this?

From the discount rate adjustment? Vanessa, I don't think we have that on just the close block. On the overall individual disability line I think it was about 1.7%.

Did the recently issued business -

Nah, we don't have it broken out by recently issued and closed but in total individual both recently issued and closed it was 1.7%. 1.6%.

Did the recently issued get a 25 basis point discount rate cutor a 50?

Both got the 50. Recently issued and closed. Basically new claims are what we look at. We don't think about this necessarily when we manage our interest rates and our claims block as new versus old. We do that disclosure for the benefit of basically for you to be able to monitor it more closely. We're basically looking at new claims, new cash put to work and so we move both of them by the 50 basis points.

And then my final question, your statutory earnings were at a loss in the first quarter and turned to a decent profit here in the second quarter. What can we conclude from that in terms of leading indicators?

I think, Vanessa, as you're aware, our business is relatively seasonal as far as some of the drivers of morbidity and mortality. We saw some of that exacerbated in the first quarter along with some poor claim results in the first quarter. Our first quarter statutory is normally a loss quarter for us which generally recovers in the latter part of the year. So I think shat we're looking for is continuation of our normal seasonal patterns where we would see statutory gains expand a bit more in the third and fourth quarter of this year.

I guess what I'm getting at Bob, is the poor claims results that drove the big loss on a statutory basis, did those ease or disappear in the second quarter?

They didn't disappear, obviously. As Tom indicated in his comments, we saw some improvement in the areas particularly on the individual side of things but I think they stabilized on the group and that came through in the quarter. We're looking forward to some additional improvements as we go through the year along with our normal seasonal patterns of claims incidents.

I think that’s the way I think of it – I think as you look at the results between the first and second quarter. There is no doubt there is a seasonality piece that is part of that improvement but what I think you're getting to is also evident there, too, is operating improvement as well.

Yeah, I guess I just want to be sure that the claims trends that you are sighting on a GAAP basis are parallel with claim trends that you see in your statutory results.

Absolutely. That shows up, absolutely.

Thank you so much.

We will go next to Eric Berg of Lehman Brothers.

Thanks very much.

Good morning Eric.

Good morning to everyone, good morning to you Tom. I guess what I would like to know is I'm going to ask an omnibus question. Would you say that we have already gotten into this but I'd like a general response. Would you say that as we look at the second quarter versus the first, had you not changed the discount rates, would the loss ratios across the business have been stable or gone down?

They would have improved by 1.3 percentage points in the group disability line and 1.6 percentage points in individual disability and earnings would have been .04 cents per share better.

Great, that's very precise. Could not have asked more precision than that.

We were ready for that Eric.

You clearly were prepared for that one. And I guess my only other technical question is this: Why would – this maybe best addressed by Bob, but I’ll let you folks decide. Why would there be a lag in terms of the impact of the discount rate change in the following sense? My understanding is that management, this was an accounting concept, not a cash concept the management establishes a discount rate that will be used to establish present value of the cash flows associated with newly surfacing claims so a claim comes in the door, you have established your discount rate. I would think right then the impact would be felt - that there would not be a lag. So what is this lag concept really all about?

Eric, on a specific dollar that is being set aside for a specific claim, you're absolutely right. There's a direct match-up between discount rate and the investment money that is used to support that. What I am referring to is the overall portfolio. We don't have just the money being applied to a specific claim. You've got the cash flow from the entire portfolio of business that's being reinvested at a different rate. So you've got kind of a flow of money that is coming in and being invested at a lower rate and that brings the overall portfolio to a different rate than what you're doing with a specific claim. While you're absolutely correct on a specific claim basis, when you put that into the overall aggregate of the overall block of claims, it's much more fluid than just that perfect match-up that you're looking at on a specific claims basis.

Thank you very much.

We will go next to Nigel Dalley of Morgan Stanley.

Great thanks, a couple of questions. First on great unrealized losses, we obviously saw a sequential improvement, but the 300 million of growth unrealized losses in (inaudible) for more than 12 months really hasn't changed much since the beginning of the year. I’m hoping you can discuss what portion of these losses is more than 20% below cost and give me a mood to derisk the company. Why not take a more practice stance in just writing down the bonds. Second on Colonial, I know you can't comment on speculation but if you can comment on the strategic importance of those operations. Thanks.

Let me start and then Tom you and Bob can fill in on the first point. Again, I think as you know our general philosophy is to buy securities and hold them to maturity because that's what really works with our commitment around matching assets and liabilities. So again, we are very comfortable and have continued to be comfortable with the valuations we hold on all of our securities. Obviously, if something is permanently impaired we are very aggressive about writing those down because that's obviously the right thing to do. Your point about writing off things that have been in a deeply discount position, that's simply not consistent with how we think about the business. There is no need to do so because many of the securities, frankly, that even were at a discounted level a couple of quarters ago have actually now moved closer to trading on par. So I guess that's never been part of our philosophy. As you know we shared that with everyone ever since the issue came up in the fall of last year. I guess I want to reiterate our comfort level with the overall position there. Now maybe Tom or Bob, as it relates to the comparison between the two periods, maybe you could.

Yeah Nigel first of all when we file the Q next week, there will be the usual tables in there that break it out by valuation. We don't have that with us right here so you’d be able to look at that comparison. But shat you see from the first quarter and second quarter is in the below investment grade unrealized losses greater than one year, we had a decline of $367 million down to basically $300 million. So it did come down by roughly $67 million. There are some securities in there that we made sales on to reduce the position. Again, in the 10-Q, there will be a table like we've done in the last two Q’s that will break that out.

That's just going forward, are you looking at tentatively reducing some of the exposure to those bonds?

Sure. We have a list of securities that we are looking at as we have opportunities and you get little positive movements in the market plus the liquidity in the market to make sales, we've been doing that. We don't feel that there's any pressure to do that. We are talking about a group of bonds that are current so there's no valuation issue other than when is the right opportunity to make some sales of those securities.

Obviously, this is Bob Greving Nigel, our philosophy is basically a buy and hold investor. While we do continue to watch on a credit by credit basis, whether or not we want to lengthen duration or we want to change credit view of a particular credit, we don't have an organized program to change our position simply because of how long it's been in an unrealized loss position or where it is on a discount to book.

I think just – I’ll make one more point Nigel, before I get to your second question. Again, reiterate, I think as you know, our commitment is to it continue to look for opportunities to de-risk the investment portfolio. We took a substantial step in that direction with the first quarter and continue to do that selectively as Tom mentioned in the second quarter. And I think that's going to be a continued theme with the company, is continue to find ways to prudently de-risk the portfolio.

I would come back to a statistic or two. I think, as I mentioned in my comments, below investment grade securities on a book value basis are now about 9.9% of invested assets after peaking at 13.9% at the end of the year. Frankly, that's the lowest level today as it’s been – back actually down back in 2001. So again our goal is to keep bringing that down, but just to put it in context, we certainly peaked at 13.9% but we are now below what we were at the end of 2001 and will continue to bring it lower. You're right though in the second question, we obviously can't speak to any of the rumors. They certainly have been circulating. They’ve been on again off again actually for a couple of years. I would come back to some of the comments I made in my prepared remarks, we are going to continue to look for opportunities to strengthen the business plan, strengthen the capital position and refine our business strategy and that's something I think this management team is committed to and the board very much supports. And we'll be talking with our board even next week about some updates and some of those initiatives. So again, that's really all we are prepared to say right now is that we are looking at all of our business, all of our products and all the things we do to be certain of the fact they are contributing to value for all of our shareholders.

That's great, thank you.

We will go next to Jason Zucker of Fox-Pitt Kelton.

Good morning and thank you. A question for you Tom. Last quarter you were asked what you might do differently if you were made the permanent CEO and if I recall, I think you were maybe only on the job for like a week. My question really is just now that you've had three months or so to reflect, whether or not, that answer might change today.

No, I think again I think the things we’ve tried to do in this period of time Jason is keep all of our people focused on our business and customers and as I made a note in my prepared comments, the value of this franchise has held up extremely well in this period of time and I attribute that to certainly the relationships with our producers and customers but also the fact that our people have responded extremely well over the last quarter. Part of that is that we are communicating more openly and frequently with our people about the business and the conditions and the issues we face in the company. The other thing I mentioned in my prepared comments is that the board has certainly supported us as a management team continue to drive and do the things necessary to manage the business. And I think one of the goals as you know with our restructing announcement on April 25 was to put some of the financial issues behind us so that we actually cleared the way to be back in to just doing business and that is something we have been doing as evidenced by the quarter. So I wouldn't necessarily change any of the things I’ve said. I would say that your right, three months further into this I think we all have a clearer vision of some of the things that are a part of the second phase of activity to continue to better position the company operationally and financially. And, as I said earlier that’s some of the things we'll be sharing with our board next week. I think the thing that has happened is that time has given us a chance and me particularly a chance to be more specific in my formulation of what needs to happen here to translate what's been a pretty good value proposition for our customers and producers and to a good value for our shareholders.

Great, thank you. And does anybody know what omnibus means? Thank you.

We'll go to Jeff Schuman of KBW.

Good morning, I do this reluctantly but I’d like to go back one more time to the closed block mathematics just to make sure we understand a little bit better conceptually how this works. If you assumed for argument sake that the portfolio yield on that business didn't change and we assume that you didn't change the discount rate and we assume that current claims trend didn't change, if we held all those things constant, what would happen to the earnings on that block? Would they be relatively stable or is there some kind of underlying glide path up or down there?

Jeff, this is Bob Greving. Essentially using your assumptions basically they would remain relatively stable. You might actually see a little bit of improvement out in some of the outlying years in the overall earnings but that wouldn't be enough for our 90 day views to really change materially so I think you'd see pretty stable. We actually look at that business very closely on an annual basis for reserve adequacy and we do those kind of projections. We don't assume that everything stays the same however. We do some stress testing around that for the reserve adequacy analysis. And so using your assumptions I think you’d see basic earnings remaining stable but to actually slightly improving out there as the margin and the reserves actually emerge but for simplicity purposes, I think stable earnings is the best outlook from your perspective.

Okay, so basically you have some release of provisions over time but then at some point as the book shrunk they would be offset by some shrinkage. One other question, I guess I'm still, it seems a little bit opaque on this issue of, I guess, sort of the management of the claim offices and the impact on resolutions. I think you said that this situation has stabilized and Tom said a couple of times that he has a high degree of confidence about kind of [riding] that situation, but can you just give us a little more transparency into kind of what the key thing is that needs to happen. Is it sort of employee retention or training. What can we hang our hat on that is going to get better there?

Hi Jeff, that's a good question, I will make a brief comment and ask George Schell to supplement that. But I think ou are getting around the right issue. But, cause it really is pretty fundamental. Again, this is a process that works very effective. We use the same process in all of our locations. And as I shared it last quarter, that to me helps validate if it's working in certain locations and not in others. That the process is not the issue the execution of the process is really the issue and that does get right down to people and having the right people in the right positions and training and those sorts of things. And George may want to add a little to that. Because I think that is in the principal focus. It sounds a little too simple, perhaps, but that has been the focus of I think what you and the team have been working here in the last quarter.

Clearly Tom, said another way it's a matter of focus at one particular site not having the specific focus on the job at hand and that is less attention to maybe some of the issues floating around in terms of PR and more on just what we need to do on a day-to-day basis. And that’s rolling up your sleeves and going back to work is clearly the emphasis particularly at one site.

And Jeff, I can add to that too, just to give you and others a sense of comfort, when I say that I have confidence in the management team, I think as you know when we talked about first quarter results, we also included the fact that we are seeing recovery rates on the individual side of our business that were below expectations. I think as I mentioned in my comments that frankly we saw some good improvement this past quarter. So, then again there was some very good work done by the team that does that work but [indiscernible] basic to execution and not a fundamental change in the process but just again, doing the things that George talked about.

Okay and given all that is it reasonable to assume from – I guess in terms of time frame that we can see some good things emerge in the 2nd half or does it take longer than that?

Yeah, I think we should start to see a gradual improvement. Again, I think that it is not something you turn on a dime but again I think you should expect to see some gradual improvement .

Thank you.

We will go next to Bob Glasspeigel of Langen-McAlenney.

Good morning, two quick questions. One, can you give me what the discount rate is on new sales at the end of the quarter?

We don't provide that Bob.

Okay. Second, I was wondering, you mentioned that the cases sold in the LTD were of a larger variety than normal that impact the sales. Can you give me what your overall cases are today versus maybe a year or two ago? Has there been a shift toward larger cases in the book business?

Bob, there has been a shift particularly in sales to larger cases. In fact this quarter in LTD we had two large case sales relative to one large case sale a year ago and that's really what drove the improvement in earnings along with the U.K. operation. But I think tn the last couple of quarters – well probably the last couple of years, that there has been a little heavier activity on the large case in the marketplace.

What has your overall case count done in the last couple years?

It’s been I’d say Bob slightly flat to down and that comes back to the comment I was trying to make in my prepared remarks. That certainly we want to continue to be a viable participant in the large case markets but we are also going to be incredibly focused around being certain that everything we do meets the profitability and return expectations we set. The other thing I tried to emphasize in my prepared comments as you know, was that we are looking at our strategies in the small and mid-sized marketplace. Those are two very attractive markets for us and frankly we have some ways to enhance the things we do to be more effective in those markets to bring a little more balance back to our [indiscernible] of business. As Tom mentioned I’d say, over the last two or three years, that balance shifted a little more to the large case to the exclusion of the small and mid-sized market place. And I think one of the things that I personally believe very strongly in and I know the management team does as well here at the company, that there is some tremendous missed opportunities in the small to mid-size markets and we’re taking action – or will be taking action to be sure we get that balance a little more in line.

How did the profitability of those two segments compare?

Again, we really don't get into that level of detail. But you can almost imply from my comments, again it's clear that the small market for example, is more profitable and frankly more predictable than the large case market. Again, I don't want to send the signal that we are not interested in the large case business but I do want to work very hard as a group – we want to work very hard as a group to bring more balance there.

Thank you very much.

We'll go to Gail Golightly at Wachovia Securities.

Thank you, good morning. Could you talk a little bit about as you look at acceleration of premium growth of how much of that rate is in sort of what we should be thinking about how that translates into operating margin in the income protection segments.

Bob, you want to speak? The question, I think was how do we translate some of the premium activity into profitability growth and certainly again one thing I would say is that we are going to be very focused as I said in my comments about not just talking about sales but talking about profitability and premium where we can bring in to play renewal programs and pricing increases and all the factors and that's the round of commitment to perhaps even greater than we've done in the past focused on profit growth and consistency of profit growth. Bob, I think that one of the factors is probably leading for example, in the group business to a sense that the loss ratio is probably flat to maybe showing some small decline over the year is in fact one measure of that is the fact that premium growth is there.

Exactly the case, Tom. As you are aware, we continue to be in a challenging environment overall. So while we've got some growth in premium we continue to have pressure on the incident side and as we have been discussing here, we as a company have challenges on our recovery side. I think getting some improvements in those areas and obviously some lift either by stabilized discount rates or some lift in the interest rate environment obviously would help there as well. Pricing continues to be a challenge and as you are all aware, you don't change an entire in force block of business to a new pricing level over night. It takes some time to do that. So as we see the renewals going in and as we see some of our operational improvements emerge, I think we'll see that margin expand back to its normal level.

Gail, what I may ask is maybe Kevin McCarthy who manages our under writing function to add to that. Because I think one of the big contributors in some of the premium growth is, in fact, the success of the renewal program. Kevin?

Thanks, Tom. Yeah, I think our renewal program this year has been consistent basically in size similar to last year but our average premium increase is up this year versus last year. Our persistency is up this year versus last year. Our persistency in renewal placements is consistent with our placement rate last year. And so in general we have a favorable and improving premium pro-life on our enforce block and on our new sales business as well and that should, as Bob said, eventually flow through to margin as we get across our entire book of business and start to see some flattening in decline in incidence rates and improvement in recovery rates.

From a cycle [indiscernible] I mean are we looking at sort of two quarters, three quarters before you start to see some traction?

Gale, this is Tom. I'll ask Kevin to add to that. We have seen some traction. I think the issue is in this environment when you got a couple of things going against us frankly. Incidents, as Bob said continue to be at levels that are high so that some of those things that Kevin talked about get used and paying for the higher level of instances we are seeing in this environment. We also talked about the fact that our recoveries are not where we would like to see them precisely so I think, to a degree, some of the improvements you are eluding to, to a certain extent will come as we see some improvement in incidence and we see some improvement in recoveries and I think the overall guidance we’ve been getting is we expect to see gradual stair step progress as we go through the balance of this year and into next.

Okay and just one other question can you tell me how much cash or investment (inaudible).

About $100 million to $120 million at the holding company I think at this point.

Okay, thank you.

Thank you Gail.

We will go to Joan Zief at Goldman Sachs.

Thank you, good morning. I wanted to know if you could just talk about on the group LTD. What type of return on capital are you pricing for? What's your expectation for that business actually getting back to your target and can you talk about what you think you have to actually do to get your ROE of the total company up to something that you feel is more acceptable? That's my first question. My second question is you talked a lot about the U.K. and I did hear about a lot of your U.K. competitors are dropping out of the business, can you actually give us a better feel for how much earnings the U.K. business actually generates.

Be happy to, Joan. Let me start with the first one. First off, as you can imagine, we don't really give pricing related data on a call like this so let me speak in general terms about LTD and say that frankly our whole sort of income protection business excluding the old business is really not meeting all of our targets. We have a series of actions underway which as you can imagine would be inappropriate to talk about now on the line to get that block of business up to levels of profit that are appropriate. Part of that is mix of business issue, part of that, as Kevin said, is continued renewals out there with business that's under performing. We have a very specific plan under way to get the returns up to the levels they should be. Again, that's something I think you'll see emerge as we go through the back half of this year and into early next year. So that's the beauty of that business as you know as it can be [reprise] and actions can be taken. And I think we are very pleased with that. Now as you also mentioned there is also the issue of the total ROE of the company. And when you look at our business, as you know, there's a big refrigerator that we drag along in terms of the old IDI blocks.

So when you talk about getting to an acceptable ROE, you almost have to break it into two pieces an acceptable ROE and then sort of continuing businesses of everything other than old IDI and the old IDI business. I think that our belief is that we are making good progress to raising the ROE on the - everything other than old IDI business and some of the actions we've talked about. Pricing, renewals, continued expense management, continued back improvements in recovery rates and that doesn't include anything for an improved economic environment but if that happens, I think you’re going to see some farily nice improvement in the returns. The other issue though is the old IDI business and I think as you know we continue to manage that as best as we can. I think as you sense from the earlier comments we are very comfortable with the reserves. The real issue is it doesn't produce any meaningful earnings contribution which is certainly a challenge. I will say as we continue to go through the rest of this year, we are going to continue to look at what if anything you can do with that block of business or a piece of that block of business as we have done in the past. And I make no promises because that's certainly a challenge in its own right. [indiscernible] the overall corporate ROE up and frankly to get the valuation up and get some of the risk out of how people perceive our company dealing with our old IDI block has to be part of that.

What would you say is the type of return on equity that you would expect for everything other than the IDI block?

Our cost to capital is 12-13% I think as a corporation. So I mean that's just one way to look at it, I'd say. But I think we certainly believe that there's even some improvements we can do above that, I'd say Joan.

Yeah, that's good. Joan, on the U.K., we don't split out those earnings separately, it is a very strong contributor to the results.

Joan this is Bob Greving. I don't have all the components here but I do have the group long-term income protection component for the U.K. and it contributed in the second quarter of this years 25 almost $26 million in BTOE on a premium base of about $91 million. So it's got a healthy 20-30% margin on the group which is the largest portion of their contribution but I don't have all the components.

Joan, just to - for everyone's benefit our U.K. operation is a business very consistent with out U.S. operation. It’s principle focus is group income protection, individual income protection and group life. Over there we are the largest group income protection provider, the second-largest group life provider and the largest individual income protection provider. So again, it's a business plan very consistent with what we have here in the U.S. I think you're right, the competitive environment over there is very, very different than it is here. There is a number of people who have exited the market because the products that we sell are not core to them so we've been a beneficiary of that trend and I think we expect to continue to be a beneficiary of that trend.

Can I just ask one follow-up question on your basic business. Have you thought about why your experience has been so different from some of the other competitors doing the group disability business?

Joan, if you look at 2002 and you look at the loss ratio and combine our group income protection group life, it's pretty comparable to what you see at other companies. You have to look at how companies report and companies combine group life with their LTD, we put all this out but you're comparing our split out numbers to other companies combined numbers.

Okay. Thank you.

Thanks, Joan.

We will go next to Ira Zuckerman of Nutmeg Securities.

Most of my questions have been answered, but uh, given the recent financing where has the money been distributed and where will the investment income be popping up over time before we invest in the program more?

Bob?

I don't have it lying in front of me right now, the large chunk of that was left in the insurance companies from a capital standpoint. Probably about $570 million basically for support capital. In the various insurance companies we used a portion of it to pay down inner company borrowings which would have been yielding I guess CD type rates for those companies as opposed to longer term investments. We can probably circle back around on a one on one and try to provide you with more detail on that.

Yeah, because I think everybody is going to need those because you're putting $1 billion.

Ira, most of that is going to show up in the corporate segment and as other business lines grow we’ll allocate capital.

That was the basic question, is for our model purposes.

Yeah, the basic corporate sector there, Ira.

Thanks.

Next to Jeff Feinberg of JLS Asset Management.

All my questions have been answered. Just to clarify the earnings per share would have been 4 cents better this quarter if we didn't lower the discount rates and lowering the discount rates is simply a timing mechanism that we'll catch up as rates rise later. Is that a correct understanding?

That's correct, Jeff. The impact of the quarter was 4 cents per share.

Great. And obviously, as you mentioned, as rates are going up and credit rates are improving now - that will be something that will benefit us down the road?

We will benefit from rising interest rates, yeah absolutely.

Thank you so much.

Let's do one more question. I know we’re running – we're not trying to cut things off. But I know people need to move on. So we’ll have one more question please.

We'll go to [indiscernible] of J.P. Morgan.

Good morning.

Sir, please check your mute button. Hearing no response, we'll go to Bob Cloman of Gardner Russo and Gardner.

Yeah, just some clarification. The expectation for the pricing of your product for the rest of the year and going out into Q4 and then I have two follow-up questions.

Again Bob, we don't provide pricing information. Again I will say that we've been trying to be very diligent about being sure that the pricing we are bringing to the marketplace reflects this higher incident environment and lower interest rate environment. And so I think we are being pretty disciplined about being sure the factors that effect price are being embedded in our pricing that we are taking to the market but we really can't get more specific than that.

And the follow-up would be the overall cost of your hedging strategies for 03' and what impact will that have on your income statement?

It really will not have an income statement. I think those are embedded in those yield rates as we make a decision to implement ahead so it's embedded in that and frankly I don't think Tom it has an income statement until it's rolled out.

Right, what we've done Bob, is particularly in the individual long-term care and some extent the individual disability portfolio is lock in rates on future cash growth like five-ten years out and we are locking in rates a little in excess of 7%. And so that is more than covering the discount rate assumptions. What we try to do is where we see opportunities to lock in reinvestment rates on future cash flows we look to do that and with the move up in interest rates it's giving us an opportunity to get back to that hedging program.

Is the bias on the hedging [interest] rates fall? Or is it towards rates rising?

The bias, Bob, we have to look we have some very substantial cash flows out into the future. If we can lock in reinvestment rates that we know are going to cover the discount rate assumption and we want to do that selectively over future quarters.

Bob, it really gives us higher census of confidence the discount rate assumptions and the pricing assumptions we use today can be realized in the future because of the investment strategy and the protection we put in place. It really tries to reduce the risk that a falling interest rate environment frankly puts even greater pressure on pricing and discount rate assumption.

And the final question is more of a material question, the fact that one of your competitors on a recent conference call with the AAA balance sheet just mentioned they are possibly looking into some of your lines of business and I was wondering what effect that will have to your lines of business, the overall industry and some of the pricing that you've been able to basically work to your benefit over the last couple of quarters and hopefully into the future. Do you expect someone like AIG making the most recent announcements they are looking into your lines of business [indiscernible] lines of business that they would cause a tremendous disruption in your industry?

Bob, they are all very fine companies and they have wonderful businesses and business plans. But again, I think there's a lot that goes into the buying decision of our product beyond just rating. If we were an annuity business absolutely that would be a factor. But, given the kinds of things we do, the majority of our business are we are in a range now that's comfortable from a rating point of view. We do want to increase our ratings by the way, but that is not something that is a primary point that people ask in their buying decisions for the majority of the things they do. They are more interested in the breadth of your product offering, your service deliverables your enrollment and benefit communication skills. Those are the kind of things that become a big part of the selling process. And so again, I think any time anybody wants to enter any of our businesses, we treat it seriously. Those are all very fine companies but I think again for the majority of what we do, we find our business is not rating sensitive. The only place that I say it is, is the spot I referenced in an earlier comment which is the individual disability business and the individual long-term care business and that's why we've seen slippage in sales there but as you know that's a relatively small part of what we do.

And then if I could ask just one more follow-up. Has there been been any changes in regulatory either on a state level or any of the states that you participate in that might impact your earnings for 03' or 04'?

I think I made note in my comments about the market conduct review which is going we think really well but again I wouldn't want to prejudge any of the work that comes out of the market conduct exam that’s being done with our domestic regulators or anything else. But again, I think we feel good about how those things are emerging.

Thank you.

Good. Thank you everybody for taking the time on the call. All of us are around for additional calls or questions as they come up during the day but that completes our second quarter call. Thank you.

That concludes today's conference call. We thank you for your participation. You may disconnect at this time.