普登 (UNM) 2003 Q3 法說會逐字稿

Good day everyone, and welcome to the UnumProvident Corporation third quarter 2003 earnings results conference call. This conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to the Head of Investor Relations for UnumProvident, Mr. Tom White. Go ahead, sir.

Thank you Jennifer and good morning everyone. Welcome to our third quarter analyst and investor conference call. Before we get started, let me read the Safe Harbor statement. The Safe Harbor is provided for forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Statements in this conference call regarding the business of UnumProvident Corporation which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. 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 further 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 "Risk Factors" in the company's Form 10(K) for the fiscal year ended December 31, 2002, and the subsequently filed 10(Q)s. The company expressly disclaims any duty to update any forward-looking statements.

We realize that most of you will be participating in another conference call at ten o'clock this morning. Therefore, we will end our call promptly in one hour. Now I'd like to turn the call over to UnumProvident's President and Chief Executive Officer, Tom Watjen.

Thank you, Tom, and good morning. Welcome to our review of our third quarter results. With us this morning are several members of our management team, including Dean Copeland, our General Counsel; Bob Greving, our CFO; Joe Foley, from our marketing organization; Rick Wolfe, our head of sales; Kevin McCarthy, the head of our underwriting operation; and George Shell and Ralph Mohney from our claims management operation. We look forward to discussing our quarter results with you and responding to your question at the conclusion of our prepared comments.

Yesterday, we reported operating earnings of 42 cents per diluted common share, in line with consensus estimates and generally in line with our own expectations. Relative to the second quarter of this year, our third quarter results showed positive momentum, with a 10.4% increase in net income and a 7.7% increase in operating income. As you know, our per-share results on a fully diluted basis for both net income and operating income were flat, reflecting the impact of the additional shares from our capital raising effort in May.

The quarter was a good quarter overall, but there were clearly areas which did not meet our expectation, especially the level of profitability in our group income protection line. While we are seeing improvements in net claim recoveries in this line, an issue that hurt our prior period results going back to late 2002, this quarter we saw an increase in our claim incidence above the level we saw in the first half of the year.

We also lowered the discount rate on new claim incurrals. The combination of these two adversely affected our quarterly results. We are obviously not pleased with the performance of this line of business this quarter, and I will spend time later in the call, sharing what is behind these results, as well as our plans to improve our group income protection profitability.

There were also a number of positive developments in the quarter, and I would like to highlight four in particular. First, we saw significant improvement in our individual income protection results for the second quarter, driven primarily by higher net claim recoveries.

Earnings improved from $46.1 million in the second quarter to $64.3 million, with both the recently issued block as well as the closed block showing improvement. Secondly, we had solid results from our other operations, including Colonial and our business in the U.K., as well as good results in our Group Life, Long-Term Care and Brokerage Voluntary Benefits lines of businesses.

Thirdly, we had our best statutory operating earnings quarter since the fourth quarter of 2001. Statutory operating earnings were $123.5 million in the quarter compared to 80.3 million in the years ago quarter and $57 million in the second quarter.

And Last, but very importantly, we saw further improvement in our investment portfolio, with lower net realized loses and a continued reduction in the below investment grade bond exposure. I will cover several of these in more depth later; but before I do, I will ask Tom White to get an overall review of the quarter's results. Tom?

Thanks, Tom. For the third quarter of 2003, UnumProvident reported net income of $108.7 million, or 36 cents per diluted share, compared to net income of $113.4 million, or 47 cents per diluted share for the third quarter of 2002. And $98.5 million, or 36 cents per diluted share for the second quarter of 2003. Included in the net income for the third quarter are after-tax net realized investment losses of $16 million, or six cents per diluted share, and $41.6 million, or 17 cents per diluted share for 2003 and 2002, respectively.

In the second quarter of 2003, net realized investment losses were 17.3 million, or six cents per diluted share. Excluding the impact of the net realized investment losses, after-tax operating income for the third quarter of 2003 totaled $124.7 million, or 42 cents per diluted share, compared to $155 million or 64 cents per diluted share for the second quarter of 2002; and again, $115.8 million, or 42 cents per diluted share in the second quarter of 2003.

Now let me provide some color on the results by segment. First, the Income Protection segment reported operating income before net realized investment gains and losses and taxes of $121.8 million. This compares to income of $165.7 million in the third quarter of 2002, and $109.8 million in the second quarter of 2003.

Within this segment, Group Income protection reported operating income of $42.7 million, versus income of $85.4 million for the third quarter of 2002, and $48.3 million in the second quarter of 2003. The earnings decline compared to last year was driven by a decline in net claim recoveries and higher claim incidence in the Long-Term Income Protection line of business, as well as a reduction in the discount rate used for 2003 claim incurals.

Compared to the second quarter of 2003, the decline was attributable to higher claim incidence, a reduction in the discount rate and higher expenses, which offset improved net claim recovery results. Total submitted Group Income Protection sales for the quarter declined 6% to $90 million, from $95.6 million one year ago. This was driven by a 3.6% decline in Group Long-Term Income Protection and an 11% decline in short-term income protection sales.

Premium income for Group Income Protection increased 8.5% to $793.9 million in the third quarter of 2003, from $731.7 million in the third quarter of 2002. Premium persistency improved in both lines of coverage. For the first nine months of 2003, persistency in our Long-Term Income Protection block improved to 86.6%, compared to 85.5% for the same period last year -- and premium per life was up 6.2% as well. Persistency in our Short-Term Income Protection line of business was 84.7 percent year to date this year, versus 81% last year, and premium per life in STD increased 7.1%.

Moving on to Individual Income Protection, this line reported operating income of $64.3 million, compared to $68 million in the third quarter of 2002, and $46.1 million in the second quarter of 2003. The decline in earnings compared to last year was primarily driven by higher paid benefits and a reduction in the discount rate used for 2003 claim incurals. Compared to the second quarter, income rebounded strongly, up 39%, on stronger net claim recovery experience.

70% of the earnings in this line came from the recently issued block, where premiums grew 12.8% and the interest adjusted loss ratio was 45.4% this quarter -- a one percentage point improvement from the second quarter.

New paid annualized sales for income, for individual income protection, were $36.9 million, compared to $41.9 million in the same quarter last year.

This decline masks the 6% increased in Voluntary Income Protection sales, which are sold through our brokerage distribution channel. Multi-Life sales -- again, in Individual Income Protection -- made up 82% of the total, the highest results we have seen.

Next, the Long-Term Care line of business reported operating income of $10.5 million, compared to $7.8 million in the third quarter of 2002. Long-term care sales were down 31.9% to $14.7 million compared to one year ago. This decline was driven by a 41.6% decrease in individual long-term care sales. Group long-term care sales were flat at $5 million.

And finally, the disability services line of business reported operating income of $4.3 million in the third quarter of 2003, compared to $4.5 million in the same quarter last year.

Now I will 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 $67.1 million in the third quarter of 2003 compared to $61.4 million in the third quarter of 2002. The earnings increase was driven by improved experience in AD&D, Voluntary Life, and other products,and were partially offset by a decline in Group Life earnings compared to one year ago.

Submitted annualized sales for the segment declined 13.5% to $48.8 million compared to 56.4 million one year ago. The decline was primarily driven by a 17.3% decrease in Group Life sales, primarily within the large case market segment. On a year to date basis, sales in this segment are up 12.7%, driven by strong sales in the Brokerage Voluntary Life and other line.

Premium income in the Life and Accident segment increased 6.8% to $490.8 million, compared to $459.6 million in the third quarter of 2002. Premium persistency in our Group Life line of business declined slightly on a year to date basis to 83.3%, versus 83.7% for the first nine months of 2002.

And finally, the Colonial segment reported operating income of $38.5 million in the third quarter of 2003 compared to $34.4 million in the third quarter of 2002. Premium income was up 8.1% to $174 million, and new annualized sales for Colonial in the third quarter of 2003 were $61.8 million, an increase of 7.5% over one year ago.

The Other segment, which contains the results of products no longer actively marketed by the company, reported operating income of $8.7 million this quarter versus $12.2 million in the third quarter of 2002. And the Corporate segment reported a loss of $47.1 million versus a loss of $34.6 million in the third quarter of 2002. A higher interest expense was the primary driver of the variance year over year.

During the second quarter of this year, the company issued a total of 52.9 million shares of common stock and 23 million units of an 8.25% adjustable conversion rate equity security unit, both in a public offering. As a result, the average number of shares used to calculate the per-diluted common shares increased from approximately 242.3 million shares for the third quarter of 2002, to 298.7 million shares for the quarter just ended.

This share count assumes the dilution impact of the units to be 2.48 million shares, and is based on the fact that the average market price of the company's stock exceeded the threshold appreciation price of $13.27 for the quarter and the approximate average price for the third quarter was $14.07. I call your attention to the notes in the back of the statistical supplement to help you calculate the number of shares at a given stock price level going forward.

As of September 30th of 2003, book value per common share was $26.52, compared to $27.62 a year ago. Book value per share excluding the net unrealized gains and losses on securities was $21.36 at September 30th this year, compared to $24.54 a year ago.

And finally, as Tom mentioned, statutory earnings on an operating basis -- this would exclude net realized investment gains and loses -- totaled $123.5 million in the third quarter of 2003. This compares to $80.3 million in the years ago quarter, and $57 million in the second quarter of 2003. Statutory earnings on a net income basis was $86.3 million in the quarter. This compares to $41.4 million a year ago and $49.6 million in the second quarter. And again, these were the strongest statutory results in several quarters. With that, I would like to turn the call back to Tom Watjen.

Thanks, Tom. I would like to start my comments by focusing really on two areas -- the results again in our Group Income Protection line and our investment portfolio performance. I will wrap up with some summary comments on a variety of topics, including a litigation and regulatory update.

Clearly, the most disappointing aspect of an otherwise good quarter for the company was the results of our Group Income Protection line.

When we look at these results relative to the second quarter, the lower level of earnings, $42.7 million compared to $48.3 million, is really primarily driven by the higher level of claim incidence and the negative impact of our continued reduction in discount rate used for new claim incurals. I’m encouraged, however, that we did see improved net claim recovery results this quarter.

Now regarding Group Income Protection incidence this quarter, there really are a couple of things here. One, we experienced this higher level of incidence in all case sizes, though it was more pronounced in the mid and large case market; and secondly, the industries in which we saw higher levels of incidence were the same ones that we had produced higher incidents throughout the recent economic slow down -- manufacturing, wholesale retail, transportation and utilities.

We have often said our claim incidence trends tend to correlate most closely with changes in consumer confidence and a level of employment. Both of which, particularly employment, remain weak. While we are encouraged by what we are seeing in the outlook for economic growth, this improved growth in the economy has not yet translated into meaningful job growth or material improvements in consumer confidence, a necessity in our business.

In past economic slow downs, we have typically experienced a add lag between a recovery and these economic indicators and a reduction in submitted claims incidence. We are clearly not, however, waiting for a turn in the economy -- but have been taking actions to improve the profitability of this book of business. The key drivers in our plan include pricing, renewals and risk selection actions, claim recovery improvement and expense management.

Let me share specifically what we are doing in a couple of these areas. First in the area of pricing, renewals and risk selection, we have continued to take a disciplined approach to this business. Our year to date North American brokerage sales were flat compared to 2002, and 30% of our new sales is actually additional business written with existing customers. This year, we have begun to shift our sales activity to our core markets or employers with less than 2000 employees, and to those industry segments that have lower or less volatile incidents.

As we look to 2004, this will continue to be our focus.

Importantly, our premium per life on all in force LTD businesses has increased almost 5% year to date, and our premium per life on new case sales is up just over 10%. This is in part the result of our continued aggressive renewal actions, which this year will involve placing over $100 million of renewals on LTD and STD business in the market at an average rate increase of 8%.

In our Group Disability lines, the cases that have terminated as a result of our actions were not as profitable as those that have stayed. On average, those cases that chose to terminate were being asked for a 25% rate increase and running at a significant loss. Someone else has obviously picked up this business. In 2004, our renewal plan will -- program will increase in size and again be focused on underperforming cases.

Now while it's too early to evaluate our first quarter renewals, early indications are that despite the magnitude of our renewals persistency appears to be holding up well. If necessary though, we would rather see some slippage in our persistency rate in 2004 than continue to keep unprofitable business on our books. I would remind you that despite an aggressive renewal strategy in 2003, our persistency improved in both LTD and STD.

The strong relationships we have in the marketplace and the fact that are our customers see value in our products and services and doing business with the industry leader, have served us well through these renewal and pricing actions.

There are clearly some positive trends in the Group Income Protection business, and I would particularly like to mention how pleased with are with the gradually improving trend in our net claim recoveries in the Group Income Protection line, a trend we have seen over the past three quarters. While our recovery rates remain below the year ago levels, they are improving -- and I know our team is focused on delivering more consistent, stable results from all of our benefit centers.

Finally, in the area of expenses -- Our company expense ratio moved from 20.4% in the second quarter to 20.7% in the third quarter on a premium and premium equivalent basis.

The key changes which added approximately $11.5 million in expenses this quarter were higher taxes, licenses and fees, higher corporate insurance costs and the expenses related to the legal defense and activities surrounding the media allegations. I'm certainly not happy about this increase, but would note that our expense ratio has declined from 21.3% for all of 2002 to 20.9% for the first three quarters of 2003.

And our 2004 plan will call for further reductions. These higher expenses impacted our Group Income Protection segment this quarter, which was allocated approximately $5 million of these expenses. As I mentioned, this is an area of great focus within the company in our 2004 planning.

Now I'd like to close my comments on our Group Income Protection line by reiterating my disappointment in our results; but assure you, we are talking the actions we need to improve profitability.

Although the focus has been on Group Disability, I don't want to negligent to mention that claims trends in our other primary lines were generally very favorable in this quarter.

Individual Income Protection experienced better claim recovery experience and a continuation of the generally flat incidence trends we've been experiencing for the past several quarters. Colonial benefit ratio was stable with the second quarter and with last year's results. Group Life claim incidence was favorable compared to a year ago, while the average claim size remained about at the levels of a year ago as well.

Now I'd like to move to investments, the investment portfolio results. Like most of the companies with significant corporate bond exposure you follow, the last year and a half has been extremely difficult. Over the past quarter, however, we saw further improvement in the environment and in our results, and I'd like to draw your attention to four points.

First, the level of net realized after-tax investment losses declined materially to $16 million this quarter, from $41.6 million in the year ago quarter and $17.3 million in the second quarter.

Second, the net unrealized gain in the portfolio declined slightly from the second quarter, due to interest rate movements, but was a healthy $2.9 billion at September 30th, reflecting the quality of the portfolio.

Third, the level of unrealized losses in the bonds portfolio held steady over the past quarter at $534 million and compares favorably to the year end 2002 unrealized loss of $1.1 billion. Within that amount of unrealized losses, the amount of unrealized losses in our below-investment grade portfolio declined further to $268 million from $393 million at the end of the second quarter, and $856 million at year end.

Many of you analyze the aging tables that appear in our 10(Q), and there you will see that we experienced an improvement of $109 million relative to the second quarter of 2003, and the amount of below investment grade securities trading at an unrealized loss for over one year. I would specifically like to highlight the reduction from $191.7 million to $106.7 million in the securities at less than 70% of amortized cost for one year or more.

This reflects both an improving trend in the credit market, as well as a reduction of some of these positions as they recover in price during the quarter.

And finally, the overall below investment grade portfolio declined again in the quarter to 7.7% on a market value basis, compared to 7.8% at June 30 and 10% at year end.

On a book value basis, the exposure has declined to 9.2% from 9.9% at June 30 and 13.9% at year end. Clearly, the de-risking actions we initiated in the first quarter and continued throughout the year are having a positive impact on the quality of our portfolio. So from our perspective, the credit environment continues to show gradual improvement.

Clearly, though, the low interest rate environment creates some challenges for us. In the quarter, our portfolio yield was reduced somewhat to 7.26%, primarily due to the lower new money rates on the market. The lower level of interest rate obviously adversely impacts our profitability, as we continue to lower the discount rate using on new claim incurals in our Group Long-term Income Protection business.

We are confident that the actions we have taken are appropriate in this environment. The lower discount rates impacted the total earnings in the quarter relative to the second quarter by approximately $12.4 million on a pretax basis, or three cents a share. This was split between $5.8 million in our Group Income Protection line and $6.6 in our Individual Income Protection line. The interest rate margin on our Group Disability block widened further this quarter, based on the actions we've taken this year, with the interest rate reserve margin widening to 51 basis points from 38 basis points at June 30.

The adjustments to the discount rate are likely to continue into the fourth quarter with our potentially final reduction. We believe that these are appropriate actions to restore our interest reserve margin to their historic risk levels, although it does come at the expense of short term profitability.

As you know, we have historically been active users of hedges to minimize our interest rate risks. That activity has been slowed by the level of interest rates, but the recent move up in rates has enabled to us activate our hedging program in several of our key product portfolios.

Over the past three months, we have been able to lock in the investment rates of approximately 7% on over $1.9 billion of future cash flow in our Individual Long-Term Care portfolio, and 7.26% on $900 million of future cash flows in our Individual Income Protection portfolios, giving significant support to our Long-Term expected portfolio yields and adding additional cushion to our margins.

Now we would also like to update you on the Swiss Life block acquisition that our Unum Limited subsidiary announced back in August. We were disappointed to learn this week that the Office of Fair Trade has referred the proposed acquisition to the Competition Commission. As you know, this block would have given us over 50% market share in the U.K., so it's not a total surprise that the transaction would undergo further regulatory review.

We are looking at our options at this time, I hope that there's still some basis by which we can proceed on some form of a transaction. Our Unum Limited operation has been performing quite well, and we are excited about the opportunities for profitable growth into the future, with or without a transaction involving Swiss Life block.

One additional item to mention is that we have completed agreements to reinsure and fully outsource the administration of our Association Individual Disability business.

This is a block of $40 million of annual premium and approximately $120 million of disability statutory reserves. The GAAP earnings impact is immaterial and there's no impact on our third quarter financials. It is slightly positive from a capital perspective.

This is a small transaction, but its consistent with our strategy to more closely focus our business plan and build capital. This transaction does both.

Now let me shift to an update on the status of our regulatory reviews. The cooridated multi-state Market Conduct Exam, being undertaken under the leadership of our primary domestic state regulators, Massachusetts, Maine, and Tennessee, is progressing well.

Currently, there are 44 states participating in the coordinated exam. We are very supportive of this coordinated approach and the process the lead states are using to conduct the review. We believe that it provides a much more efficient and effective examine process than a number of separate state exams. Based on our work with the reviewers to date, we expect the examination will be concluded in the second quarter of 2004.

Now moving to trends and claim litigation: There are two specific trends that I would highlight that are very important to us, particularly at this time. First, I am very pleased to say that the level of complaints received in the third quarter was the lowest level we've experienced since 2000 just after the merger and and well-below the levels experienced a year ago immediately after the negative media attention.

Secondly, new Individual Disability claim litigation -- the primary focus of the adverse attention last fall -- is running 40% below the level we experienced in the third quarter of 2002.

Now with respect to the class action activity, the judicial panel on multi district litigation ordered the alleged class action and stock derivative suits to be transferred for [INAUDIBLE] proceedings to the Federal District Court of -- the Eastern District of Tennessee. 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 and derivative suits. The have requested that any subsequently filed lawsuits of a similar nature also be transferred under the multi-district order. These actions remain in their very early stages, and I encourage you to review our 10(Q) filing for any update on these cases.

In closing, we are pleased with the overall results in the quarter, but certainly not satisfied -- especially with the Group Income Protection line. Although we still face challenges, I believe we have successfully weathered the issues of the past year and our franchise remains strong. As I travel and meet with producers, customers and our employees, I can assure you that we are well connected with our market place and our position as industry leader remains intact.

Lastly, our outlook remains unchanged. We are continuing to expect relatively flat earnings results until we see some improvement in the economy. Our expectation for the fourth quarter is that the operating EPS will remain relatively flat with the third quarter results. We are finalizing our plans for 2004, including our longer term financial targets and it is premature to provide any detail on this call.

That will come with the announcement of our fourth quarter results. I would say that in terms of our broader goals, they continue to be on building further capital strength, continuing to focus on businesses and lines of business which meet our strategic and financial objectives and improving the level and consistency of operating profits and earnings.

We are making good progress and I think you will see further signs of this as we close out the year.

Jennifer, this completes our prepared comments and we will now certainly go to the question and answer session.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please indicate that by pressing the star key followed by the digit one on your touch-tone telephone. We'll take our first question from David Lewis of SunTrust Robinson Humphrey.

Thanks, I had a question for Bob Greving. It's pleasing to see the improvements in the IDI claim trends. Some investors obviously have been concerned that you will need to take a reserve addition in the Individual Disability block. What's your thoughts given that we have now seen steady claims incidence and some improved resolutions?

David, I think you hit on the two items that we really watch really closely in this line of business, and that is our flat incidence; and it has been relatively flat for, actually, the last several years for this overall line. And of course, with the recoveries of moving up in the last couple of quarters, that's given us confidence that there is no need for any kind of a reserve adjustment at this point.

So if something were to change and would cause you to, it would probably have to be most likely a spike in the claims incidents, is that correct?

That's the one that we watch most carefully on the Individual Disability line of business, that's correct.

Thanks very much.

We'll go next to Vanessa Wilson with Deutsche Bank.

Thank you. Good morning. I have two questions, one related to the statutory earnings and one related to your targets for 2003. On the statutory earnings, the swing from this quarter -- first quarter to this quarter -- from a loss of $55 to a profit of $123 million on an operating basis. That's a significant swing. Could you help us understand how the incidence in the first quarter compared to the incidence in the third quarter and if this swing is related to any improvement there on a relative basis, or if it's primarily related to the recoveries and the slower sales of long-term care in IDI?

Vanessa, this is Bob Greving. The incidence is actually up on a relative basis from the first quarter to the third quarter, as you had indicated. But really the major driver that we are seeing on our statutory line -- and that goes for both our LTD line of business as well as our Individual Disability line of business -- is in the area of claim recoveries. We've seen a very strong rebound in both of those lines of business in our recoveries, and also relatively flat incidence on our Individual Income Protection line of business. So while we have seen a kind of a continual pressure on the Group Income Protection incidence, the other elements are what are really giving the momentum for the statutory results.

Okay. Thank you, Bob. And Tom, earlier this year, you know, after you had done your offering around the time your offering, we had a guidance range that was a little higher than $1.70 than it looks like we'll have for the year,. That was clearly part of the range, but we are kind of ending up at the low end of the range. Could you talk a little bit about what took away the upside to that number in terms of what you were expecting -- because at the time you had expected the 425 basis points ratchet of discount rate to ratchet down and you'd also contemplated selling a big chunk of your high yield portfolio. So what were the other pieces that sort of took away some of that upside?

Vanessa, that's a good question. This is Tom Watjen. I think, as you're alluding to, we are now more in the low end of that range and I think the upside is really probably a couple of things. One is, again, we didn't see quite as quick a recovery in some of the claim recovery rates that I think we expected. I think though, as you heard from our report, we are encouraged by the things we've seen here in the back half of the second quarter and the third quarter.

I think secondly, we have continued to find opportunities to go beyond some of our original plans in terms of de-risking the investment portfolio. Again, I think as you sense in the report this quarter, that's having, I think, a very favorable impact on the risk part of the portfolio, but that's only a second piece of it; and probably thirdly, just again, just continuing to be, I think, prudent about building capital over this period. I think we've taken every chance we can to build capital and have strengthened the balance sheet through things like continuing to bring the discount rates down. Again, some of those are things we have contemplated, I think others of which have been ones I think we just thought this was a good time to really circle back do a little more of a that than would otherwise would be the case.

Okay, so did you miss on the expenses?

Expenses are pretty close to being on plan. We are not off that much being on-plan, where we need to be. And I think the -- the bigger message -- I know that people would love some guidance on 2004 -- as I said, I really think we have got some very good planning with some things going on, that I'd rather give that guidance with the closing out of the fourth quarter. I think there, again, you will see some expense initiatives into that guidance as well.

Okay, you caught me. That's where I was going, so I will let it stop here. Thanks, Tom.

Well again, I think I'm going to overanswer a little bit, but just to say, as you know, we take this very seriously when we put out some guidance. We've had some challenges here in the past years in terms of that guidance, and I think we want to be very good about the clarity of the guidance, the timing of our ability to hit certain targets and provide some clear measurables that I think you and others can hold us accountable for. So I think that's why we want to be sure we have all those pieces together before we provide that guidance.

Thank you. And Tom, congratulations on your appointment to CEO.

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

Good morning to everyone, thank you.

Three questions. Three questions. First, with respect to the closed block -- which I believe is about half of the Individual Protection, Individual Income Protection area -- it looks like from a review of the quarters one by one, it looks like the interest adjusted loss ratio moved up modestly in the June quarter and then moved up sharply in the September quarter, suggesting, I think that claims experience on this old, sort of Albatross that you’ve talked about is getting worse. I'm hoping you can me tell what's going on there.

My second question is -- why, given how much, let's see, let me just pose the question. Why do you expect the decline in yield will end, if I understand you correctly, in the fourth quarter? And third, finally, comparing the earnings out of the other lines in income protection such as Long-Term Care and your Disability services area, with the capital allocated to the business, it looks like the returns are extremely low, about 5% coming out of Long-Term care and the other area, the Disability services. Are there prospects for improvement? Thank you.

Eric this is Tom. Well, I think Bob, why don't you take the first question? I think it's really the loss ratio and the difficulty sometimes using the loss ratio to draw conclusions.

Really there's been a couple of different movements, I think, in the third quarter between the new and the old.

And as you know, Eric, we've just begun this year with actually allocating both capital, as well as assets between the new and the old. The reported interest adjusted loss ratio for the old block of business for this quarter was 85%. Part of that was that we do continue to see a little bit in the recovery distribution between the new and the old -- and the recovery distribution was a little bit heavier and more favorable on the new this period, which gave us a 45.4% interest adjusted loss ratio overall for the block of business.

And so there was a little bit of distribution between what we were seeing in the claims management area. We really didn't see a tremendous amount of incidence change between the two, but the one driver that I think you're running into with looking at that particular metric is that we have done an increasing job, particularly in this quarter, with allocating specific assets to support the reserves of that block of business, which does affect the interest adjusted loss ratio.

As you know, that is basically your paid benefits and your change in reserves and then you adjust for the actual interest on the assets that are supporting the reserves and with a shift in the assets between those lines of business, the new and the old in this quarter, it has affected that interest adjusted loss ratio. If you take a look at the overall, our interest adjusted loss ratio has gone from 73.2% for the overall Income Protection line of business down to 70.8% -- and that's really more indicative of the overall block, but I do think there's been a little bit of noise between the old and the new this quarter.

With the yield I hope my comments, Eric, didn't suggest that I think that the portfolio is not going to decline -- I think it will continue to decline. I think what I was referring to, though, was that we believe through the actions we've taken so far plus some things that I think we anticipate taking -- I think Bob Greving will be able to protect the margin, the interest margin. So it will move more in tandem, Eric, so the margin we retain -- that will still be causing a drifting down in the portfolio yield.

Actually, Eric, I think with the additional movement in the fourth quarter, we are already seeing where we are placing new investments with a reasonable margin relative to the target discount rate that we were anticipating for the fourth quarter. So unless we see a major shift in the interest rate marketplace -- again, further downward -- we would anticipate that we can probably level off at that level.

I guess what I'm trying to get at is, to the extent that the decline in the discount rate -- which is, as I gather, the accounting concept off of which the claims, the newly emerging claims are present valued, to the extent that that discount rate continues to come down, that obviously has been and would hurt earnings prospectively. Even though you expect the margin between your yield in your portfolio and your discount rate to remain constant, do you expect the discount rate to decline further? That's really my question.

We don't anticipate the discount rate to decline further. I think prospectively, as far as profitability -- as you know, Eric, there's a little bit of a lag between the kind of movements that we've seen in 2003, as far as the discount rate, we've moved it progressively down following the interest rate marketplace.

There's a little bit of a lag there between that kind of movement and pricing correction so that basically makes up for those increased costs. So I think we will be seeing that future profitability will actually -- if we can have a little bit more stable interest rate environment, the future pricing actions will make up for some of that lost profitability in the near term.

Great. And then the the ROE and the Other lines?

Yeah, I’ll say it again, Eric, I’ll come back to my earlier comments about our commitment to be sure that we are focusing on businesses that meet the financial and business characteristics that we think -- and there's no doubt there are product lines that don't meet those characteristics. and I think that you should make the assumption those are all being looked at. And you know, you mentioned one like Long-Term care, others have taken actions, and we are looking at our strategy there in terms of what our position should be in the Long-Term Care business, and the showing the returns that have the ability to generate consistent results is a big criteria that we use in looking at thing like that.

We'll go next to Colin Devine with Smith Barney.

Good morning, gentlemen. A couple questions. First, with respect to the statutory earnings, I was wondering if you might give us some sort of indication of what you are looking for out of the fourth quarter?

Second, we’ve talked a lot about discount rates and interest rates today. I was wondering if you can give some idea -- obviously it's just a rough guideline -- of how sensitive UnumProvident’s earnings are to interest rates, i.e. if we see risks go back up 100-points next year across the curve, what is that likely to do -- or conversely, if rates came back down?

I think Colin, as far as the statutory results for the fourth quarter, you know, obviously we had a very good quarter this period. It actually came through not only in our Disability lines of business but also in our Life lines of business, which you also saw in our GAAP business. I would anticipate probably in the fourth quarter something relatively flat, maybe even a little bit less from a statutory standpoint, depending upon what the fourth quarter incidence, particularly in areas like our Group Life line of business are. So I wouldn't continue to kind of project a projection of continued growth in that statutory side. There is some seasonality, that each merges much more on the statutory side of the business than does on the GAAP.

I think last year fourth quarter we earned a little over $100 million on an operating basis, and I think again, we expect to have an improvement over the fourth quarter of last year. I think that's part of Colin's question, too, is the importance we place on place on building risk-based capital; and obviously, earnings are part of that creation of risk-based capita. But again, we're looking at some other things that I think that hopefully can also be supplemental to the kind of growth and improvement risk based capital -- just comes from operation.

The second question I think, Colin, had to do with the discount rate sensitivity, Bob, and I think either you or Tom can take that one, because I think we do have a -- a deal on that.

Yeah. Obviously, as we move discount rates down, there is -- as was indicated in prior discussions -- an immediate impact on new claim incurals. As interest rates move up, our portfolio is a long portfolio and current investments are invested long to support our liability.

I haven't really gone through to quantify what would a 100 basis point movement do to the overall portfolio; but obviously, as you have seen the lower interest rates each emerge and have affected our investment portfolio this year, you would also see the reverse occur as new money is invested in increasing spreads. And so I would think that we would see an overall increase in the spreads that we would be getting on our new business -- on our new cash invested -- as we would move forward.

We would want to make sure that we wound up continuing to get the reserve margins on our discount rates; so particularly in the Individual Disability line of business, as you've seen, we are about 38 basis points, I think, this quarter on our Individual Disability margin. We'd like to see that expand by about 20, 25 basis points -- so I think as the market moves up for Individual Disability portfolio interest rate, we probably would not be moving our discount rate in lock step with the movement in the interest rates. But we would go ahead and allow that to go ahead and build some margin within our Individual Disability discount rate.

Bob, specifically, perhaps -- on the Individual, you are saying Individual, do you mean the new Individual or the closed block?

It's actually new incurred claims, Collin, that get the discount rate. We do not use a different discount rate for the old block versus the new block as far as the discount rate is concerned on new incurals. It's basically new claim incurals from either one of those blocks of business.

Okay, and then one quick follow up. The earnings level we saw out of the closed block this quarter, is that a representative level going forward? Obviously, it's four times what had you in the second quarter. What is the sort of run rate of this, or is it at this point fairly tied to interest rates -- because you can obviously, what -- put out your renewal premiums at higher rates and use the lower discount rate if you get rates backing up, Is it really down to interest rates, or the key driver there going forward?

I think your key driver is really your risk performance, and that ties back to your incidence and recoveries. For this period, particularly, what we saw was a bounce back in the recoveries -- probably a little bit more of a bounce back in the new block this period that helped us out than the old block. But, I think if we can maintain some stable recoveries in that block of business and we don't see any spike in the incidence rate, we can see some more consistent results coming from that old block of business than what we've seen in the last several quarters.

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

Good morning. I had a couple of questions. Actually, an easy one is, I just wanted to get a better understanding for the duration of the investment portfolio. It just went up a little bit more than I would have expected in the quarter, and I wanted to see if that reflects any change in your overall liability -- your view of your liability mix.

And then secondly, I just want to make sure I understand your flexibility in repricing your book of business on the Group Disability side. I think only a third is up for renewal in any given year. And I just want to make sure I am thinking about that correctly.

Tom White, why don't you take the first question on the duration?

Yeah, Liz, I think basically on the duration issue, it did expand as we are putting the cash from the offering to work, as well as the portfolio restructuring. In the first quarter, we sold a lot of the high yield, that's $760 million, and given the market new issuance of the types of securities we like to buy, which are long duration investment grade corporate bonds, it's just been a slower process in getting that money to work. But, we got most of it put to work at longer duration, so you're starting to see the duration move back out again.

One more final piece --I do believe that we saw the mismatch in asset liability actually improved between the second and third quarters (multiple speakers). That’s bee a steady improvement, actually, since the first quarter. So we were mismatched but that mismatch is actually tightening. Now with respect to the flexibility on repricing, Kevin, I believe I will ask you to handle that. I think as I introduce Kevin -- Kevin runs all of our underwriting operations and I think he and his team are right in the throws of managing our renewal activities -- so maybe, Kevin, you can pick up on Liz's questions about repricing flexibility.

Thanks, Tom. Good morning, Liz. Typically, about 40 -- a little more than 40% of our block of business is available for renewal, and that has been creeping up as our Life mix over the last several years has gotten a larger percentage of our portfolio. So going forward, I would say that a greater emphasis on underperforming large case business is going to generate a greater opportunity to reprice a more significant percentage of the overall portfolio in 2004, 2005.

Okay. Great. And then just lastly, given your comments on capital, can you -- is it possible to put any numbers around your current levels of risk base capital and where you really want them to go?

Liz, this is Tom, I'll take that. I think again we didn't have it in the prepared comments, but I think it should be a given that we are going to continue to look for opportunities to strengthen the capital base.

Our risk-based capital targets for the end of this year are somewhere in the 245, 250 range; and that's again, just from operations. And I think, as I said earlier, we are going to continue to look at opportunities to supplement what comes from operations through other capital raising initiatives. Certainly not selling any securities, but more just looking at reinsurance alternatives and things like that to continue to hopefully supplement some of the things that we are doing internally.

So, the shorter term goal is to get obviously closer to 250%. I think beyond that, though, we intend to continue to work towards, perhaps over the next three to five years, getting closer to 300%.

So the goal is to continue to improve the risk-based capital. The other aspect of this is we continue to bring down leverage. Our debt to total capitalization was 24.1% at the end of the third quarter. That's down slightly from the 24.3% in the second quarter. And 28.3% in the first quarter. So again, you see the holding company leverage is continuing to come down as well. So that remains an important priority, to build capital and reduce leverage.

That's great. And the shift in assets between the closed and recently issued block on the Individual side, is any of that related to your evaluation of sources of incremental capital?

No, Liz, that really is just a shift of assets that are supporting the various reserves. That would not have an overall impact on the capital change.

Okay. Thank you very much.

We'll go next to Bob Glasspiegel with Langen McAlenney.

Hello? Okay. Great. There was one thing I was a little confused on when you were talking about your discount rate. Given that rates were higher Q3 versus Q2, I would have thought that the new claims would go in with, wouldn’t be penalized by a lower discount rates impact sequentially.

Were you talking the entire portfolio or actually new claims?

Bob, it's Tom White. The strategy that we set out the first of the year in the Group Disability line was to make quarterly adjustments throughout the year of 25 basis points. So we've done that in the first three quarters, and it's our plan to do that again in the fourth quarter.

So this is really just following through on a strategy that we embarked on in the first year.

Now yes, we have had rates move up, that's great. As Tom said in his comments, the interest rate margin has improved. It's gone from 38 basis points up to 51 basis points. So we are accomplishing what we want, which is -- as Tom said -- to build that margin back up; and again, we'll make what we hope will be a final adjustment here in the fourth quarter and keep that steady throughout 2004 would be our expectation right now.

And I think, Bob, I heard too in your comments -- this actually is related explicitly to new claim incurals?

That's the way this rolls through our financial.

Okay, well -- couldn't you -- I mean, the text was sort of like, you know, factors that contributed to sort of the negative [INAUDIBLE] versus expectations; and I thought you were saying, you know, the lower discount rate, you know, was an issue. But it seems like you could have said spreads widen, or margins widen, versus our pricing expectations.

I think we tried to, Bob. I think again, we've, the steps we took, we think, were the right ones and, again, I think what we are trying to do, though, is explain some of the differences period to period. And as I said, the LCD results -- particularly where the area of focus in terms of things that didn't perform exactly how we expected -- The biggest piece of it was higher incidence – a good proportion -- probably 75% of the change was based on higher incidence, maybe 25% of it was based on the discount rate.

So the discounted rate was a planned understood thing going into the year that was going to be a sort of a hurdle. That's a not a new delta surprise.

No. Again, that was, as you know, a reference to the second quarter results that we were trying to show the impact between the sequential quarter development, as I said -- 25% of that development was related to the discount rate change.

Good. Okay, I'm encouraged that you are going back to your old core small to medium case size.

Do you have some figures that maybe could show the extent to which you went away from the core, at least if we can track maybe over the last five to ten years what your number of accounts in that size, how far it went down and what the potential is to go back up?

Bob it's a good question. I think again, we will see what we can do in the subsequent calls -- because it's an important strategic priority for us to bring more balance to our book of business. And you are asking really nicely what measures can we share with you to help you see whether that's happening.

So we won't be able to speak to that right now, but knowing as we go through subsequent quarters we will try to provide some feedback to give you a relative sense of how those things changed and how they are changing in the future.

I have a perception -- maybe it's wrong -- that there was a migration to large case accounts that hasn't gone well. In retrospect, maybe shouldn't have been done over the last three or four years. Is that a fair observation -- or?

Maybe I would restate what you said. I think what it is, was we mostly dependent on large case for growth and probably put more emphasis and focus around that. We want to continue to be a very viable player in the large case marketplace, but I think what you are hearing from my comments and others is that we are recommitting more energy, more focus and more discipline back to the small and mid side size marketplace; and in fact, in doing so, take some of the pressure and focus off just the large case. I wouldn’t want to say it didn't work as expected.

It certainly was an area we grew, we didn't have as much of a large case presence. There still is a very good large case market out there we want to continue to compete in. But we are, as you're saying, going back to some of our roots to get more balance in terms of our book of business toward a small and mid size business which also has tremendous opportunities. Competitive, but still has opportunities.

Last question. Have you made any important management changes, or are you basically running with [INAUDIBLE] team?

No, I think, Bob -- no one should expect a big bang on this side. I think -- we are making some changes in the organizational structure, and in terms of people, and it's a gradual process and there will be some things that, again, will emerge over the balance of this year that I think people can point to some of the things that are a result of my taking over the leadership.

Appreciate it. Good luck.

We have time for one more question, Jen.

And we will take our final question from Ira Zuckerman with Nutmeg Securities.

My questions have been answered, thank you.

Okay. With that, we appreciate everybody taking the time here this morning. We are all available over the course of the day to answer any further questions. But I think at this point, this completes our third quarter conference call. Thank you.

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