普登 (UNM) 2003 Q4 法說會逐字稿

Welcome to the UnumProvident Corporation fourth quarter 2003 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr. Tom White, Investor Relations UnumProvident. Please go ahead, sir.

Thank you, Bill and good morning, everyone. And welcome to our fourth 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 on management's current expectations and beliefs as of the date of this conference call. But, there can be no assurance that future developments affecting the company will be those anticipated by management.

For a discussion of the risks and uncertainties that could affect actual results see the sections entitled Cautionary Statement Regarding Forward-looking Statement and Risk Factors in the company's form 10(K) 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, I would like to turn the call over to UnumProvident's President and Chief Executive Officer, Tom Watjen.

Thank you, Tom, and welcome to our review of our fourth quarter results. With us are several members of our management team, including Dean Copeland, our General Counsel; Bob Greving, our CFO; Joe Foley, who is responsible for marketing; Rick Wolff, our Head of Sales; Kevin McCarthy, our Chief Underwriter; and George Schell who heads our Claims Management Operation.

As you know, since assuming the CEO role I have stated many times we intend to take the actions needed to assure that we are positioning ourselves to deliver better and more consistent results in the future. I think there were some who had doubts about someone from the inside being willing to make the tough decisions. I hope that we are beginning to put that concern behind us. Just as we have, I hope, also put the issue of our financial strain and capital advocacy behind us. Everything we have done these past couple of quarters has been designed to do one of the following: Improve our statutory capital, refocus our operations on businesses which over the long term should generate attractive returns for our shareholders, improve operating effectiveness and, thus, as well future profitability, and position the company so that when we see a turn in the economy and an improvement in interest rates we benefit as quickly as possible. Our fourth quarter results reflect our continued commitment to move as quickly as possible through this repositioning phase, which as we do, makes it, I know, very difficult to assess our true operating result.

I believe within the next quarter or so, we will have the vast majority of our restructuring activity behind us, creating a simpler, better positioned organization, and one that will still have some challenges; but one that is capable of generating improved value for our shareholders. As you have seen from yesterday's release, this past quarter results reflect the impact of a number of previously announced transactions; as well as additional actions I felt, as a new CEO, were appropriate including the reserve strengthening. All these were appropriate to better position our company for an improving economy and higher interest rates. Specifically, number one in the quarter, we reflected the impact of divesting our operations in Canada, Japan and Argentina; as well as three relatively small, but important, reinsurance transactions in our individual income protection and AD&D lines of business. Second, we strengthened our U.S. group income protection GAAP reserves by $440 million. Approximately $300 million of the reserve strengthening reflects implementation of a lower discount rate for our group income protection claim reserves.

The discount rate was lowered to reflect our expectation of future investment portfolio yield rates, and our new discount rate management approach of maintaining a wider spread between our group income protection portfolio investment yield rate and our average discount rate. Our new discount rate management approach is intended to better reflect the current interest investment environment and position us to be more responsive with discount rates on new and current claims as changes in the investment environment emerge. Approximately $140 million of the reserve increase relates to a strengthening of the morbidity assumptions to reflect the impact of a continuing weak economic cycle, the impact that's having on claim incidence and severity. Claim incidence in the second half of 2003 was 8% higher than the first half of the year, and 5% above the second half of 2002. Increased claim incidence is expected to continue at an elevated level for several quarters as the early indications of a recovering economy are not yet reflected in improved consumer confidence or job creation. The reserve increase represents a 5.4% increase in total net group income protection reserves as of December 31, 2003, which were $8.2 billion prior to the increase. These changes do not impact our statutory reserves or our statutory surplus.

We also adopted three accounting policy changes in the quarter, which we'll certainly review with you. We also recognized a number of smaller non-recurring expense items, and we continue to lower our discount rate on new claims growth. Assuming rates stay at present levels, I believe this is the last quarter we will be lowering our discount rate for new claims in our group long term income protection line. These items, unquestionably, added a great deal of complexity to our reported results. I think as we walk through each of the items in the quarter, you will see that our overall operating results for the quarter were generally -- I say generally -- in line with consensus estimates. While we're pleased with some aspects of our overall results, I continue to be very disappointed in our U.S. group income protection operations. These results continue to be unacceptable. As we'll discuss, the underlying fourth quarter claim trends, from an incidence and a net claim recoveries perspective, were flat actually to slightly improved over the third quarter results. The lower earnings were driven by lower net investment incomes, higher expenses in our foreign operations, which we believe will subside in future quarters, and the impact of the lower interest rate, I mentioned earlier, we used for new claims growth. I'll discuss all of this further in a moment, including our plans, which are well underway to improve this line's profitability.

When you pull apart our results you'll see there are a number of very positive developments that emerged in the quarter which I believe are very encouraging as we look into 2004. First we continue to see favorable trends in our individual income protection results, with stable incidents trends and solid net claim recovery experience. Our results continue to be solid in both the recently issued business, as well as the closed blocks. Second, we had solid results from our other operations, including Colonial, our business in the U.K.; as well as good results in our Group Life, long term care, and brokerage voluntary benefit lines of business. Third, we had solid statutory results in the quarter and ended the year with a substantially improved statutory capital position. Fourth we saw further improvement in the underlying credit trends in our investment portfolio. The losses on our Parmalat exposure managed the continuation of the trend we see throughout 2003 of improved investment portfolio performance. And lastly, it may seem odd to mention this as a positive development, but in the fourth quarter our sales from continuing operations were down 10% in total and 20% in the U.S. fully insured income protection line. These results indicate that we are strongly committed to slowing sales growth in order to improve profitability.

When you look behind these numbers, there's another very encouraging message. We are seeing growth in sales to small and midsized employers. Sales in these market sectors grew 14% and 22% respectively in the quarter, and were offset by a decline in sales in the large case marketplace. We'll talk about that more in a moment. As I said, I'll cover more of these in greater depth later, but I'll ask Tom White now to give an overall review of the results in the quarter. Tom?

Thank you Tom. As Tom said, there were a number of items in the fourth quarter results. I would like to take a minute to summarize each item and it's impact on our overall results. First, we reported a loss from continuing operations before cumulative effect of accounting principal change of $330.8 million before tax, or $208 million after tax, which is 71 cents per diluted common share for the fourth quarter 2003. This compares to income of $146.3 million before tax, or $98.7 million after tax, which is 41 cents per diluted common share for the fourth quarter 2002. This includes the GAAP only reserve strengthening of $440 million before tax, which is $286 million after tax for our group income protection line to reflect our expectation of future investment portfolio interest yields; and to a lesser extent the impact of the continuing economic cycle on claim incidence and severity. The after tax impact is 97 cents per diluted common share.

Also included are net realized investment losses of $36.4 million before tax, and $23.9 million after tax; which is 8 cents per diluted common share in the fourth quarter 2003. This compares to $80.8 million before tax, and $52.6 million after tax; which is 21 cents per diluted common share in the fourth quarter of 2002. Next, the sale of our Japanese operation and the sale of a portion of our Argentine operation reduced earnings by a total of $14.7 million before tax, and $5.3 million after tax; which is 2 cents per diluted common share. Finally, we are accounting for our Canadian operation as a discontinued operation. This operation had a strong quarter with $28 million of operating income before tax, and net realized investment losses which was $18.2 million after tax; which is 6 cents per diluted common share. This compares to $5.8 million of operating income before tax and net realized investment losses which is $3.8 million after tax, or one cent per diluted common share in the fourth quarter 2002.

So therefore in total, these four items lowered our fourth quarter results by $519.1 million pretax, and $334 million after tax; which is $1.13 per diluted common share. As described in the earnings release there were a number of other items that impacted these results, including two reinsurance transactions primarily affecting our individual income protection line of business that reduced before tax earnings by $3.6 million; or $2.4 million after tax. Second, we reinsured our business travel accident block of business within our AD&D line reducing our before tax earnings by $1.5 million and after tax earnings by $1 million. Third, we adopted FAS 123 for stock option expensing, reducing before tax earnings by $900,000 and after tax earnings by $600,000. And finally, our U.K. operation had non-recurring expenses and transaction related expenses, which reduced before tax earnings by $3.6 million and after tax earnings by $2.3 million. These four items combined reduced our before tax earnings by $9.6 million and after tax earnings by $6.3 million, which is about 2 cents per diluted share.

The additional impact in the quarter from the discount rate reduction on new claim incurls that Tom referenced, reduced earnings per share by additional an 2 cents or $9.4 million on a before tax basis. And finally, there were two additional items. First, in conjunction with the classification of the Canadian branch as an asset held for sale, we tested the goodwill for impairment and determined the balance of $190.9 million to be impaired. We also recognized a loss of $9.3 million before tax, which is $6 million after tax; to write down the value of bonds in the Canadian branch investment portfolio to market value. And lastly, we adopted the provisions of FAS 133 implementation issue B 36, which resulted in an increase in fixed maturity securities; this would be as of October 1, of $61.3 million to record the fair value of embedded derivatives with a corresponding $39.9 million cumulative effect of accounting principle change. Now, I would like to move on to provide some more color on the segment results. Please keep in mind since our Canadian operations are now reported as a discontinued operation, their results have been reclassified from current and historical numbers. In addition, all segment results referenced here are before tax and before net realized investment gains and losses.

First, the income protection segment reported an operating loss of $355.7 million including the reserve strengthening. This compares to operating earnings of $147 million in the fourth quarter 2002, and $107 million in the third quarter of 2003. Within this segment, group income protection reported an operating loss of $429 million including the reserve strengthening versus operating income of $80.5 million for the fourth quarter and $37.5 million in the third quarter. Relative to the third quarter, the earnings decline was driven by lower results in group short-term income protection, lower investment income, higher operating expenses in our foreign operations, and a reduction in the discount rate used for all 2003 new claim incurls. The benefit ratio for this line was 92.9% excluding the reserve strengthening. This would be for the fourth quarter of 2003. This compares to 92.8% in the third quarter. You will note that in our statistical supplement, we are now reporting ASO fees only, instead of on a premium equivalent basis to reflect more directly the revenue impact. The historical numbers have been restated to reflect this change as well.

Total sales in the fourth quarter of 2003 for group income protection declined 7%, to $224.9 million from $241.6 million one year ago. This was driven by a 10% decline in group long-term income protection, which was only partially offset by a 1% increase in short-term income protection sales. Again, as Tom said, we're pleased with the mix shift that is beginning to occur within this quarter. Premium income and group income protection increased 10% to $779 million in the fourth quarter of 2003, from $706.3 million in the fourth quarter of 2002. Premium persistency improved in both lines. For the full year 2003, persistency in the long-term income protection block improved to 87.2% compared to 86.5% last year. Persistency in our short-term income protection line was 84.5% for the full year 2003 versus 81.5% last year.

Moving on to individual income protections, this line reported operating income of $53.5 million compared to $55.2 million in the fourth quarter of '02. Claims incidence continues to remain relatively stable in our individual income protection business. Paid annual sales for this line were $36.5 million compared to $41.4 million in the same quarter last year. This decline masks a 52% improvement in our voluntary brokerage income protection sales which generated $7.7 million in sales. In addition, the quality of our individual income protection sales continues to grow with 77% of the sales premium being on a multi-life basis for 2003. Next, the long-term care lines of business reported operating income of $15.6 million compared to $6 million in the first quarter of 2002. A lower operating expense ratio drove most of this increase. Despite a 44% increase in group sales, total long-term care sales were down 28%, which was driven by a decline of 59% in the individual long-term care product line. Finally, the disability services line reported operating income of $4.2 million in the fourth quarter 2003.

Now, I'll move to the life and accident segment, which includes our group life, AD&D, and voluntary life products. This segment reported income of $72.6 million in the fourth quarter, compared to a very strong $86 million a year ago, and $66.3 million in the third quarter. The earnings decline from the prior year was driven primarily by lower AD&D results due to higher benefit and expense ratios. Submitted sales for the segment declined 25% to $132.8 million, driven by a 26% decline in group life sales primarily within the large case market. However, our brokerage voluntary life sales continue to grow, up 5% this quarter and 31% for the full year. Premium income for the segment increased 7.5%. Premium persistency in group life declined slightly for the full year to 83.2% from 83.9% last year. Finally, Colonial reported operating income of $37.6 million in the fourth quarter compared to $36.2 million a year ago. Premium income was up 8.7% and new annualized sales for the quarter were up a strong 17% to $98.2 million.

The other segment which contains the results of products no longer actively marketed by the company, reported an operating loss of $2.3 million this quarter versus income of $8.6 million last year. Keep in mind these results include the before tax writedown on our Argentine operation of $13.5 million. Lastly, the corporate segment reported a loss of $46.6 million versus a loss of $51 million in the fourth quarter. Keep in mind these results include the $1.2 million pretax writedown related to the sale of the Japanese operation, as well as the $900,000 impact from the adoption of the stock option expense provisions of FAS123. As of December 31, 2003, book value per common share was $24.55 compared to $28.33 a year ago. Finally, the statutory earnings on an operating basis, this would exclude the net realized investment gains and losses, totaled $89.7 million in the fourth quarter of 2003; and this would compare to $103.3 million in the year ago quarter. Statutory net income was $23.7 million in the quarter compared to $50 million a year ago. For the full year, statutory net income totaled $22.7 million for 2003, which is a very nice improvement over our 2002 loss of $209.7 million which was heavily impacted by investment losses. With that, I would like to turn the call back to Tom Watjen.

Thank you, Tom. I'm going to focus my comments on the several areas that I referenced earlier, as well as summarize where we have come over the last nine months or so; and some initials thoughts on our outlook for 2004. Let me start again by reiterating that I understand that there is a lot noise in the quarter. So when look through the pieces of the announcement, a number of things are working well. With the major disappointment being the continued low level of profitability in our group income protection line. I want to come back to that in a minute. Before I do, let me maybe make a statement of the obvious. As our new leadership team takes shape, we have taken a new look at certain aspects of our business and have determined it is appropriate to make changes. Changes operationally, financially, managerially, and organizationally. You can see that clearly in the past quarter's results. These changes are designed to satisfy one or more of the objectives I noted earlier with the result that our company will be not only better positioned for the future, but also a simpler more transparent company. Before moving through a few details, let me reiterate a few points I made earlier.

First, the majority of our other businesses and products lines performed in line with our expectations. I think you will see that as you make your own adjustments to actions we have taken in the quarter. Second, the sale of our non-core businesses, Canada and Japan and the partial sale of Argentina are consistent with our business plan objectives; including continuing to build capital strength. There is a price we paid, or will pay, for exiting these businesses; which we incurred in the quarter, but we believe there are substantial long-term benefits from these actions. Lastly, in the spirit of recognizing the persistent and projected economic and interest rate environment and positioning us for the future, we have made a decision to strengthen our group income protection reserves to a level more in line with current interest rate environment; and to adjust our assumptions relative to morbidity. Our approach in the past has been to gradually recognize rate changes through claim incurls, as we have done in past quarters. Future discount rates will more closely track up or down to the interest rate, to the market interest rate. I believe if many of you were in my shoes, you would have used this period as I have to position our company to capitalize on the opportunities which lie ahead and generate better, more consistent results. We still face challenges, especially with our group income protection results.

Let me turn to that now. Our fourth quarter results for total group income protection were below our third quarter. With operating earnings of $11 million in the fourth quarter of 2003, excluding reserve strengthening; compared to $37.5 in the third quarter. This was primarily driven by lower results in our group short-term income protection line, higher expenses in our foreign operations, slightly lower level of net investment income, and the negative impact of our continued reduction and discount rate used for new claim incurls in this line of business. I'm encouraged, however, that our underlying claim trends have stabilized. Submitted incidences was down slightly in the fourth quarter compared with the third quarter; though still above our expectations. Paid incidence did increase slightly, which is not surprising given the recent submitted incidence pattern we've experienced. Net claim recoveries were solid in the quarter. And this represents the third consecutive quarter of results generally in line with our expectation.

We have often discussed how our claims incidence tends to correlate with changes in the consumer confidence and level of employment. While we're encouraged by what we're seeing in the outlook for the economic growth, it has not yet translated into improvement in our business. In past economic slowdowns we have typically experienced a lag between recovery of these economic indicators and reduction in our submitted claim incidence. This economic cycle has been no different. Let me be clear, we're not however, simply waiting for a turn in the economy to improve the profitability of this block of business; but have initiated actions in 2003 and have planned actions for 2004. The key areas of focus are in the following areas: Selected pricing adjustments, renewals and underwriting actions. Continued emphasis on claim recovery improvements. And lastly, expense management.

Let me provide a little more insight into our plan for each of the areas. First, in the area of pricing, renewals, and risk selection, we are taking a very disciplined approach with a more more conscious effort to balance growth and profitability. This is not something that will start in 2004, but rather something that began in 2003. As I mentioned earlier, our fourth quarter U.S. group long-term income protection sales were down 21%, compared to the fourth quarter of 2002. Primarily reflecting a slowdown of sales in the large case sector of the market. We want to continue to pursue profitable large case opportunities, but are also shifting resources and focus to our poor markets, which are employers with less than 2000 lives; and to industry segments which have lower and less volatile incidences. I believe in the past we placed too much emphasis on the large case market, and we are striving for a more balanced mix of sales. As I mentioned earlier, our fourth quarter sales results were encouraging in this area, as our core market sales in group long-term income protection grew 18% in the quarter. This will continue to be an area of focus in 2004.

We are also continuing to focus considerable resources on implementing targeted renewal actions. Targeted toward those cases or market segments which are not meeting our expectations. This past year we placed more than $100 million of renewal on group long-term to short term income protection business in the market at an average rate increase of close to 9%. In our group long-term protection line, the cases that have terminated as a result of our actions have historically performed worse than our inforce block. On average, those cases that chose to terminate were being asked for significant rate increases and running at significant losses. Someone else obviously has picked up the business. Growth in excess of normal industry growth is usually achieved at the expense of margin, and we're not going to do that again. We have continued to place a strong emphasis on our renewal actions in 2004. This year's renewal plan is larger than that undertaken last year, and continues to be targeted toward underperforming cases and market segments. As you know, a substantial portion, almost 40%, of our business renews in the first quarter of year, and the largest portion of that has a January 1st renewal date. Therefore, at this point, we are well into our 2004 renewal program.

Early indications of our first quarter renewals are not surprising. First, because of the size of the program, the size of the rate actions in certain situations, the level of business terminations is running ahead of 2003 levels. We fully expect somewhat lower persistency in 2004, as we maintain our discipline renewal action. Since we have adopted more conservative DAC assumptions over the past several years, we do not expect lower persistency to lead to any acceleration of DAC amortization, as we've had in prior years. Secondly, we don't like to lose any business if it can be retained profitably; but we continue to find the right businesses to terminating--that is, the poor performing business. The January 1st business that has terminated has been producing higher incidences than our overall block, and a much lower margin. We have certainly seen positive trends in the group income protection business and I wouldn't want to miss a chance to mention those. As I know in the past they have been a concern to you, as they have been to us in management.

Most importantly, I'm very pleased with the improving trend in our net claim recoveries in the group income protection line, a trend we have seen over the past few quarters. While our recovery rates remain below historic levels, they are improving; and I know our team is focused on delivering more consistent, stable results from all of our benefit centers. Also, our submitted incidence did improve slightly relative to the third quarter, with the improvement coming from the more economically sensitive sectors. It still remains at levels above our expectations and historical levels. However, this is certainly an area we're watching very, very closely. Our hope is that we will begin to see a gradual improvement as the economy continues to strengthen over the year. Finally, regarding expenses, we incurred approximately $3.6 million in non-recurring expenses in our U.K. operations related to software, write-offs, and the cost of the Swiss Life acquisition. It will be a primary focus for us in 2004 to address our expense structure, expressly given the outlook for a slower rate of premium growth.

I would like to close my comments on the group income protection line by reiterating my disappointment in our results, but assure you that we're taking the actions needed to better position us in 2004 and begin to generate more attractive returns in this business. Although the focus, as it should be, has been on our group income protection line, I also want to mention that the claims trends in our other primary lines were generally favorable this past quarter. Individual income protection experienced solid claim recovery experience, and a continuation of the generally flat incidence trends that we've been experiencing for the past several quarters. This is true for both the recently issued block, as well as the closed block of business. Colonial benefit ratio was slightly higher reflecting the final stages of exiting the group long-term income protection market, but the ongoing core business of Colonial remains steady. I'm obviously very pleased also with the strong finish the company had in sales with a 16, almost a 17% increase in the fourth quarter. Group life claims incidence was favorable compared to a year ago, while the average claim size remained above the year ago level; but was flat with the third quarter. Now, I would like to move to a review of our investment results.

Like most other companies with significant corporate bond exposure, although we continue to see some challenges, we have seen steady improvement in the environment and our results. And I draw your attention to four points. First, the level of net realized after tax investment losses declined significantly to $23.9 million this quarter, from $52.6 million in the year ago quarter. In the quarter we liquidated our Parmalat holding company exposure of $30 million, and a net loss of $25.2 million. Second, the net unrealized gain in the bond portfolio declined slightly from the third quarter due to interest rate movements, but was a healthy $2.8 million at December 31 reflecting, quite frankly, the quality of our portfolio today. Third, the level of unrealized losses in the bond portfolio held steady over the past quarter at $479 million and compares favorably to the year end 2002 unrealized losses of $1.1 billion. Within that amount of unrealized losses, the amount of unrealized losses in our below investment grade portfolio declined further to $154 million from $268 million at the end of the third quarter; And $856 million at the year end 2002.

As you analyze the aging tables you will see that we have experienced an improvement of $51.7 million relative to the third quarter in the amount of unrealized losses on below investment grade securities, trading at an unrealized loss for over a year. We also saw a reduction from $106.7 million to $56.8 million on the unrealized loss on below investment grade securities that had maintained a value of less than 70% for over a year. This reflects both an improving trend in the credit market, as well as a reduction of some of these positions as they recovered in price during the quarter. Lastly, overall the below investment grade bond portfolio declined again in the quarter to 7.6% on a market value basis, compared to 10% at year end of 2002. On a book value basis, the exposure has declined to 8.4% from 13.9% at year end 2002. Clearly derisking actions we initiated in the first quarter of 2003 have continued throughout the year. As you can see with the numbers; it has really had a very positive impact on the quality of our investment portfolio. It has come at a cost however, as we estimate the net investment income giveup to be approximately $23 million in 2003.

So from our perspective, the credit environment continues it's recent pattern of gradual improvement. At this time, there is no reason to believe the situation of Parmalat is indicative of return to a more challenging credit environment we saw in 2002, early 2003. Clearly though, the low interest rate environment creates some challenges for us. Although the credit market is showing signs of improvement, we do not yet see signs of sustainable recovery in corporate bond rates. In the quarter, our portfolio yield dropped to 7.15% primarily due to the lower new money rates available in the market. This past quarter, we again lowered our discount rate used on new claim incurls in our group long-term income protection business by another 25 basis points, completing a full 100 basis points reduction for the year. The lower discount rates impacted total company earnings in the fourth quarter relative to the third quarter by approximately $9.4 million on a pretax basis, or 2 cents per share. This was split between $4.5 million in the group income protection line and $4.9 million in the individual income protection line.

For the full year 2003, the lower discount rates impacted our total company earnings by approximately $57.5 million on a pretax basis, or approximately 14 cents a share. This was split between $40 million in our group income protection line and $17.5 million in our individual income protection line. As we look at 2004 and given the actions we've taken this quarter and the current interest rate environment, we do not expect to lower the discount rate further.

Let me shift to an update on the status of our regulatory reviews. The coordinated multi-state market exam being undertaken under the leadership of our primary domestic state regulators: Massachusetts, Maine, and Tennessee is progressing on schedule. Currently, there are 44 states participating in the coordinated exam. As I've said before, we are very supportive of this coordinated approach and the process that the lead states are using to conduct a review, as it provides a more efficient and effective exam process than a number of states handling the exam separately. We continue to expect the examination will be concluded in the second quarter of 2004.

Moving to an update on litigation, let me start with our claim litigation trends and here I want to bring to your attention two points. First, we continue to see a decline in the number of complaints, which are often a leading indicator of future litigation. With the number of reported complaints in the fourth quarter approximately 34% below what we experienced a year ago. For full year 2003, complaints were at the lowest level since 2000. Secondly, new individual income protection claim litigation, the primary focus of the adverse media attention in the fall of 2002, is running 25% below the level we experienced in the fourth quarter of 2002. With the inventory of open cases also at 25% year ago levels. I wish we had no complaints or no litigation. But that's an unrealistic expectation in our business. But, I'm very encouraged by these trends we've seen the past several quarters.

Now with respect to the class action activity. The judicial panel on multi-district litigation ordered the alleged class action and stockholder derivative suits to be transferred for pretrial proceedings to the federal court in 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 action and derivative suits. We expect that any subsequentially filed lawsuits of a similar nature will also be transferred under the multi-district order. These actions remain in the very early stages, and I encourage you to review our 10K and 10Q filings for updates on these specific cases.

In summary, we are pleased with the overall results in the fourth quarter, but understand the work ahead of us to restore profitability margins in our group income protection operations. While our GAAP earnings were below our expectations in 2003, there were a significant number of accomplishments to help us build a stronger financial and operating base from which to profitably grow our companies in the future. I want to assure you we have used this time of change at our company wisely, and will continue to do so in early 2004. I don't want to spend too much time on, this because I want to get to your questions, but I do want to draw your attentions to a few significant accomplishments over the past year. First, we announced plans to sell our Canadian and Japanese operations and pare back our exposure to Argentina, all with the goal of focusing our operations on high value businesses and building financial strength. Secondly, we have built a strong statutory capital base. In fact we closed the year with a record level of statutory capital. With the close of the Canadian sale later this quarter our consolidated ridge based capital ratio will be between 270 and 280%; well above our 210% at year end 2002.

Additionally, our intercompany loans have been reduced by $535 million. A strong indication that the quality of our capital has improved significantly as well; and I would add that we expect this trend to continue in 2004. We've made significant improvement in the quality of our bond portfolio. One indication certainly is that the bond portfolio gross unrealized investment losses declined to $479 million at year end from $1.1 billion at year end 2002. The derisking of our high yield exposure has brought this asset class to 7.6% of invested assets from 10% a year ago on a market value basis, or 13.9% to 8.4% on a book value basis. So again, a significant reduction in our high yield exposure was an important accomplishment this past year. As I mentioned earlier, that came with a cost. Our reserve base for group income protection has increased $8.6 billion at year end 2003 from $6.7 billion at year end 2002; well over 20% increase. The discount rate for our group long-term income protection line was reduced by 100 basis points, to slightly over 5%, at a cost of $40 million to earnings in 2003, excluding the fourth quarter reserve strengthening.

Finally, we made a number of operational adjustments to streamline our company, such as the move we made this past week to reorganize our field sales structure to reduce the layers of management, improve productivity, reduce expenses, and enhance the accountability of our organization. In short, 2003 was a year to build back financial flexibility, and in 2004, our focus will be to improve the profitability of our business. As we look to 2004, our more general goals continue to be on building further financial strength, continuing to focus on businesses which meet our strategic and financial objectives, and improving the level and consistency of our operating earnings. Our outlook for earnings is relatively flat with upside potential for a more favorable interest rate environment and a stronger economic condition. Operating earnings should grow at a modest rate, offset somewhat by a higher share count from last May's capital raising.

As I said, our focus will be on profitability and margin improvement at the expense of persistency and market share. The lower persistency we're seeing from January 1 renewals suggests that we're losing the right business, which will ultimately have a positive impact on earnings. We will hold fast on our renewal pricing and new business pricing, so we don't expect significant sales growth here in the upcoming year. To better align our interests, we have included more block margin and profitability measures into our sales compensation plans this year; which is really a very important point for this group, and others, to know. We're also highly focused on expense management, including managing our expenses as the rate of top line growth flows which we fully expect. Finally, we will continue to focus on a more balanced mix of business with heavier emphasis on core markets and less large case sales.

We presently believe that the current consensus estimate of about $1.80 for 2004 is a stretch, given the backdrop of a flat interest rate environment and generally flat economic conditions and a slow recovery for the group disability line. I do want to close that we do have leverage in our plan. The leverage certainly is for if we see improvement in the business environment or in the economic environment. Let me give you two brief examples to close. A 25 basis point improvement in the group disability discount rate is worth about 4 cents a share for our company. Another indication of the leverage in our business plan is 100 basis point improvement in the loss ratio for our group disability line is worth approximately 6 cents per share. So we've positioned our company, we believe, to be more responsive as we begin to see improvement in the economy and improvement in the interest rate environment. Operator, that completes our prepare comments and we'll actually go to the Q-and-A session of the call.

Thank you, sir. If you would like to ask a question, press star followed by the digit one on your telephone. We'll take our first question from Michelle Giordano of J.P. Morgan

Good morning. A couple of questions. First, have you spoken to the rating agencies about this? And what has their reaction been? I see this morning that Fitch has you on negative watch. Which ratings agencies have you spoken to, and what has their reaction been to the news?

That's a good question. I'll just ask Tom White to give a brief update on that.

Yeah, anytime with a situation like this, you want to brief the rating agencies beforehand, and we've done that. Fitch has put us under review. Their goal was to come in and meet with us, as we would normally do this time of year, to look at reserves. We feel very comfortable with our reserves. We have a high level of confidence there won't be any rating action from Fitch once we've gone through the information. The other agencies -- I don't want to speak for them. You might see similar action. You might see a rating agency view this as not having an impact.

Keep in mind, this is not statutory. Typically the rating agencies are going to focus their work on statutory results. When you look at, that as Tom said, our capital is up to $4 billion from $3.3 billion at the first year. RBC levels are up nicely. Statutory earnings in the second half of the year were very good. I think the issues that they are focused on are the same things we're focused on, which is the profitability of the LTD business. And as Tom outlined, we think we have a very solid plan to address the profitability of that.

Is the new discount rate you're using as conservative as you could be? Because I understand on the statutory basis, the discount rate is much lower. What are you factoring in in terms of portfolio yields through the remainder of the year? And are you factoring in the risks that we could have even lower yields through the remainder of year?

Michele, I'll ask Bob Greving to speak to it. I think in summary, I think we did try to be very responsive to bringing the discount rate lower. The statutory rate tends to be somewhat lower than that. Our discount rate on new claim incurls today is below some of our competitors right now.

I think as Tom indicates, the discount rate in his presentation, the discount rate right now is a little over 5%. The discount rate on statutory reserves is about 4.5%. There is still a bit of a margin between statutory discount rates and our current discount rates. However, as also indicated, the current level of discount rates also provides a nice margin between our actual investment yield rates and our current discount rates.

And, then Tom Watjen, you had mentioned that the $1.80 for 2004 looks like a stretch. And you were sort of implying in your comments earnings should be flat. Off of what base are we taking flat earnings from? And then when you're talking about some lower persistency, what kind of persistency are you expecting in 2004 for the businesses?

Michele, a couple of thoughts. I think when I speak in flat, it is more flat from this quarter, moving through the year. Sort of a flat pattern to that. So if you adjusted this quarter for some of the things we view as extraordinary in the quarter, and extrapolate that forward. Some of us have felt when you make some of those adjustments one way, you can look at it as roughly a 42 cent quarter and I think-- I think that kind of feels flat for the year. And I think the outlook we have as a management team.

Now, with respect to persistency, if you step back -- look back to 2000, right after the merger we saw a fairly dramatic reduction in persistency. It had been running -- we're talking about LTD now-- it had been running in the high 80s. It had come back down to the low 80s. We had been gradually been building it back to the mid, to a little above the mid level, 80% persistency. I think we fully expect that that's going to come back closer to the 80, given some of the things we talked about.

As I mentioned earlier, very importantly, two points, number one: We've made adjustments in our DACing policy. So unlike in the past when we saw those kind of trends, we saw an acceleration of the amortization of DAC, I don't think we see that now. Number two, I think we're more confident than ever, as the business leaves, if it is the kind of business that if we can't write it profitably, it should leave, because it's not generating the kind of margins that it should. So, again, I think the bottom line is I think we see ourselves drifting closer to 80 as a result of these actions. I think we feel confident that's the right short and long-term trend for the company.

Lastly, Tom, after everything that has happened here over the last couple of years, why should we feel comfortable the individual disability reserves are adequate?

Michele, as you can imagine, think back to my comments about how you think about some of our demeanors as we thought about year end. This is the time to put issues of the past behind us and look at issues with a different set of eyes on a number of aspects of our business. I think you should assume that as we looked at all aspects of our balance sheet, including the IDI reserves; and I think certainly came away with comfort that that business is properly reserved. I would say that as you think about some of the things I've said operationally, there have been two different things happening. In LTD we've seen continued high levels of incidence.

That was part of our decision to adjust our reserves going forward. We've not seen that pattern in the individual side. Quite the contrary, we've seen actually the incidence continue to be somewhat below our expectations. It's been relatively flat over this period of time. There seems to be two very different business themes emerging with those two businesses. That's why, when we put all of that together, we felt comfortable where we were at year end in terms of IDI reserves.

Thank you.

Thank you.

We'll go next to Liz Werner, Sandler O'Neill.

Quick follow-up on the individual business. I just wanted to get a sense of how you prioritize dealing with the closed block given that you continue to focus on the strength of your core businesses. I understand that those reserves are adequate, but would you be willing -- the question is, what size of charge would you be willing to accept for the sake of trying to further segment your core businesses and getting their profitability to be a little more visible from the individual closed block, which is obviously a drain on the current ROA?

That's a good question. For those who follow us closely, everyone has probably seen a disclosure in our 10 Q, which reflects the fact that we continue to look at the individual disability business and look at the options. Again, that continues to be a priority of mine and for the management team. So that's probably one of the one pieces I mentioned that is still out there that we want to continue to have an open mind as to what we can do with it. In terms of what we would digest, I don't think of it in those terms. I think of what makes the most sense to bring the focus around the parts of our business that we really think are the high value business. Obviously, being insensitive to capital and those aspects of it as well. I don't know how I can really answer the question about dollar amounts.

I can continue to say as we've say in the Q's and K's in the last few quarters, this is an area of focus. And we're going to continue to see whether there's things we should do there either from a reinsurance point of view, from a segmentation point of view. It would fulfill one or more of the four objectives I talked about earlier. It's either capital, it's either focus, it's either enhancing the earning's stream going forward. So those would all be objectives we would be using as we thought of different alternatives for that block.

Okay. That's helpful. One follow-up on that block in particular, can you tell us what the margin on that block is in terms of your portfolio yields and discount rate assumptions? I thought it was like 60 on the group side. I'm wondering if it is the same on the individual side.

When you actually add in -- there are two different calculations. When you add in the rate plus the margin. It is probably about 50ish basis point spread.

Our overall spreads and the ID assumptions are in line with our new discount rate management approach that we're applying to our group line.

Liz, this is Tom White. If I could add one thing on the IDI portfolio, keep in mind, that is a longer duration block of business. The cash flows we have to invest are much lower than LTD, just because of the different rate of growth. There is a fair amount of hedges in place in the IDI portfolio, so the portfolio yield for IDI is going to be much more sticky over time than we see from the LTD portfolio. We've got different kind of characteristics of the portfolio given the different durations there.

Okay. Thank you very much.

We'll go next to David Lewis, Sun Trust Robinson Humphrey.

Good morning. You indicated more restructuring could develop over the next few quarters. Are you talking about the IDI block and what you might do to free up capital there? Or is there the potential need -- I think you just answered this-- But any discount rate adjustment on the IDI side?

I think it really is -- we've worked very hard to get as many things done as quickly as we can. The one that we still want to be sure we've exhausted all the alternatives and think about it with the new set of eyes and folks, is the IDI. I don't see it as a discount rate issue. I see it more as the issue we talked about earlier, which is being sure that people can see the real value of the other parts of our franchise. Again, I'm assuming we're going to finish the group LTD piece so that people can see true value in the other components of what we offer as an organization. That is the remaining one outstanding. On the other hand it is one of those things I think we want to try to resolve, so we don't have continued sort of overhang around additional restructuring; resolve it as quickly as possible.

And could Tom or somebody comment on what the IDI interest rate adjusted benefit ratio was in the quarter and the year?

Tom, do you have --

I'm sorry, David. For which block of business?

The closed and total.

The interest adjusted loss ratio---this would be for the recently issued business---was 41.2% in the fourth quarter. For the full year was 44.7%. And David, on the closed block --

Can you give me a year ago, too?

A year ago would be 35.5%. Let me start over again, David. For the quarter---- 41.2% compared to 35.5% a year ago. For the full year, we're 44.7% compared to 43.4%. And David, I can get you all the numbers adjusted for Canada. For the closed block it was 87.2% compared to 82.5%, and then for the full year it was 82.7% compared to 78.1% last year.

Okay. And finally, it talked about some business you weren't willing to keep, it was underperforming. Going out, getting picked up somewhere else. Is that getting picked up, do you think, at similar prices to what you had written it at? And is it believed that is being picked up by public companies or mutuals?

I think it is going to different players. In terms of prices, I doubt it is getting picked up at our inforce rate. Probably what happens, people see some of these more significant rate increases and put it out to bid. There probably is an increase a competitor will have over our inforce rate, but it isn't anywhere near as high as the rate we would have as the encumbant carrier who has a better sense of the claim experience. I don't think it's at the rate, but it is certainly below the rates we would have had in our renewal. As I mentioned earlier in the comments we tend to be seeing more of the business leaving on the large case side where there's greater---so you know some of the players who play in the large case marketplace.

Any change in the last three to six months on competition?

It is still pretty aggressive in certain segments. That's why, again, we're going to be prepared to back away from growing sales if we can't find the sales can be developed in the right margin. There are people that continue to be competitive in certain situations. Hopefully your hearing from us is a real commitment to be more disciplined and not chase that. That's why we may see declines in growth rates. But on the other hand, we should be improving profitability while we do that.

Thanks very much.

Our next question comes from Jason Zucker, Fox-Pitt Kelton.

Tom, I just wanted to go back to something you aid before, it was in the release when we talked about claim incidence expecting to continue at elevated levels for several quarters. My question is, what is the difference, or what has changed since last quarter where you didn't make a similar statement? And just as a bit of a follow-up, any guidance for us as to the benefit ratio now that we've taken these charges? Does it mean things start to move down because you have a little less pressure off the discount rate? Anything there would be helpful. And just last -- something that surprised me, I guess, we had the Argentinian restructuring preannounced, but not these charges, and I guess---why no preannouncement?

Let me take all of those. I think on the incidence front, Jason, if you think about our results last year, we saw a moveup, pretty dramatic in incidence in the third quarter. As you know our business has volatility and I think when you have a month or quarter of increase like that, you're not sure whether it is a trend or volatility. We saw the level in the fourth quarter continue to be at high levels, albeit slightly below the third quarter. That was the thing that caused us to be somewhat more pessimistic about the outlook. You have a couple of quarters of incidence at elevated levels, above your expectations. I think that is the thing that probably, as much as anything, triggered some of the things that led to looking at the morbidity and why we didn't do it sooner. You do tend to see that volatility quarter to quarter.

Just period to period we do see it. What really caught our attention more than anything else was the fact that the entire second half of the year was about 8% above the first half of the year. So obviously while the news media seems to be indicating we're at least entering what they think is some form of recovery, we're not seeing that in our claim patterns just yet. If we go back to prior recessionary periods in the United States, a similar pattern also exists there, where there is a lag between the news media announcing the recession is over. But the actual public behavior changing and jobs creation does lag those announcements.

Bob, then maybe on the benefit ratio?

On the benefit ratio, I think what you're going to see, obviously we've been decreasing our discount rate quarter by quarter. It has cost us basically about $5 million a quarter on the group line. That all goes into benefits, because it goes into increasing reserves. If we can stabilize, if we don't see any additional decrease in investment rates going forward, if they actually stabilize to even go up, that obviously takes that pressure off of the loss ratio and we ought to start seeing that move back in the other direction.

Thanks. And Tom back to the preannouncement, I'm curious.

I think we were still finalizing things. Again, once we had everything confirmed and agreed to, Jason, if we did ahead of time, we would have done something on a prebasis. There is a lot going on to bring closure to the year end. Until all the I's are dotted and T's crossed of an announcement like that, you don't preannounce.

Sure. Thanks guys.

Thank you.

We'll take our next question from Colin Devine, Smith Barney.

Good morning, gentlemen. Just a couple of questions. First, could you reconcile the GAAP versus stat reserve issue? And why -- I guess all of the charges for this quarter were macroeconomic related, why some of those didn't flow through to your stat reserves. Second, why do you think we're seeing the magnitude of these charges with your company with respect to these macroeconomic trends, we're not seeing it with others? Third, perhaps you could also come back and revisit why you feel the IDI reserves are adequate when certainly this quarter with respect to interest rates you've strengthened the group reserves $300 million and the duration on the IDI blocks to roughly double your group. And then you also commented about the reserve interest margin on the IDI line. I believe, Bob, you indicated it was 50 basis points. Perhaps you can reconcile that to the slide Tom used in his speech at our conference last week when this reserve discount margin, I guess interest margin, was narrowed from roughly about 48 points back in '01 to 28 basis points at the end of the third quarter.?

We'll do all of those, Colin. Actually, Bob, why don't we start with the reconciliation to the --- between the GAAP and the stat reserve position. I know that is a very important question. We've got to be sure people are comfortable there is no connection between the two.

Effectively, statutory reserves are obviously done on a completely separate basis. The factors are regulated by the states. They obviously use much more conservative discount rates, as we've already mentioned on this call, as well as more conservative morbidity. I think what we're seeing in statutory is, our statutory earnings will reflect the lower net investment income rate, but there is not a need to adjust the reserves because of their more conservative nature. The lower net investment income rate does flow through in statutory income. In fact, in the second half of the year, we reported about -- for the year, we reported about $214 million in statutory earnings versus our plan of about $239 million. So we are seeing a bit lower net investment income coming through in the statutory line. That will be reflected in earnings, but it does not require a statutory reserve adjustment.

The higher level of incidence would have shown up in statutory income and did as well in the second half of last year. So that has been reflected as we've seen it in the past put some strain on the statutory earnings, although some other things have done better than we expected.

It primarily flows through the earnings, Tom, as far as our incidence is concerned. The morbidity that's on the statutory basis is conservative. We're well within the assumptions as far as the statutory assumptions are concerned.

Colin, second question, we're well aware of the fact as we share with you our results, they're to a degree, somewhat different from others. So we seem to be suffering from a macroeconomic environment that seems to be different from others. It's very hard to explain that. We've seen incidence move up. We're not ones to look the other way or presume it is just an aberration. We want to take appropriate action. If we find that we see a more rapid recovery, as I mentioned earlier -- maybe I'll ask Kevin McCarthy who has responsibility for all of our underwriting operations to tell you what he's seeing from his point of view of the incidence trends and market factors. Kevin?

Thanks, Tom. Colin, I think some of the incidence difference between us and other carriers would reflect two things. One, the sheer size of our book of business. Where maybe looking at our data we see some of those trends differently than competitors would, or even look at them differently. The other thing I would say, our mix of business by size cuts across all side spectrums, whereas a number of competitors play either on the large side or small side of the business. So mix of a business by industry, mix of business by size would reflect varying incidence patterns. Our incidence rates on large cases are somewhat larger than on small case. Incidence rates on manufacturing, wholesale, retail, transportation, utilities are considerably higher than they would be in professional services, financial services and education. So the extent to which mix of business reflects that might explain some of that.

Colin, I'll add one more piece. As we look back to our experience in the last few years, we grew quickly at different points in time. I think part of this, as you can hear from us, is a commitment to be sure that we temper back growth and that we were even more diligent than ever around being sure extra pricing and risk selection is such that we don't find ourselves in situations where we have adverse selection against us. That has got to be a piece of it as well. With respect to the IDI, Bob?

IDI implications, we went through the same kind of scrutiny on the IDI at year-end as we did with LTD. Our reserve testing did show that the reserves were okay for the IIP subsegment. The lower net investment income is being reflected in our earnings, but in the IDI line of business it's being somewhat offset by our better morbidity. We're simply seeing stable incidence. It is mostly a professional clientele that the individual disability is sold to, which doesn't seem to be as affected by the incidence that we've been experiencing on our LTD business. And our recoveries have been strong in that particular area, as far as our overall claim results, as Tom indicated earlier.

Getting to the spread mention that Colin noted, one of the things we do in our IDI business is we have a separate load that we put into our reserves that is for adverse deviation around, not only the interest rate, but it is equivalent to a spread of about 30 to 35 basis points. And so as we look at our overall margins, overall spreads and IDI assumptions relative to a provision for adverse deviation, we find them to be consistent with what we're doing in the LTD line with the more direct spreads in the interest rates.

Hold on. Can we just come back on this one. I'm having a real tough time with this. Using your slides, the reserve interest margin on the group business was 65, 70 points a couple of years ago. It seems to be creeping up, I presume, although you didn't provide the explicit number which I'm looking for. It is certainly up to at least 50 to 55 right now. On the individual -- and I presume the use of the pad has been fairly constant. It's gone from 48 to 28. Now, I make that a 40% drop. And if the strategy -- to me that spread reflects inherent conservatism in the reserves. Why are you not restoring the spread on the individual if you feel it is so necessary to do it on the group?

First off, we're going to adjust that exhibit. That is confusing. And I'll take responsibility for that. We're going to adjust that exhibit. Comparing the individual on one graph next to the group on the other, there is an apples and oranges comparison. There is more margin in that individual reserve than, frankly, that exhibit would show. We're not saying that we don't want to continue to grow margins. Our discount rate plans are such that, in that part of our business, that we continue to build margins. I think that graphic does lend to some of Colin's comments about perhaps not being real accurate. There is no doubt apples to apples it has come down. It is still within the comfort range when you account for the thing we're talking about that we're very comfortable with that.

I think we're missing the point. If you feel it is so necessary to restore the margins on the group side, which I applaud --

Right.

Why, however you want to measure this IDI, is it not -- do you not want to restore the margins on that? Because if the use of the pad has been constant, then the bottom line is the margin's narrowed by 40% in the last two years.

Colin, it is split. But the point is, the margin still in our mind is very adequate in the IDI side, whereas that was not the case as we were talking about. Especially when we look at the outlook, at the more significant cash flow on the group side. Those are all factors that led us to look at those two in very different ways.

Okay. One follow-up. You referenced a business that is rolled off. We're going to see fairly weak persistency in the first quarter. Specifically since you've got the number, what was the benefit ratio on the business you have not renewed so far this quarter?

Colin it was -- I don't know that we have an exact benefit ratio the way we report it. But it was about a 9-point spread in the profit margin. A 9-point lower spread in the profit margin between business that terminated and our in force block.

Colin, that's a very good question. We will get the answer for that one. That is a good way for us to speak to it. Kevin, do you have that now by chance?

Not the benefit ratio. I can give you a feel for it. The incidence on the larger cases that terminated is 40% higher than the business that we retained. The losses -- the average increase on the business that is terminating that we didn't achieve the rate increase was 28%. You're talking about business that is substantially underwater.

We'll try to translate that into a loss ratio.

We should see the impact of that begin to hit the benefit ratio this quarter, assuming the discount rate is 5. Is that correct?

It should begin to have an impact, yes.

Thank you very much.

We'll take our next question from Joan Zief, Goldman Sachs.

Hi, it's Steven Kron. Good morning. A couple of questions, given the sales decline in the group business, can you just review for us what the group rep count was at year-end versus the third quarter; and maybe just a quick review as to the compensation structure as group reps are dealing with in the pull back in the pricing increases? First question. The second one is on this new DACing policy you're talking about. Could you be a little bit specific as to what you're not DACing at this point? And might there be some recoverability issue with the DAC that you put on in past years? And then finally, if you could just touch on what the new money rate is in the portfolio, specifically on the group protection side.

Actually, just for everyone, as you know, we're running late today. We want to leave the line open as long as necessary because we know there's a lot of complexity this quarter. I want to make that overall point. I'll make a comment about that and then we'll just see if Rick Wolf has any additional comments to make. But actually our staffing plan is to keep it relatively flat in total in terms of our reps between one year and the other. We did do some shrinkage at the back half of last year. We are putting more reps in areas that we see additional growth like voluntary benefits, some of the executive benefits. There is a mix, if you will, a somewhat different mix of reps and where we're spending time now than there was as little as six months ago.

Just to add, we are building into our compensation plans, not just for the sales reps, but also for the marketing managers and people in the field that are at the management level. Compensation plans that have more emphasis around profits and renewals. So each plan differs by each type of rep. And each type of manager. But I can assure you that every layer within the organization starting with the managers working on down to the reps, have a somewhat higher percentage of their compensation tied to profit, pricing and renewal delivery. Maybe some of the more specific pieces that go along with the rep count in particular.

The rep count we're looking at is 316 reps. Tom, we would expect to hold that constant throughout the year at that number. On the group side, the turnover in the fourth quarter was six reps, which is the below historical averages.

As I mentioned earlier, a big focus for that us has been in the last quarter, and will continue to be in 2004. We may have lower sales. But you're going to see a mix of business difference. You saw it already with the fourth quarter results where our large case sales were down. But our sales in the small and midsize marketplace were actually up. And so -- you might scratch your head and say, how can sales be down and rep count flat? We're reallocating reps to the markets where we see greater growth and greater profitability potential.

Steve, I think while we have not fundamentally changed our overall DACing policy, what we have changed over the last several years has been the assumptions and the amortization patterns we have for our deferred acquisition runoff. Back in 2001 when we started seeing those accelerated DAC amortizations, they were coming off of persistency projections that had much higher persistency, in some cases near the 90% type of range of anticipated persistency that the company on a premerger basis had some experience with. Post merger, when we started putting through a more effective renewal program, we were seeing lower persistency in the mid 80s percentages.

We have since modified our amortization assumptions to reflect a much lower persistency on the business, actually to take a conservative view of the amortization so that we're actually accelerating and amortizing a bit more of the deferred acquisition costs more quickly than what would have been the case back in the 2001 type of timeframe. What we've done is basically modified our assumptions relative to persistency. And we believe the persistency in putting through the 2004 renewal program will be within those assumptions.

But you're not just amortizing maybe a little bit quicker-- you're also capitalizing less. Is that right?

That's correct.

That also relates to the persistency or is there something else there?

That relates more to basically what goes through in a current period than it does in the amortization. The DAC acceleration normally is more related to your persistency and your amortization expectations versus what you actually see in terminations. While what you indicate is true, that really is not focused on the persistency.

New money rate. Bob or Tom? Talk about --

I'll have to get back to you on that. I don't have the hedge adjusted purchase yield with me. I'll be happy to get back with you right after the call.

On that new money rate, even though you don't have the exact number, do you think that 2004 is going to be a bigger challenge because you've got narrowing credit quality spreads, as well as low interest rates?

That's one of the reasons we made some of the adjustments we did already. I think we brought those rates down significantly.

I think you're right. We assumed as we thought about the issues that we needed to decide upon to close the year and set the company up for 2004; so that we don't see some massive increase in rates, particularly, because you're right, if treasuries are moving up and spreads are tightening, we're buying corporates. It is that corporate yield we're focused on. We've taken a cautious view in terms of how much corporate yield expansion we're going to see this year.

Thank you.

Our next question comes from Vanessa Wilson, Deutsche.

Thank you. Could you just give us all these rates, the yield on the LTD portfolio, the yield on the DI portfolio, the blended discount rate on LTD now after your new charge, the blended discount rate on DI, and then the new incurl rate which is what you keep referring to I believe at 5.25% on LTD, and what it is on DI.

Let's see if we can try to simplify that. We give you the pieces I think we can get to right now. We'll certainly come back to those.

Vanessa on LTD, we have a current portfolio yield at 6.93%. The discount rate is a 6.45%. So that's a 48 basis point spread. Now, with the reserve adjustment, that will basically add about 25 basis points to that spread. So that will get us to the 65 basis point spread.

So that's goes to 6.25%?

About that. That's correct.

Good way to look at it.

And the new incurl is 5.25%?

That's not a number we publicly talk about. It is lower.

And now the DI yield?

The DI yield.

7%---7.54%.

Okay, 7.54%, portfolio yield. And the discount rate is, when you adjust it for the 30 basis points that Bob mentioned, it would be about a 7% discount rate.

Okay. Now, when you gave us the individual disability loss ratios -- I'm going to read back what I wrote down. For the recent business, the fourth quarter is $41.2 versus $35.5?

Let me get that. Hold on. Let me get that page in front of me here for you. Okay.

Okay. For the recent is $41.2 versus $35.5?

Correct.

The close block $87 versus $82.5?

Right.

I don't understand your promissory that incidence is stable and claim trends are fine. I don't understand given that these are interest adjusted loss ratios, how your commentary on incidence and claim trends doesn't translate into more stable loss ratios. These to me feel sharply up.

Well, there's a lot of factors, not just those two factors into what goes into a loss ratio. There's settlements, paid claims. There's, you know, a whole series of things that go into -- the paid benefits and the change in reserves. What we can try to do, I think, although we don't have it in front of us, is maybe do a reconciliation of those loss ratios for you as to what contributes to the change in the loss ratio as far as it's major components.

I'm happy to do that offline. My next question is on the group disability business where you have $11 million of operating earnings. The U.K. business had $3.6 million of, arguably, onetime items. So that brings us up to a normalized run rate of maybe about $15 million. All the other items you mentioned, the short-term disability profitability, the net investment income, and then the recent change in the discount rate; from what I understand, are ongoing continuing pressures. I don't really see those in any way as a onetime item. Given a $15 million operating earnings run rate, which would be a $60 million annualized run rate, how do you reconcile that with your comment that you put $100 million of price in this book in 2003?

Yeah, yeah, again one of the things we found, Vanessa, and I'll ask Kevin to expound on it, the renewal actions we took are obviously proving to be-- we thought they were hitting the right mark in terms of the level of incidence and other economic factors. But, in effect, much of that was used with just the weakening general environment we found. Kevin, do you want to expand on that a bit?

I think a couple of things going on. Although we put over $100 million worth of price increases on, there are two factors there: one, those price increases are primarily associated with underperforming pieces of business-- so we're trying to catch up. Secondly, you're not achieving all of that $100 million in one year. It is flowing in over the course of the year. Thirdly, during the course of the same year, we had an 8% negative change in incidence rates. We had flat recovery rates and declining interest rates all happening at the same time. To a great extent, we're sort of washing it out.

Again, that's why we're taking a more cautious outlook and pricing accordingly. Because the very significant actions that we take in effect have been just basically offset with the deterioration Kevin talked about.

I have a comment to finish up with.

Sure.

Given that you have taken the substantial charge related to incidence and we spent the last many quarters talking about incidence rates ticking up, down, slightly, this, that, you need to give us the numbers. You can't tell us now after the fact that incidence was up 8.4%. We need to see the numbers, so that we can analyze the numbers. And when they tick up that much in the third quarter, we know the absolute numbers.

Point very well taken. As I mentioned in my comments, one of the goals is to dramatically improve the transparency of our company to you and this group.

Thank you.

Thank you.

We'll take our next question from Gail Go Lightly, Wachovia Securities.

I wanted to verify a number I think I missed. Did you say statutory capital was %4.3 billion?

$4.0 billion.

And the risk base capital number?

We don't have a final number yet. It will be right around 240 to 242% at year end. And with the close of the Canadian transaction that will push it up into the 270% range. Possibly higher.

Is that company action level?

Company action level, yeah.

And my other question is, as you've made this change to your process about the discount rate and adjustment, and given the fact that it is 4 cents a share, if you had a 25 basis point move up in it. Are you going to instill a discipline that says you will move up slower than you've moved down? How are you going to balance that so that you don't end up having to play catch up, because you didn't have a sustainable change?

Gail, that's a very good question. It's a very important judgment we need to make as a group. To your point, you don't want to be running the business with rapid ups and downs just because rates are moving up and down relatively quickly. We're going to pick the discount rate on a basis that we think is conservative and sustainable. If they do move up, we can be more prompt to move up. But to be sure we don't move up at the risk they move back down.

But how do you make a judgment sustainable? Is it a matter of weeks? Is it different if you're taking the discount rate up or down?

Bob, do you want to talk about the process we have in place? We have a pretty thorough process we go through in terms of establishing that.

Gail, we have a fairly extensive asset/liability management, a unit that does a lot of that modeling for us. And also we work with our investment people in conjunction with that, along with our pricing folks to take a look at not only the current environment; but also where the investment people seem to be finding a good supply of quality investments and factor that into our overall projection. So that will all come into play as we take a look at this. I think a lot of it depends how quickly the marketplace is moving as much as the absolute change in the interest rates.

There is a bias to be slow on the upside, to be more quick on the downside. If we follow that over the long term, we'll find ourselves much more likely to stay at the current total margins we have, if not expand them.

Thank you.

Thank you.

We'll go next to David McGowan, Citigroup.

I wanted to ask you several questions. First one is hearing what you are saying about the rating agencies, back to what Tom said, it doesn't sound like they are going to move the ratings on this. Given you have a review from Fitch and perhaps from Moody's, could you give us a feel for if you do have a downgrade, what impact do you have on the business from going out of the A category on the financial strength side?

I'll answer that. First off, I think it is a theoretical question. I don't think we're going to find ourselves in that position. I think you have to put yourself in the place of the rating agencies when an announcement goes out--- When you've made a restructuring. As we have. They need to better understand it and we're going to be sitting down in the next few weeks reviewing our plans for 2004. Both the earnings plan but, most importantly the capital plans. Now, to your point, the what if side of it, what if we saw a downgrade? There is no doubt that the part of our business that is most vulnerable to ratings is the individual side of our business. That would be the place if I had to pick, where we might find ourselves vulnerable, it would be that side of it. That would be things like individual disability sales, individual long-term care sales, things like that.

Tom, I would guess that the group side is most vulnerable to ratings.

It is actually the other way around. It is the individual side. Group as you know you've got a very well informed group of consultants and brokers. They certainly are very extensive with the financial strength. That's an important part of how they make a decision about a partner. But I think they can look through a little more clearly to some of the more important fundamentals. The individual sales, particularly when you're selling through individual agents and brokers and the other products they sell, they are very sensitive to ratings. We saw that when we went through some of the ratings adjustments earlier in 2003, David, was that really we found the most significant level of questions that many of us had to deal with were coming from people who were principally producing the pure individual business. I'm not taking the group side for granted. We'd have to work very hard with all of our clients and customers to reassure the company's strength, as Tom said in some of his comments and I've said in mine. It's never been stronger from a statutory point of view.

Could you update us on holding company liquidity, I think you ended September with somewhere over $100 million in cash up there. What do you look like at year end?

I'll take that one. We ended the year with $80 million in cash at the holding company level. As we look at 2004, I don't have an exact number, but we probably have dividendable cash out of the insurance subsidiaries in the range of $375 million to maybe $400 million. In our initial look at the plan, we would probably only be taking dividends of maybe $40 to $50 million out. There are a number of other sources of cash for us to get to the holding company. So we're probably looking -- $45 million out of a potential $380 million of dividendable cash.

Very important point Tom touched on. We're not expecting to take material capital out of the subsidiaries this year. We have sufficient liquidity and other sources of cash at the holding company. We're going to find ourselves with a plan that we talk about with the agencies where a large proportion of the capital is staying in the subsidiaries.

Basically, we've got about $88 million in common stock dividends to pay. On an after tax basis, about $130, $120 million of interest payments. And there are a number of other sources of cash to the holding company. And the insurance company dividends would probably only be about $40 to $50 million.

You talked about those before.

Yeah.

I think one of the things S & P said they are going to keep a close eye on is that earnings don't drop from here. They are probably looking at the stat earnings. Do you have an outlook for stat in '04?

I think gradual improvement. I don't see it dropping from here. Again, we think we've weathered some very difficult adjustments in our business. I don't see, Bob, that that's going to be the case. We should see continued steady improvement there. As we said earlier, we're retaining the majority of the capital in the subsidiaries, so from a statutory point of view, it is a pretty positive message. Not to mention the fact it is very important also that, from their point of view, they feel confident in the quality of the investment portfolio. As I mentioned there has been a substantial reduction in the high yield year-over-year. Those are all things we think are pretty positive from a credit point of view.

The other element of that, in addition to just operating earnings is the realized investment losses continue to be lower and lower, and we're anticipating that trend to continue into 2004.

Right. Last one, guys, getting back to what you said about the last major issue to address -- if I heard you correct, it was the closed block IDI. You said you wanted to take care of that in the short-term. Should we be anticipating additional charges? And if so, would those be both GAAP and statutory?

Again, that would be speculating. I think what I said, was that we all know as we've gone through this restructuring, we've been methodical about getting a lot of business, financial, operational, managerial, organizational issues behind us. There is still more to come. I think what I was trying to infer was that I think the one big strategic thing I know is on the Street's mind, it's on management's mind, is disability block of business. I think what we've said is very clear. It is an area of focus, we're looking at a lot of options. All I was trying to say was that, rather than continue to have this issue lingering out for an extended period of time, it is my preference to kind of resolve this one way or another. Whether there is something out there that makes sense for us or not. Soon, so we can take this one piece of uncertainty off the table.

So I guess the message is from our perspective, we can't rule anything out on that front if you find something that makes sense.

If people go back and look at those four principles that I talked about that are guiding every decision we make, it has to be positive from a capital point of view, otherwise we wouldn't do it. Thanks. Thank you.

We'll go next to Arum Kamar, J.P. Morgan.

Can you give us the status of your bank lines at the holding company? I know some of them have been discontinued. I wanted to get an update on that?

We did discontinue the bank line. At the time that we did the equity raising in mid-year 2003. We're looking at potentially establishing another bank line in 2004. It will probably be smaller than the last one, which was about half a billion dollars.

At this point you don't have any bank lines.

That's correct.

In terms of the A invest rating, have you talked to those agencies, there's been less of a focus on them than on S & P and Moody's. They have an A minus rating on you right now. I guess a fairly relevant rating in terms of selling the individual business. Could you give any comments on that front?

We have had discussions with A.M. Best on what we're doing here.

Again, I think A. M. Best is needing to speak for themselves, but focuses heavily on statutory results. We closed year end 2003 with record statutory results. A substantially stronger investment portfolio, and very strong cash flow.

Great. Thank you.

Thank you.

We'll go next to Ed Spehar, Merrill Lynch.

Good morning.

Good morning.

Thanks for taking time to go beyond the hour.

We know this is not an easy quarter. We tried our best to simplify it, but there's no way you can simplify it. We appreciate everybody's patience to stay on the call.

I have a few questions. If we go back to earlier in the year, Tom, I think you suggested when you took the first charge in group disability in the first quarter, that your taking over, taking a good look at the balance sheet, assessing everything and that we should feel comfortable. Obviously we would have been mistaken if we had taken comfort from that. Again, related to that, you know, over the years, since the merger with UNUM; we've heard many times and across different businesses about willingness to let the top line go to preserve the bottom line. Also consistently hear about pricing and losing the business you want to lose. I mean it is just hard to see how that has actually happened when you look at some of the developments we've had this year in the group business. On both of those questions, I'm wondering if you can help us understand what is different now. Why should we feel better?

And I know it is a long first question, but just one quick question on stat. We keep coming back to that this was not a stat charge. But at the end of the day, stat and GAAP have to get you to the same spot; and I think Bob Greving suggested it is in the income line. We're going to see lower statutory results maybe than what would have been anticipated because of what is going on in the group business. I mean, don't the rating agencies have to care? The S & P comment saying we're going to look to see what earnings are going to do. Why do we feel like there isn't some earnings issue on a statutory basis? Clearly, the GAAP charge does say something.

We actually have been reflecting in the stat earnings the last half of last year, in our results include the higher level of incidence that we've seen. I think what we've said, is the things we did on a GAAP basis for a reserves point of view don't connect over to stat reserves. The stat reserves have a whole different basis. When you see higher levels of incidence, that piece of it ought to be somewhat connected between both GAAP and stat, and to the extent it really was. Our stat results for the last two quarters of the year on the group LTD side were not at the level that they should be; in large measure because of the higher level of incidence that we saw. Again, we feel very good that the stat reserves are where they need to be, very full. But on the other hand, we also are not saying that we don't see that there can be some strain on statutory earnings for this piece of our business. Again, there are some other pieces that are actually exceeding our expectations; but for this piece of our business, if we continue to see elevated levels of incidence, that will continue to affect statutory report income. As it did the last two quarters.

I think the other point on the stat basis is, in 2002, we actually had stat earnings of about $221 million. We're reporting stat earnings this year on an operating basis of $215 million. So you can see that our stat earnings have clearly reflected the pressure of the environment in 2003. So I don't think -- I think the issue on stat is that the experience is emerging in the statutory earnings much more directly, not through the reserve changes; but more much directly in the actual stat results. We can see that by looking at the 2002, versus 2003. We had planned on stat earnings expanding out to $240 million. Obviously that did not happen in 2003.

I think that gives you, Ed, sense of magnitude. You're talking about being off plan by $15, $20 million. I'd say, Bob, as a result of this on a base of well over $200 million. We're not pleased with that. But, Ed, we feel comfortable that that's where it manifests itself and shows itself is really in the earnings level, and not the capital or the reserve level.

Right, but being off $15 million in '03 is not the full effect. We just took a reserve charge in the fourth quarter to reflect these issues. I'm assuming some of the issues regarding investment yields, et cetera, are not fully reflected in your '03 stat numbers.

Well, again, I the think the actual net income is reflected. I think the difference that we've got is maybe a look forward. Stat basically takes your -- you're basically on the establishment of your reserves, it just says use 4.5%. As opposed to on a GAAP basis where you're actually looking forward to where the interest rates are actually going to come out. I think your other comment with regard to the rating agencies deals with our overall net income, not just our operating income on a statutory basis. There we've gone from a $210 million loss last year to about a $23 million gain this year. There's been a fairly dramatic turn around as far as our overall net income on a statutory basis. When taken in addition to the capital position that we're in now relative to where we were last year makes quite a bit of difference.

Let me go back to your other point. I think your question -- you're right to ask it. It was probably in other people's minds as well. I appreciate you asking it. We took what we thought, what we knew at the time, which we didn't have a lot of time to prepare for. We took what we thought was the right charge and adjustment to our GAAP LTD reserves last spring. As we said, some things have changed. One of the things you've seen is, throughout this period of time since that springtime, we've made a number of changes. Frankly as we look at a number of parts of our business things have changed. We've made some pretty bold moves in a number of fronts to be sure we're properly positioning the company for the future. All I can say is again, things change. This is a management team not afraid to make decisive decisions. We think the ones we've made the last six months are geared towards dealing with the issues and really putting them behind us. To your point about "you've heard over the years" and I know you have heard over the years this commitment to profitability. But I haven't been the CEO at least permanently since the end of the third quarter. The things we're doing operationally, from an incentive plan point of view, in terms of even managing the Street's expectations; are all geared to being sure we don't have the pressure to things that, frankly, are not right for the business and build profitability.

Tom, I'm sorry, to follow up, I know we have a CEO change. Don't we have sort of -- what else has changed? We have a lot of -- in terms of the pricing and actuarial side of the business. Don't we have the same people making the decisions. Is there something that's changed in your process toward how you approach the disability business? It is just hard from the outside to see how the change deeper into the organization, where that really is.

That's a good question. It starts with the comments I made. I know you know other CEOs of other companies have made them and it doesn't get implemented more deeply in the company. It starts with the comments I made earlier. We readjusted all of the expectations, and took the pressure off the fact we have to grow to feel a successful company. The growth ought to come in profits, not in terms of revenue growth. I do think there has been changes in a number of parts of the company to better align with that objective. Maybe I'll ask Kevin McCarthy who runs the underwriting organization to talk about some of the things we've done in underwriting to be sure we're doing just what I just said. Kevin?

Thanks, Tom. I think fundamentally the big difference is, historically or in the past, we were looking to find a way to balance pricing with very aggressive sales and growth goals. Now, it is very clear that we're willing to back off of those sales and growth goals, both on a new sales side and on the persistency side; and willing to move in the direction of price and make tradeoffs. If you look at our fourth quarter, for example, our large case sales are down 45%. Our expected large case sales for 2004 are going to be down another 20, 25%. We're committed to that, in terms of purging business. Our terminated business in '03 was about 9 points worse than our inforce business. In LTD on the renewal block, was 20 points worse. Most of that, temporarily, is offset by deteriorating experience on the remaining inforce business. So we're continuing to move ahead on renewal pricing as well. We don't intend to back off on that either. We're moving renewals rates up in double digits across the board. And we're moving new business rates up in double digits as well. If you look at our fourth quarter '03 pricing, and our premium for life year-over-year, our new business was up 18% in LTD and 23% on large case business. So fairly substantial pricing moves. Then finally, as I said earlier, our mix of business was very much skewed in the past by large case business which we're backing off of. That large case business has 20% plus higher incidence rates, and tends to be concentrated more in the manufacturing sector. By moving that downstream to the smaller case business and also into the white collar business, we should get a substantial positive move in terms of incidence effect. So overall, I think the message that Tom is sending here, and that we're all committed to is that we're going to hold the line in terms of price and move profitability up; and we're going to chop off those marginal put pieces of business that we wrote in the past.

Then just two more, because I know you don't want a laundry list. We also have changed the chief actuary and have brought in new staff around him to better align the reserve and pricing pieces of our decision-making process, with the analytical part. Lastly, we made some adjustments in the field structure which brought some of the large case pieces, which Kevin talked about, much more closely aligned with our field. Frankly when it was sitting off to the side, there probably was a more aggressive effort to grow that side of the business. There's been some things done structurally and people-wise. Maybe I need to be more aggressive in promoting those.

Thank you.

Thank you. I think we'll have time for one more question. We're actually going to lose the line here in a few moments. Operator, this will be our last question.

We'll take that final question from Barry Cohen with Maverick.

Good morning. A couple actually. First is, when you listen to your ideas of persistency and renewals, I guess I have two questions come to my mind. The first one is, persistency in and of itself does not give us, as shareholders or potential shareholders, any idea whether the marginal business being renewed or written is any more profitable or less profitable than prior business. I was wondering if you might be able to give us some better metrics, even in the benefits ratio which has way too much swing in it. About some metrics that you plan on showing us that will help us better understand what the new business being put on the books, whether renewal or actually new wins are going to be. That's my first question. The second question is, when you look at your book of business what percentage of your books of business are simply underwater or break even at best? What percentage of your book is providing you with an equity cost of capital that's above 10%? Those are my first two questions.

Let me make an overall comment and ask Kevin to speak to the first one. I think you're on a very important point. There's two aspects to profitability that are in the simplest forms. One is the new business pricing and second is the renewal action. We really need to state very clearly that we have also not just tightened up the renewals, but tightened up the new business pricing as well. We're not going to be as willing to discount new business pricing with the hope that we can get a renewal increase down the road. Because, you're right, when you look at the new business margin; the new business margin is going to be everywhere from some of our large case business, frankly, is in the 2, 3, 4% margin. Some of the smaller case business is closer to 10%. So it's a pretty wide range of margins, so to speak, on our pricing for large cases versus renewals. So Kevin, you may want to speak to that. Again, we probably didn't say it enough. It is not just the renewals, because the renewals dealing obviously, in theory, with a piece of business that's underperformed. Part of the question is how do your assure that you don't get yourself in a position where you have a lot of business that's not performing.

Thanks, Tom. Let me reiterate a couple of statistics, then maybe add a little bit. As I said, on the business that's terminated in the first quarter, the average increase that we placed on that business that was unsustainable was 28%. Clearly we moved that business off the books and needed a significant price increase to keep it and chose not to keep it, and allowed basically competitors to take it. Our terminated business in terms of the LTD renewal program was 20 points worse than the business we retained. We're moving rates up, as I said, 18% in terms of new business pricing in LTD year-over-year. In terms of your question about what percentage of the business is underwater, I think maybe one way to look at it is maybe the large majority of the strain on our business from the bottom 20% of our business. Particularly in the large case sector, and we're moving aggressively to renew that business up with substantial rate increases; or to move it out.

Okay. Not quite what I was getting at. But maybe I'll discuss this with you later offline sometime. I guess the other question I was trying to get to, what is your current intercompany debt stand at?

Probably about $150, $160 million.

I'm sorry, there's a lot of voices. Did you say $160 million?

Yes, $160 million, so that's down a little over $550 million from year end 2003.

Could you maybe,when you talk about your statutory income for the year, could you maybe give us a time line progression, how that looked from first quarter to fourth quarter?

Yeah, I've got that. The first quarter of 2003 was a loss of $55.4 million. Second quarter was a gain of $57 million. Third quarter was a gain of $123.5 million. And fourth quarter was a gain of $89.7 million.

I think the bottom line, Bob, clearly the first quarter was the quarter that was the most challenging for us. We've seen consecutive generally good or close to our expectation results after that.

That's right.

Okay. And I don't know how to ask this question in the most polite way. I'll do my best. How are you essentially shocking the system to your producers? Because at the end of the day, if you incent them the wrong way -- I haven't heard a great detail how you're significantly changing the incentives to your producers to produce better business blocks for you. Are you putting any clawbacks in place in terms of what they get paid and how they get paid?

That's a good question. You need to think altogether about two levels. One is our field organization which is our employees, and the other is the producer or the broker. Maybe I'll ask Joe Foley who I mentioned earlier is responsible for our marketing and product launches, including our compensation strategy, to respond to that. Joe.

Let me take our sales reps and managers first. We've made a significant shift. It began about two years ago. It will be more dramatic for 2004, in terms of the percentage weight that we put on profitability factors versus just pure new sales factors. And essentially now we've got them almost equally weighted between the two. And there are clawback provisions, in some respects, and we can make those adjustments over time. With respect to producers, the average producer is generally paid a flat commission on sales. That's the way the market works. However, with our kind of key partners where we have special bonus arrangements, we are increasingly writing those bonus arrangements so that there is a profitability component in them. We've moved dramatically in that regard over the last -- I'd say over the last nine to 12 months to get those in place. I think actually for our top probably 50 producers, most of those will be in place for 2004.

Who gets to override what is essentially your grid pricing? I'm a little new to the stock, but I've spent some time reading your Q's and K's. Pretty consistently there's a lot of language about mispricing, mispricing, mispricing, mispricing, which doesn't necessarily have anything to do with the interest rates. You should be pricing your products simply betting on the yield curve, you should be pricing your products on an embedded liability asset durational match and putting in some kind of embedded pricing power that you have. So I guess one of the questions I'm having here is, who has an override factor on what essentially is grid? Does your actuarial team -- who gets to say no to your producers?

There are a number of checks and balances in that and also some discounts and discretions. I'm just thinking out loud, it might be better if we did that offline and talk that through with you in terms of how it works. I can understand your point. We may have great ideas at the top, but there is no basis of enforcement or controls at the bottom.

I appreciate your answer.

Let's find a time if we could, offline, to go through that because that gets a little more deeply into --

I'm sure it does, I appreciate that. Thank you very much for your time.

Thank you. I want to close by saying how much we appreciate everybody taking the time. I know this was a challenging quarter to communicate, challenging quarter to understand. And certainly we appreciate people taking more time on the call to better understand it. We all stand ready to help in whatever way we can after the call to respond to your questions. All the actions we took this past quarter we truly believe are the right things for this new management team to do, to better position ourselves for the future. As we go through all of them, hopefully people can get more comfortable with that. The intent very much was to set the operating and financial platform into position for 2004 that gives us a better chance to derive value for our shareholders. With that, thank you very much for your time. Operator that concludes our call.

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