普登 (UNM) 2004 Q1 法說會逐字稿

Good day, everyone and welcome to the UnumProvident Corporation first quarter 2004 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to Mr. Tom White of Investor Relations.

Thank you, and good morning everyone. Welcome to our first quarter analyst and investor conference call. Before we get started, let me read the Safe Harbor statement. A Safe Harbor is provided for forward-looking statements under the Private Securities Litigation Reform Act of 1995. Statements in this conference call regarding the business of UnumProvident Corporation which are not historical fact 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 statement are made based upon management's current expectations and beliefs as of the date of this conference call, but there can be no assurance that future developments affecting the Company will be those anticipated by management.

For a discussion of the risks and uncertainties that could affect actual results, see the sections entitled "cautionary statement regarding forward-looking statements and risk factors" in the Company's Form 10-K for the fiscal year ended December 31, 2003. The Company expressly disclaims any duty to update any forward-looking statements. Our discussion this morning will include non-GAAP financial measures, so for a reconciliation to GAAP we direct you to our website, www.unumprovident.com.

Now I'd like to turn the call over to UnumProvident's President and Chief Executive Officer, Tom Watjen.

Thank you, Tom, and good morning. With us this morning are several members of management team, including Dean Copeland, our General Counsel; Bob Greving, our CFO; Kevin McCarthy, our Chief Underwriter; Joe Foley from Marketing; Geroge Shell, who heads our Claims Management Operation; and Roger Martin our Chief Actuary.

It's been an active 12 months or so. And as a new CEO, with the full support of our Board of Directors, we have used this time wisely to take the steps to assure that we've adequately positioned this Company for the future. There have been some tough decisions along the way, but I couldn't be more proud of how our organization have responded.

With the restructuring we initiated this quarter, we have taken what I believe is the final step needed to position ourselves and deliver improved operating results and restoring the focus to those parts of our business which represent our future. Our future which still contains some challenges, but I'm very confident that we now have the financial and operating base and business plan to successfully overcome these challenges.

We believe these actions, along with a better general business environment which we are seeing, position us for the first time in a long time to begin to generate enhanced returns for our shareholders just as we have consistently delivered value for our customers and producers. Also, I hope that through the actions we have taken over the past 12 months we are beginning to build a reputation as a management team that is realistic and open about its business, decisive in its actions and one that delivers on its commitments.

Our first quarter results reflect our continued commitment to both improve our operating performance while also taking the restructuring actions needed to assure that we are positioned operationally and financially to leverage this unique franchise into improved value for all of our constituents.

Before I discuss the restructuring actions we have taken with regard to our individual income closed block of business, let me first summarize a few key points regarding the first quarter in general, which I'll come back to later. First, excluding net realized investment gains, the charges associated with the closed block individual income protection business, the Company reported earnings per share from continuing operations of 38 cents per share, in line with consensus estimate. I would add that our operating income before tax and the other adjustments grew 10.6% this quarter over the year-ago quarter. The increased number of shares outstanding from last year's equity offering tempered our per share growth.

Second, net realized investment losses from sales and write-downs of investments continued the improving trend with net realized investment losses in the quarter, excluding the $48.9 million pretax B-36 gain on derivatives, was $15.5 million pretax down from $85.1 million in losses in the first quarter of last year, and below the $36.4 million in losses reported in the fourth quarter. In addition, the portion of our invested assets and below investment grade securities dropped to 7%, its lowest level in several years.

Third, although still below our long-term expectations our group income protection business seems to have stabilized and the actions we have taken over the past six months to improve the profitability in this business are having a positive impact on our results as evidenced by the improved benefit ratio in the quarter. I'll have more to say on that later.

Fourth, our operations. With the possible exception of Group Life line, which was somewhat below our seasonally weaker year-ago quarter all produced results in line with our expectations. This includes our U.K. operation in Colonial, as well as our U.S. individual income protection recently issued business, which showed improved incidence and stable recovery trends.

And lastly, we reported significantly improved statutory results over first quarter of last year. The Company's U.S. insurance subsidiaries combined statutory operating income was $132.6 million versus a loss of $55.4 million last year's first quarter. On a net income basis, which includes net realized investment gains and losses, combined statutory income was $99.1 million compared to a loss of $136.9 million a year ago.

These are the strongest quarterly statutory results we've reported in some time and reflect solid operating results in many of our lines of business. In fact, over the past four quarters our statutory income exceeds $400 million. Now one quarter certainly does not suggest we are fully out of the woods, but I'm certainly very encouraged by what I see at this point.

Stepping back from the quarter, as you know too well, there have been several issues which continue to be a focus of investors and adversely impacted our evaluation. These include, first, the performance and potential risk associated with our older block of individual income protection business, specifically concerns around reserves, intangibles and overall profitability. Second, the general balance sheet concerns, including capitalization of the Company. And, thirdly, frankly, confidence in management's ability to generate improved consistent results in the future.

Through a number of actions taken last year we made tremendous progress in addressing a number of these concerns, particularly around the Company's capital position and general balance sheet strength. This quarter we made some important decisions around our old or closed block of individual income protection business. This is business generally sold prior to the Company's substantial changes in product, pricing, distribution and underwriting which occurred during the years 1994 to 1998.

For many years the financial results for this block of business have not met our expectations. Over the past couple of years we've considered many financial restructuring options for this business, while at the same time continuing to provide these customers with the same high quality service we provide all of our customers. A commitment I made which will not change with this restructuring. After considering many alternatives, we believe restructuring steps we announced yesterday best meet our objectives of helping to provide greater transparency, strengthen the balance sheet associated with this block of business, and minimize the Company's exposure to potential future adverse morbidity trends in this block.

Specifically, the steps we have taken include the following: First we will be reporting our closed block individual income protection business as a separate reporting segment, with premiums of $1 billion in 2003, and as of March 31st of 2004 capital of approximately $2.9 billion in total assets, assets of approximately $15.7 billion.

Second, with the financial reporting separation of our closed block business from our recently-issued individual income protection business, we evaluated the balance sheet supporting this closed block as a discrete segment. As required by accounting rules, prior to the change in reporting segments, these tests were performed for the individual income protection line of business on a combined basis. We are now required to perform impairment testing for goodwill and loss recognition testing for the recoverability of DAC and VOBA on a closed block as a stand-alone segment. We've also evaluated the claim reserves for the closed block separately from the recently issued block to ensure that as a stand-alone block of business these reserves are sufficient.

As a result of this review, several actions were taken. First, we have written off the goodwill which was $207 million, the VOBA, which was $367 million, and the DAC, which was $282 million, associated with the closed block of business. This is a GAAP charge only, it has no impact on statutory results. With the intangibles written off, the Company will no longer incur amortization of intangibles for this block of business, which was expected to have been approximately $70 million before tax during 2004. Again there is no impact on statutory results.

The segmentation also results in the closed block having a narrower reserve margin than the combined blocks previously due to segmentation of assets between the two blocks. We are therefore lowering the claim reserve discount rate used on the closed block to reflect the segmentation of assets between the two blocks, the change in the yield on the investment portfolio in the first quarter, and, frankly, our desire to maintain the margin between the portfolio yield rate and the reserve discount rate for the closed block claim reserves. This resulted in an additional before-tax charge of $110.6 million and helps to ensure that we are well positioned regardless of the direction of future interest rates. The interest rate margin at the end of the quarter on the closed block is 64 basis points. Once again this is GAAP charge only, and there is no statutory impact.

The last piece of this is, although we feel we have a very strong reserve position, in order to provide further protection against potential adverse development in this block of business, we have entered into a reinsurance agreement with a subsidiary Berkshire Hathaway which includes approximately 90% of the closed block of business. The 10% withheld from this agreement was done so for the ease of administration of the treaty and not any unusual risk concerns with this smaller block. Under the terms of the reinsurance agreement, the reinsurer will provide cover for approximately 2/3 of the exposure above the approximately $8 billion in existing statutory reserves.

The program includes a quota share agreement for the top $825 million in reserves and an excess of loss protection of $350 million above the present reserves. This program will provide protection up to an ultimate limit of approximately $2.6 billion. The annual after-tax GAAP cost of the reinsurance is approximately $13 million or 4 cents a share. Subject to regulatory review, the effective date of the reinsurance program is April 1st of 2004. Although this transaction will add to our cost of doing business, we feel that the partnership we have built with Berkshire Hathaway and the coverage we have established is an important step toward further reducing our exposure in this line of business.

The last element of our plan involves a $300 million private placement, which is fully subscribed at this point. Although most of these charges only impact our GAAP financial statement and only have a modest impact on our GAAP leverage, the reinsurance transaction does have an up-front statutory cost of approximately $40 million. This combined with our desire to put the issue of financial strength behind us once and for all, prompted us to raise the approximately $300 million of additional capital through the sale of mandatory convertible securities to a group of private investors. In addition to restoring the risk-based capital to the appropriate level, the approximate level that existed prior to reinsurance transaction, we will use proceeds to also reduce our outstanding debt and retain a higher level of liquidity as a holding company. We are very pleased to have a group of well-known investors supporting our company and this restructuring plan.

Now over the past several weeks we've had numerous discussions, as you could imagine with rating agencies on our recent results and these plans for the future, including the restructuring plan we just discussed. While we are pleased Fitch has reaffirmed our ratings, we are very disappointed by the rating action taken by Standard & Poor's. We believe that our actions over the past 12 months has strengthened the Company, both operationally and financially, and their decision is completely inconsistent with the improving trends we are producing, especially with our improving statutory earnings and the positive developments in the U.S. group long term income protection business.

To us these improving trends are signs that our operations are responding favorably to the actions we have made in the past year in such areas as renewals, pricing and risk selection. We have acted decisively to improve our business and the restructuring actions announced yesterday are the right steps to ensure our financial strength. We feel strongly that Standard & Poor's actions are unwarranted, but we must move on and we will take the steps necessary to minimize any disruption this may have on our business.

One other item in the quarter, separate from the restructuring of the closed block of business is around the DAC capitalization for our U.S. group products, specifically group long term and short term income protection, Group Life and AD&D. We updated our analysis of costs associated with the acquisition of new business for our group products, and as a result expect that cost capitalized during 2004 will be approximately $40 million lower. We remain very comfortable with the recoverability of our DAC asset for these product lines, which totaled approximately $1 billion as of end of first quarter.

The amount we will now be amortizing will generally be equal to or greater than the amount we are capitalizing, which means the ongoing DAC asset for our U.S. group lines will be stable or reduced over time and shrink in relationship to the premium base. These changes reduced our first quarter results by $10.2 million before tax, and as I noted will result in additional annual costs of approximately $40 million before tax or $26 million after tax, which is approximately 9 cents a share. Again, it has no impact on our existing DAC asset which we have tested under several scenarios and found to be fully recoverable. It will also have no impact on statutory results.

Now before we go into more discussion of our results, let me say again how important these steps are toward our goal of positioning this Company to generate stronger and improved results. On our last conference call, I referenced that I felt we were still a quarter or so away from completing the more substantive portions of our restructuring activities. When I was placed in this role I set an objective with the support of the Board of Directors to take the actions needed to strengthen the Company's balance sheet and set in place a business plan capable of generating more predictable results. With yesterday's announcements, I now feel we have achieved this objective and the primary focus of management is now executing our plan and improving operating performance.

We still face challenges, but I'm confident we are on the right path. And I believe our results this quarter bear that out. I would add, despite all the actions noted earlier, we are not changing our 2004 guidance, and we are generally comfortable with Street estimates.

Now I'll ask Tom White to give a more detailed review of our results in the quarter before I make a few closing comments. Tom?

Thank you, Tom. Let me review with you the results of each of our segments. Please keep in mind that since our Canadian operations are are now reported as discontinued operations, their results have been removed from current and historical numbers. Also, with the resegmentation the results of the closed block individual income protection business are reported as a separate segment and have been removed from the historical results reported for the income protection segment. In addition, all segment operating results referenced here are before tax and exclude net realized investment gains and losses.

The Company reported a net loss in the first quarter 2004 of $562.3 million or $1.91 per diluted common share. These results include income from discontinued operations of $7 million, or 2 cents per share, and net realized investment after-tax gains of $16.1 million or 5 cents per share. The charges related to the restructuring of the closed block totaled $701 million after tax, or $2.37 per share. Of this amount, $71.9 million relates to the after-tax reserve strengthening for the interest reserve margin and $629.1 million relates to the after-tax impact of the intangible asset write-off. Adjusting for these items results in after-tax income of $115.6 million, or approximately 39 cents per share.

One additional adjustment to point out is that the net impact of the write-off of the intangibles for the closed block individual income protection business and the update for group DAC capitalization benefited first quarter 2004 after-tax results by $3.8 million this quarter or approximately 1 cent per share. This adjustment results in our view of 38 cents per share as an appropriate level of operating earnings for the first quarter.

Now I'd like to turn to the operating segments. First, the income protection segment reported operating income of $74.3 million in the first quarter of 2004 compared to a loss of $375.5 million for the first quarter of 2003. The year-ago loss includes an increase in group long term income protection, GAAP reserves of $454 million. Excluding the reserve strengthening, operating income would have been $78.5 million for this segment in the first quarter of 2003.

Included in the income protection segment is our group income protection line which reported operating earnings of $30.3 million in the first quarter of 2004, compared to a loss of $423.4 million in the first quarter of 2003 or income of $30.6 million excluding last year's charge. The impact of the update to DAC capitalization that we implemented in the first quarter of 2004 reduced operating income by $6.3 million.

Let me provide a few highlights. First, premium income grew 7.7% year-over-year. As we had projected, persistency declined due to our efforts to reprice the more poorly performing business with our U.S. group long term income protection persistency declining to 83.5% from 87.2% for full-year 2003. Tom will discuss the positive trends we're seeing in our renewal efforts more fully in a moment.

The benefit ratio in the quarter was 89.4%, an improvement from 92.9% in the 2003 fourth quarter and also improved from the 91.4% reported in the 2003 first quarter, excluding the reserve charges for both the prior year's quarters. The key factors that impacted the improved benefit ratio in the quarter were, first, the risk metrics in our U.S. group long term income protection showed improvement in the first quarter, with paid incidence lower relative to the 2003 fourth quarter and marginally lower than the 2003 first quarter. In addition, claim recovery experience was higher in the first quarter 2004 compared to both the first and fourth quarters of 2003, continuing the pattern we have experienced in this metric since early 2003. Again, Tom will have more to say on this in his comments.

Secondly, the discount rate on new claims remained level with the fourth quarter. The impact of the lower discount rate in the 2004 first quarter when compared to the 2003 first quarter is $13 million. The interest reserve margin on U.S. group long term income protection reserves increased from 60 basis points at year-end 2003 to 63 basis points at the end of the first quarter.

Thirdly, the expense ratio for group income protection was 22.6% in the first quarter in line with expense ratios for the first quarter of '03 and full-year 2003 as well. Our sales trends in this line in the quarter reflected our strategy to seek better balance in our case mix, as well as the success we're experiencing in our U.K. operation from its block acquisitions over the past several quarters. While total sales for group long term income protection were flat with the first quarter of last year, our U.S. brokerage sales declined 27% driven by a 68% decline in large-case sales, and these are cases over 2,000 lives. This decline was offset somewhat by a 21% increase in our core market sales. We believe that this more balanced mix of sales with growth in core market sales offsetting some declines in large-case activity will help drive better profitability in the long term.

Next I'll review the individual income protection recently-issued line of business. In this line we had operating income in the first quarter of $29.3 million, compared to $38.2 million in the 2003 first quarter. Specifically, in the individual income protection line, first, premium income grew 3.9%. Sales were down 12.5% year-over-year with our U.S. brokerage sales declining 3% and our U.K. sales declining 62%. Multi-life sales continued to be our primary area of focus for this line with 83% of individual income protection sales coming in a multi-life basis.

Second, the GAAP benefit ratio for this line improved to 54.3% in the first quarter compared to 56% in the year-ago quarter reflecting lower incidence trends and stable claims management results. We continue to be encouraged by the trends we are seeing in the new claims submission and our recent resolution experience especially in light of the continued favorable trends we are experiencing in new income protection litigation and the complaint levels associated with this business.

Third, the shortfall in year-over-year income is due to lower-than-expected net investment income due to the higher level of cash held in the quarter and also higher allocated expenses for this line.

Fourthly, the interest rate margin on the reserves is currently 85 basis points. This is wider than our long-term average or target and reflects the conservative view we are taking on this recently-issued individual income protection business. Also within the individual income protection segment our long-term care results improved sharply to $11 million in the first quarter of 2004 from $5.8 million in the year-ago quarter with improved income in both the group and individual businesses compared to last year. Strong revenue growth and expense management offset a slight increase in the benefit ratio in long-term care. Finally, the disability services line produced income of $3.7 million in the first quarter of 2004 compared to $3.9 million in the year-ago quarter.

Now I'll move to the Life and Accident segment which includes our group life, AD&D and voluntary life and other products. This segment reported income of $56.9 million in the first quarter of 2004 compared to $62.8 million one year ago. The results in this line were impacted by the update to DAC capitalization we implemented for group life and AD&D in the first quarter which reduced operating income in the first quarter by $3.9 million.

Overall our group life sales were slightly below our expectations -- our group life results, excuse me, were slightly below our expectations with mortality results slightly worse than the seasonally weak results we typically see in our first quarters. The highlights for this segment include, first, premium income for the segment grew 4.2% on a year-over-year basis. New sales declined by 18.6% overall, driven by a 62% decline in large-case group life sales. Sales in our U.K. operation grew by a multiple of 4 due to acquisitions in 2003, and our U.S. core market group life sales declined by approximately 4%. Persistency for group life improved slightly to 84% in the first quarter from 83.2% for full-year 2003.

Second, as mentioned, claims incidence illustrated its usual seasonally high first-quarter pattern, but was higher than a year ago for both group life and the AD&D line.

Finally, the Colonial segment reported operating income of $36.6 million in the first quarter of 2004, compared to $35.2 million in the first quarter of 2003, an improvement of 4%. We continue to believe there is tremendous potential in this business. For the first quarter I draw your attention to the following: First, sales at Colonial grew 3.5% to $61.7 million dollars in the first quarter. This is a slower rate than what we had experienced in the past few quarters and our expectation is that sales momentum will rebound as the year progresses. Colonial's year-ago sales results benefited from heavier large-case sales activity.

Second, Colonial's benefit ratio improved slightly to 55.5% in the first quarter of 2004 compared to 56.3% in the first quarter 2003, reflecting the completion of our exit of the underperforming group long-term income protection block within Colonial's operations. As we've said before we see great potential in our Colonial subsidiary, given its strong market presence in a growing market, excellent technology platform, and broad product portfolio. Colonial gives UnumProvident important earnings diversification with its consistent stable performance, the addition of Randy Horn as Colonial's new President during the first quarter, injects strong leadership and broad experience to help Colonial realize its full potential for the Company.

Next, in our new segment, the Individual income protection closed block business, excluding the impact of the write-off of the intangibles as well as the reserve increase, this segment produced operating income of $43.2 million up from $15.8 million in the first quarter of last year. This quarter's results include a positive benefit of $16.1 million since the segment no longer has amortization related to intangible assets.

The key highlights of this business include, first, premium income declined 6.4% in the quarter and persistency remains stable at 94.3%. Second, incidence trends remain relatively flat with the levels experienced in 2003 while recovery trends improved relative to the 2003 first quarter and were in line with the 2003 fourth quarter. The increase in the benefit ratio over the year-ago quarter reflects a lower discount rate on new claims along with slightly lower-than-expected deaths and settlements.

Third ,with the reserve strengthening for the discount rate, the interest rate reserve margin is 64 basis points for this block of business and in line with our long-term average or target for this segment. Fourth, the other income revenue item within this segment, which primarily includes the results of a block of business reinsured to center ree [ph] showed an increase to $27.8 million in the first quarter compared to $13.5 million in the year-ago quarter.

The other segment, which includes results of the remaining products no longer actively marketed by the Company reported income of $7.1 million in the first quarter compared to $11.7 million in the year-ago quarter. Finally, the Corporate segment reported a loss of $46.7 million, versus a loss of $54.4 million in the first quarter of 2003. These results include the interest and debt expense which totaled $49.2 million in the first quarter of 2004 compared to $41.5 million last year.

With that, I'd like to turn the call back to Tom Watjen.

Thank you, Tom. I'm going to focus my closing comments this quarter in four areas. One is our U.S. group long term income protection pricing and renewal action. Secondly is the performance of several areas critical to our future success including investments in our claims area. Thirdly, is our recently launched service enhancement productivity initiative. And last is an update on the regulatory and legal activities around the Company. I'll also close with a few comments on the guidance for the balance of the year.

As I mentioned last quarter, there is no more important activity at the Company today than improving the profitability of our group our U.S. group long term income protection business. We've been very visible on this as an objective, both in our discussions with investors, but also in our communication with employees and the market place in general. We have had several actions underway since last fall which have successfully executed, will position us to generate slowly improving results over the balance of this year.

The pricing, renewal and shifting business mix actions we began to initiate are having the desired impact. More specifically, these actions included, first, implementing a very targeted rate increases to those cases in market segments where we were not meeting our profit objectives. We don't like to see any business leave the Company, but we are prepared to lose unprofitable business if it cannot be renewed to a profitable level.

Secondly, we've adjusted the business plan to restore a more balanced mix in sales between employers with less than 2,000 lives and those above 2,000 lives. As we have noted on previous calls, the results in our U.S. group long term income protection line of business have been adversely affected by a small portion of the large-case business.

Thirdly, we've increased focus on the profitability of new business we are selling. We do not intend to replace terminated underpriced business with new underpriced business. As I mentioned in my opening comments, I'm very pleased with results we've generated thus far around these actions. Specifically, I draw your attention to the following: Our renewal program is off to a strong start in 2004. Although our persistency in the U.S. group long term income protection line dropped from 87.2% for full-year 2003 to 83.5% in the first quarter of 2004, the business which terminated this quarter generated substantially worse results than our block as a whole. Additionally, the persistency decline was focused in our large-case block, and persistency was actually higher than our under 2,000 life business compared to the year-ago first quarter.

An important element of our plan to improve profitability is to protect our profitable cases in this core market and our first quarter results indicate we are successfully doing so. Secondly, average rate increases on renewed business for group long term income protection exceeded 14% for the first quarter, ahead of our internal plans at this time. We also expected to see a shift in our mix of new sales which has become more heavily weighted to sales to large employers or those with over 2,000 employees and this shift is clearly evident this quarter.

For our U.S. group long term income protection brokered sales in the first quarter of 2004, our under 2,000 life sales were 76% of the total compared to 45% in the first quarter 2003. For our U.S. group products combined, sales in the under 2,000 life segment were 61% of sales compared to 41% in the year-ago quarter. These results are consistent with our plans to move our mix of in-force business back to something closer to a 60/40% split over time.

Not only were we pleased with our sales results from a mix perspective, but we also believe that the new business we are selling is better priced. As I said before, we do not want to replace poorly-performing business, which is either repriced or terminated with an adequately priced new business. For validation of this pricing discipline, I would point out the data from the recently-issued JHA report indicates that our premium for life for 2003 group long term income protection sales was $227, the highest of any of the top dozen companies and well above average premium per life of $200 of the next 11 competitors.

As I mentioned earlier, the steps we began to take in the fall of last year are having a positive impact on the business. I still believe it's a long road toward restoring this line of business to appropriate profitability, but I'm encouraged by our results thus far. Now while much attention has been on the actions noted earlier, it's also important that we perform well in other areas around the Company, and I am going to specifically focus my comments this morning on investments and claim management, two areas that have drawn considerable attention in the past.

As both Tom and I noted, our investment results for the quarter remain strong. We continue to be impacted by the generally low level of interest rates, but through the adjustments we have made in our pricing assumptions and in discount rates used for our different reserve blocks, we are well positioned. Should interest rates continue to rise, we will certainly be a beneficiary. Just as reminder of our earnings leverage to a change in rates, a 25 basis point increase in rates is worth approximately $4 million in pretax quarterly earnings for our group long term income protection line, $1 million per quarter for our recently-issued individual income protection, and $5 million per quarter for closed block of individual income protection.

As you may recall, during the past 15 months we have aggressively reduced our discount rate, and in the group income protection line alone we reduced our rates by 100 basis points. We will adjust upward as we believe higher interest rates are sustainable. With the recent run up in interest rates, we have been able to resume our hedging program. Since the end of the first quarter, we have purchased almost $500 million to swap on group long term income protection future cash flows, which give us additional confidence in our ability to maintain the interest margin on the reserves.

I'd be remiss if I didn't also say a few things about the credit environment and the derisking actions we've taken with our $33 billion investment portfolio, a critically important concern as recently as year ago. The credit environment continues to improve and the $15.5 million in credit losses, excluding the fair market change in our derivative position, is the lowest since the third quarter of 2001 and we expect continued gradual improvement throughout the balance of the year. What I think is even more significant is the repositioning that has occurred in our portfolio in the past 15 months. Specifically, the portion of our portfolio and high yield bonds has decline from 13.9% at year-end 2002 to 7.9% at the end of the first quarter on book-value basis. Our goal is to operate in the 6 to 8% range.

Secondly, the average credit quality in the portfolio has improved from a low A-3 to a high A-3. Our focus is on maintaining if not slightly continue to enhance the credit quality in the portfolio. These changes did not come without a cost, approximately $25 million annually in lost investment income and over $400 million in reserve strengthening, but we are now well positioned regardless of the direction of interest rates or the economy in the future.

Moving now to claims. This too has been an area of focus and remains an important driver of our improved performance this quarter. Claims recoveries in the first quarter of 2004 improved in both our individual income protection, as well as group long term income protection line relative to the first quarter last year. We have seen a continuation of the improvement which began in the second half of 2003, and our goal is to maintain this momentum into 2004. Certainly the leveling off of new claim activity we experienced in the first quarter is helpful as it allows our claim professionals to focus their attention on their current case loads.

Now a different topic, but one critical to our longer-term results, we need to better leverage our industry leadership position, both in terms of the quality and breadth of our products and services, which I think we do today, but also in the efficiency and productivity of the organization where I see further opportunity. In the first quarter, we launched a significant undertaking we have termed EQ'd [ph] which means efficiency plus effectiveness equals expectations. In other words, improving the effectiveness in delivering on our commitments to our customers and producers at a lower cost will improve our ability to meet or exceed expectations.

We have set some fairly lofty but achievable targets, including improved service levels, improved productivity, and lower expenses. It was very important to me that this initiative fall closely behind the completion of our financially restructuring actions by the Company, as well as represent a process where the ideas are coming from within our organization, not a consultant. We are approximately eight weeks into this program and I'm very encouraged by the way our organization has responded and by the ideas which have been developed by our internal teams. We have an outside consultant working with our internal teams to help facilitate the work of our people, but not tell them would to do.

I firmly believe that these actions will have a positive financial impact this year, but also through these actions we are helping to redefine our Company and culture to one which is continually learning and reengineering its business processes in order to produce better results for our customers and shareholders. Again, I'm very pleased with the reaction of our people with this project and the cultural shift it entails. And we'll keep you informed as this initiative unfolds throughout the year.

Let me shift to an update on the status of our regulatory reviews. We are continuing to provide information and support to the multi-state market conduct exam being undertaken under the leadership of our primary domestic state regulators, Massachusetts, Maine and Tennessee, presently 41 other states are participating in this exam. As I said before, we are very supportive of this coordinated approach and process that the lead states are using to conduct the review as it provides a much more efficient and effective exam process than separate state exams. The schedule is flipped somewhat and we are now expecting the exam will be concluded sometime this summer.

As these exams progress, I'm also encouraged by our recent litigation and complaint trends. We continue to see a decline in the number of complaints which are often a leading indicator of future litigation, with a number of complaints reported in the first quarter approximately 25% below what we experienced one year ago. In addition, new claim litigation related to our individual income protection products, the primary focus of the adverse media attention fall of 2002, is running 44% below the level we experienced in the first quarter of 2003. Now we are continually seeking ways to improve the way we manage claims and support our customers, but I'm very encouraged with the trends I'm seeing in this area.

Now with respect to the class action activity. The judicial panel on multi-district litigation or the alleged class action of shareholder derivative to be transferred for pretrial proceedings to the Federal District 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 actions and derivative lawsuits. We have requested that any subsequent filed law suits of a similar nature also be transferred under the multi-state order. These actions remain in the early stages and I encourage you to review our 10-Q filing for a more complete update on these matters.

I mentioned last quarter that 2003 and early 2004 was a period of restoring financial strength and flexibility in taking the actions needed to position this Company both financially and operationally to deliver improved operating results in the future. I believe that we have delivered on that commitment. It's been an extraordinary period of change in this Company and I'm very pleased with the way our organization has responded.

I don't want to focus too much on the past, but let me take a minute and draw your attention to a few things which indicate how much progress we've made over a very short period of time. First, we estimate that our risk based capital position will improve from the 210% level it was at the end of 2002 to approximately 280% following the Canadian business sale which closed last Friday. We have significantly de-risked our investment portfolio, absorbing over $25 million in reduced investment income in the process. We have lowered our discount rate absorbing over $70 million in lower earnings over the past five quarter. We have exited several businesses which did not meet our business and financial objectives, including Canada, Japan, and have reduced our exposure in Argentina. We reduced our intangible asset position from approximately 55% of shareholder equity at the end of 2002 to approximately 45% of equity at the end of the first quarter.

Our net GAAP reserves have grown from $21.9 billion at year-end 2002 to $25.4 billion at the end of the first quarter, a 16% increase. We have positioned our U.S. group long term income protection business to better balance our profitability and growth objectives. Our customers' surveys indicates that we have maintained our service levels for brokers and customers, and in may categories we have seen significant improvement in our service quality. Our leadership team is coming together, there's still more to be done, but I'm pleased with what we have accomplished in a relatively short period of time.

Most importantly, I believe we have improved our employee morale. Our people are still our biggest competitive advantage, and I'm very pleased with the support and commitment they've exhibited over this period. Continuing to improve morale and attracting and retaining the best people will certainly be a focus of our senior management team this year.

In conclusion, there's still work to do. We face competitive challenges in our businesses and we need to show that we can produce improved result on a consistent basis. We still also face the potential for continued adverse publicity, and S&P announcement represents one of those hurdles. Despite this, I'm encouraged by progress and very confident that our people will continue to rise to the occasion.

As I mentioned earlier, we are comfortable with the consensus estimates for our 2004 earnings per share and expect some upside potential from a more favorable interest rate environment and a stronger economic advantage. Operating earnings should continue to grow at a modest rate, offset somewhat by a higher share count from last May's capital raise. As I said, our primary focus will be on improving profitability in our group long term income protection business and we believe our first quarter results have us moving in the right direction.

Operator, this completes our prepared comments. We'd like to go to the question-and-answer session.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again that is star one if you'd like to pose a question at this time. We'll go to Vanessa Wilson of Deutsche Bank.

Thank you, good morning.

Good morning.

Tom, I have two questions. The first is, if you think about your relatively short tenure here as CEO, you've accomplished a lot, you started off with a lot on your plate and a lot of things you wanted to do. At this point looking out into the future from here, what are the to-do items on the list that still remain that we might need to be concerned about?

It's a good question, Vanessa. Again, I think that, as I said in my comments, I firmly believe that we have put the financial restructuring phase of what I view as my sort of, one of my key responsibilities behind us. That unfortunate has grabbed a lot of the attention in the last 10 to 15 months, importantly as it should have, and I think the actions and steps that we've taken that have positioned us operationally and financially to really be a much more competitive company and have a much more conservative business plan into the future. I do view that chapter as now actually closed.

And so the things that, frankly, I and the management team of this Company are spending our time on is actually taking the operations that we have today and making them better. Improve the quality quality of earnings, improve the consistency of our results, improve our ability to be a more predictable sort of public company. And so again, when I think about how I spend my time and how our senior management is spending its time, it's on the things I talked about earlier. It's being sure that as we build and grow our business we're doing it profitably, so the renewal plans, the pricing actions, the mix of business actions are very, very, very key focus of our senior management team.

Secondly, I mentioned the importance of creating a more -- maybe a more streamlined organization that not only allows us to have better service deliverables and better productivity, but also lowers our cost and so a big piece of what I see going forward is the importance of being sure that we're not only providing the best quality of products and services, but in fact, we're also doing so from what the lowest cost platform in the business.

Thirdly, again continuing to build depth and strength to our management at all levels. This is still a people business and being sure we've got the best people we could possibly have and the best positions and put them in a position to be successful, that's certainly been a part of what I've done and will be certainly part of what we'll continue to do the rest of this year. So those are just a few areas, Vanessa, I guess I'd point to this morning.

Okay. And if you were to think about your capital position at this point, I recognize we have the rating agency downgrade, where do you stand? Are they asking to you raise more capital? Are you at the right capital level?

It's a good question, Vanessa. I think we're at the right capital level. I think when you actually, when you look at even those that have -- the ones that lowered our rating, I don't think the issue is as much capital, I think more qualitative factors that entered into that decision, so I don't see any need to do anything more from a capital point of view, again, as I mentioned, our risk-based capital falling, the Canadian sale is about 280%. Over time our business plan calls for this, over time just with internal growth, we see ourselves bringing that closer to 300%, but I don't feel any pressure to do that tomorrow, that's something we can take our time to do.

When I look at the leverage at our holding company, our debt to total capitalization ratio, even though it moved up a little as a result of charges in the quarter, it's still at a level that I think that both management and the rating agencies feel comfortable with. So, again, I think that we've taken the big steps to improve all those pieces and now I think just internal growth will allow us to continue to strengthen it, but I don't feel any pressure to do something more dramatic.

Okay. Tom, in addition, I think what we need to understand and evaluate from here is the fundamental impact of the S&P downgrade, whether we agree or disagree with what they've done here, I think it's important to understand how it affects your business. And specifically, could you go into some detail on what can happen with your large or medium-size long-term disability customers? Is there anything that the insurance brokers would have in their practices that would be triggered by a downgrade where they would be required to go and review their relationships or where a customer might have a policy that they're not allowed to have an insurance company at a certain rating level. Could you just help us think that all through?

Be happy to do that, Vanessa. And, again, I share your sentiment. I'm disappointed by their actions, but we as a management team have to move on and run our business, and as I said in my comments, we're prepared to do that. I don't want to minimize the impact. This creates certainly some PR issues, it creates some challenges for us to communicate with key brokers and customers, the good thing is I think as we start that process we have strong relationships. All the research, all the things that I see show that we do connect very well with the marketplace, we've not lost that over the period of the last 12 to 15 months as we've gone through our restructuring phase, and so anything we think about or anytime we think of the impact, it starts with I believe a very, very strong and solid set of relationships with our producers and in turn with our customers.

Now maybe I could ask Joe Foley to fill you in a little bit around just how to think about this issue, because again, it's something that's very much on our mind, but we think it's very manageable and really where we're going to be spending our time to be sure that we minimize any of the business impact. Joe?

Yeah, Tom, thanks. Vanessa, I think first of all, we shouldn't be too simplistic about how we view this. Carriers have a mix of ratings, and how producers and customers look at things is generally across that mix as opposed to focused on one individual rating. The competitive universe that we see today has that mix and, in fact, we compete against carriers that have B ratings and that doesn't seem to prevent them from writing business in the marketplace. When you really even expand that universe and you start looking at, for example, health insurance carriers, it's a relatively common universe there that you have a range of either no ratings to B ratings to A ratings. Again, they're not prevented from writing business with producers. So I think this view that you have to have A ratings across the board for somebody to do business with you is absolutely incorrect. We haven't seen evidence of that in the marketplace.

It does it make our story a little tougher to tell. I mean, we have to be able to go in and talk to people about our financial strength. But, if you think back to where we were a year ago, we've actually got just a much better story to tell. A year ago we were sitting here with downgrades across the board, uncertainty as to whether we could go out and raise $1 billion of capital, uncertainty as to who the CEO of the Company was, and I have to tell you as a sales rep that's a tough story to tell and we worked our way through it. So today we're out there being able to point out that we've got stronger capitalization, stronger reserves, do we have to tell that story? Do we have to work harder to present that? Absolutely. But our sales reps have the tools to do it and we'll be out aggressively in the market doing that.

Thank you very much.

Thank you, Vanessa.

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

Good morning, Colin.

Good morning, gentlemen. Okay, I have a couple questions. First, I certainly think it seems to me to make a lot of sense to put the risk on the IDI block behind you in terms of future negative reserve development. Let's if we can turn to the fundamentals, I've got two questions. One, if you've got Kevin handy, I'd like to really get an update on the implementation that he's doing of the, I guess let's call it the downsizing of the group LTD business, obviously the 14% rate hike this quarter was a really nice one. I'd also like a little bit more explanation on what happened on the group life and AD&D line which is with the benefit ratio there picking up a little bit, 77.7 versus its full year level last year, of what 76.8.

Kevin, why don't you take that one. I think, the question Colin raised about status of the group LTD initiatives.

Thanks, Tom. Good morning, Colin. We're about 75% of the way through our renewal program for this year. That represents about 40% of our LTD book of business. As Tom mentioned, we are placing rate increase above 14%, actually 14.7% year to date. Persistency is above expectations in terms of renewal placement, we've got about 85% placement so far, which is considerably better than we expected to be at this point. Terminated business via the renewal program is going actually better than expected as well. The rate increase is needed on that business, running about 37% so you can see that business was significantly underwater.

On the so-called bottom 20% of our business, we targeted about 100 cases or so in that book of business this year, about $16 million worth of premium. We've placed $45 million worth of rate increases on that back of business, which is considerably better than expected. And we've been above plan as well with producers that had significant blocks of business that we needed to work with in terms of corrective profitability actions and they've been very cooperative with us. We're about $23 million through rate increases on that producer book of business.

So across the board, by every metric whether it's jettisoning, poorly performing business, placing the rate increases we needed, partnering with the right producers and effectively managing the top 80% of the business, if you will, versus the bottom 20 we're right on track and ahead of plan.

Okay. Can you also maybe give us a little bit more on what you've done to tie producer comp to profitability, since clearly that I think some of us might say there was a bit of a disconnect with that in the past.

Joe's right here with me, Colin, and I'll let Joe take that one.

I think we've done it at two levels, Colin. First of all with our own sales reps and managers, we've adjusted their compensation plans and, over time here we've shifted the mix so that prior years they would have had 90% of their income coming from sales and maybe 10% profit related and we've moved that mix to about 50/50 and we feel good about that.

The second piece is -- and it's primarily with our key producers, probably our top 50 or so, have significant blocks of business that you can measure and there's no volatility their results, as we have special producer agreements with them we are building in profitability components into all of those.

Okay. On those top 50, if I recall they generated about 25% of the premiums on this block of business. As you know my issue there is what's the target on what percentage of earnings they're going to generate? And how soon do you think you can after strategy implemented to at least get those in line?

Kevin, it might be worth talking about the size of -- just the size of the large-case block and then also how much of it was in the renewal plan, certainly in the first quarter and will be in this year, sort of how that block -- when do we have chances at that block, and then I think that helps drive to Colin's point about when it will then begin to produce visible profitability.

Yeah, the large-case block we get at probably closer to half of that book of business in a given year, Colin, and we're well ahead of plan in terms of profitability. Persistency is better in all lines of business. The rate increase on that business has been running sort of in the 16% kind of range for LTD. The terminated business, we've pushed out about $70 million or so of terminated large-case premiums that had margins in the minus 25% and worse kind of range, so we're well through that right now.

In terms of the mix of business, in terms of producers, I think that we're effectively working with our largest producers to get through their particular blocks of business. We're partnering with them one by one in terms of what their book of business looks like, what the necessary rate increase is to move it to profitability, and I'd expect that business to perform in line with the rest of our book of business as we move through it.

Great. Thank you.

Colin, just to come back, this is Bob Greving, just to come back to your question on the group life line of business, basically our group life line of business experiences its highest incidence in the first quarter. This is consistent with historical patterns and it's also consistent with U.S. statistics as far as our overall population in the U.S. We've often tried to figure out why that is, but all I can say is it's difficult to try to figure out why we have higher mortality in the United States than in the first quarter than otherwise.

This particular quarter was up about 6% relative to the first quarter of last year, as far as our overall incidence. Translated into about a $7 million differential relative to what we were expecting, so just to quantify it, it looks like about $7 million worse than what we were anticipating. I will point out that what we're seeing so far in April indicates that that pattern, is returning to its normal pattern, that the first quarter did kind of blip up but April's back to more of its normal patterns. And as we would indicate and as we've seen in the past, I would anticipate that we would continue to see improving patterns of incidence in the last three quarters, almost sequentially if it follows historical patterns

Great. Thank you.

Thank you, Colin.

And we'll go next to David Lewis of SunTrust Robinson & Humphrey.

Good morning. Just to follow up first of all with Vanessa's question on the rating agencies. Can you shed any light on conversations you've had with A.M. Best and Moody's? Second on S&P, hadn't it really been historically more of a rating sensitivity to the individual products than the group side?

I'll answer the first question first, then just maybe have Tom sort of give everybody sense of what we've actually been doing with the agencies and what remains still open to be done.

You're right, David, the individual part of our business which is I think everyone knows tends to be the much smaller part but very important. It tends to be the place which is more rating sensitive, so again, I would say that's the part that we have to work particularly hard when we have to overcome some things like this, but that is the part that's most sensitive and, again, Tom, maybe what you could do is just update everybody on what we've been through with the agencies and kind of where things stand.

Yeah, David we've obviously spent a lot of time with the rating agencies over the last six weeks, starting out with kind of discussing what our plans are, certainly for the restructuring, as well as for what Kevin was talking about in terms of improving the LTD performance, so kind of the first discussion for what the plans were and here more recently talking about what the results are.

So we have spent a lot of time, we've provided a lot of information to the rating agencies. I guess, we have public announcements from two of them. I would expect a third agency to make some indication of their rating decision today and I think the fourth is planning on waiting until the first part of next week before they have a committee meeting.

Okay. That's helpful. And could you give us a sense of what the earning sensitivity is? Well, not the earnings sensitivity, but when might we actually see a 25-basis-point rise in the overall discount rate for the Company, the 10-year treasury is at 4.57 as of last night, so if the goes up to the 5% area is that a potential where the Company could actually start to raise the discount rate?

David, this is Tom, that's a tough question to answer. I think as I said in my prepared comments we do have some strong upside to even a 25-basis-point increase in the discount rate. I think one of the things -- and by the way having made the adjustments in the discount rate for our in-force block of reserves, we're well positioned that as rates move up that we can make those adjustments in the new claim incurrals.

I think the thing is, we're going to be want to be sure the practice we go through is being sure that those rates that we see in the market are sustainable not just a blip. And so, again, we certainly are seeing some very encouraging signs there. I'd say, Bob Greving -- it's important that we kind of be sure that those are sustainable before we begin to make increases, and I hate to speculate on a time, but we have a group of people that regularly evaluate this, and again, we're well positioned if in fact we see them being sustainable to be able to make some adjustments. Bob, I don't know if you'd add to that.

Tom, I don't think we want to be modifying discount rates by 5 to 10 basis points, we would want to see something more substantial and sustained. Obviously, we don't want to be blipping them up and blipping them down on a quarterly basis as we see the rates kind of bounce around and right now we know that they're highly susceptible to a lot of different influences right now. So I'm not saying we'll change next quarter as indicated, we didn't make any changes this quarter, we've historically been, I guess over the last year, been reducing our rates by about 25 basis points per quarter, this is the first quarter where we kind of stabilize and, David, you did see the spreads actually expand a little bit on our overall portfolio, so we'll be watching those closely as we try to do going down, we'll be watching them closely going up as well.

Thanks very much.

Thank you, David.

And that is star one if you'd like to pose a question. We'll go to Nigel Daley of Morgan Stanley.

Great. Thank you. Good morning.

Good morning, Nigel.

Just to continue on with impact of the rating agencies perhaps you can also discuss the impact that has on your financing costs, and what implication that has for your earnings outlook? Second, just on the DAC, when you look at your balance sheet, DAC is still very large, represents $9.50 before tax, I know you said you completed various scenario testing regarding recoverability, but just wanting to get clarification whether one of those scenarios was a ratings cut by one of the major agencies? Thanks.

With respect to capital structure, again, we have all fixed-income debt, we have no financing needs that we foresee until probably 2005, Bob, when we have a $200 million debt instrument maturing. So, again, any movements in rating agencies at this particular point don't have any impact on our cost of capital, if you will. And, again, most of the maturities we have are quite long so 2005 I think goes then from, Bob? To 2010 --

Stretches out.

Stretches out, so there's not a very up-front sort of set of capital requirements that we have and the hope is, obviously, that we're going to spend the time and do the things necessary to improve the rating between today and the time we actually have any financing to do. But the good news is we don't have any floating rate financing and the good news is we don't have any near-term financing requirements.

And there's no covenance in those -- in the debt that you have [inaudible] the rating agencies?

They're all publicly traded bonds, Nigel, again, they're just pretty standard provision there, so there's nothing there that triggers any of that.

If I can go into your second question, Nigel, on the DAC balance, we did do and always do DAC studies at year end to determine the recoverability as you're probably aware, under GAAP assumptions there is no need nor is there any opportunity to modify the existing DAC balance unless there s a loss recognition on that block of business due to lower persistency. This is all ruled by the GAAP accounting standards under FAS 60, and if you think about our persistency we've been increasingly becoming more conservative with our persistency projections on our DAC amortization since we actually had some accelerated amortization back in the 2000/2001 kind of time frame.

As you may recall post-merger we did see a drop-off in our persistency from the fairly high levels that had been there previous to the merger. We actually incurred about $40 million, $41 million in DAC amortization back in 2001. We've been taking a much more conservative position with both capitalization, as well as amortization since that early 2000 period of time. And about a 5% drop in our DAC -- in our persistency results under the current amortization patterns and about a $3.5 million pretax kind of charge in our group lines, so we don't feel that we're heavily exposed. We've been anticipating some drop-off we don't see any accelerated DAC amortization until we actually get down into the 70s.

As far as overall persistency for the LTD line of business, we're obviously currently in the 83.4 type of range. We don't see any acceleration of that DAC amortization until you get down into the 70s, and even at that point about a 5% drop once that is there is about a $3.5 million annualized pretax type of an impact.

Right. Thanks.

Thank you, Nigel.

We'll go next to Jimmy Bhullar of J.P. Morgan.

Hi, I just have one question. On the $300 million hybrid security that you're planning on offering, what sort of dilution is that going to have going forward?

That's going to be about 5%. Again, it's a security very similar to the one that we issued last year, just in a private placement form.

Okay. Thank you.

Since you've raised the question while we are were on the call I was a little more vague about the status of the $300 million. We actually have that issue completely subscribed now, fully signed up and so that $300 million transaction is completed.

And what about the S&P downgrade, does that affect the rate you're going to have to pay on that or is that locked in?

We've worked that out over the last 24 hours, so again, the subscription agreements are signed, and as I said, it's all fully subscribed and now completed.

In terms of the details of the offering, are those going to be in the -- when are you planning on filing it? Later on today?

We'll probably be doing some informational releases later today.

Okay. Thank you.

Thank you.

And we'll go next to Jason Zucker of Fox-Pitt Kelton.

Good morning, Jason.

Great. Good morning, everybody. Let me just sort through what I want to ask next. The first thing was, was the S&P downgrade expected?

Absolutely not, Jason.

Okay. So you guys --.

I ask you to look at the response that S&P put out when we released the fourth quarter, there was no indication that those sorts of -- any threats were there, and, in fact, I think the view was that if we continue to perform as we expected to perform, things would be perfectly fine, so it was not expected.

Okay. Good. Well, not good. But thank you. Also, I wanted to talk about ROE a little bit. Where do you think realistically it grows over the next couple of years? Do you think you could you start to earn an ROE that's above your cost of capital? So let's say above, a percent or so?

If you think about ROE, I think, as you know, we were on a consolidated basis as an ROE of 8 to 8.5% and I think when you look at the components now that we've separated out the closed block of business from the rest of the Company, you're looking at it before we made those adjustments with the amortization and the write-off of the intangibles, we were looking at an ROE for the closed block that was something around a 1 to 1.5%, and the rest of the Company was operating at 10.5 to 11%. Now that we've made those adjustments, the corporate ROE is roughly up 100 basis points. What you'll see is that the core business or the focus of the future is still in the 10.5 to 11% and where the boost is obviously coming is the ROE on the closed block of business, which now gets closer to 4.5 to 5%.

My point is it's going to continue to be important for us as we talk about ROE and talk about potential is to recognize that the old block of business, frankly, now that we've got it up to this level of ROE there's not much more that we'll do to be additive to the overall corporate ROE. I will say that over time as you can imagine, the capital behind that business will begin to shrink because that's an aging block of business. Frankly, I think the premiums are dropping probably about 5 or 6% a year.

Right.

That will be more evident now that we report this separately in terms of how that premium is fading away, it's slow but it does fade away. I'm giving a background point to your real question which is again I think corporately we're sort of in that, as I said, around 9.5% ROE.

The part that we can control is obviously the part that I mentioned is 10.5 to 11%, and as we said earlier, the greatest thing we can do to improve ROE there is to improve the U.S. LTD performance, and we've got some good progress there. I hope corporately that we can take what's now close to a 9 to 9.5% and get that up something closer to 11% over the next few years, and in doing so, the way we're going to get there is really continuing to work that continuing business part of our operation in terms of improving performance there.

Great. And last question. Bob, going back to persistency, if it does go below 80% in LTD, is the result just an increased acceleration or is there ever a time when it would set yourself up for some kind of one-time charge to the DAC asset?

Nigel, I think what we would have to do is to take a serious look at what is driving the persistency. Generally speaking, what we see as a result of these kind of impacts of ratings downgrades, things of that nature, are kind of the shock impact of an immediate drop in persistency that generally recovers. We saw that back in the 2000-2001 where we instituted a fairly strong renewal program. Persistency dropped off for a period of time and then grew back. If we saw something that was more permanent, if we really saw that we were going to be in the low 70s on a permanent basis, we would have to take a look at the overall recoverability of the DAC asset and whether or not there would be a charge.

I don't anticipate that the events of this ratings downgrade nor do we anticipate that kind of a dramatic impact on a more permanent basis relative to our overall book, so I think the impacts we're talking about here are really more temporary in nature until we can obviously work with the rating agencies, work with existing accounts, and we'll see probably more of an acceleration of amortization if that actually occurs. It still has to go quite a ways from where it's at right now.

And on the LTD business, when I said the $3.5 million on a 5% type of a drop in persistency, that's all of our group lines, the LTD is probably between 1.5 to 2 of that $3.5 million.

Jason, if I could add, if you think back to where we are today versus where we were the last time we saw persistency drops, I think I'd point to a couple of things. One is, as Bob mentioned earlier, we've adopted much more, even before the adjustments we put in place in the first quarter, we adopted much more conservative DAC policies in the last couple of years, so the trigger point for any acceleration of the amortization of DAC has moved from something that was in the low 80s to something in the mid 70s, and so that's the first point is that it has to drop pretty precipitously, as Bob said, down to those levels before it has any impact even on the earnings side.

Second thing, as you know, since that point in time we've improved the quality of our offering, we've improved our relationship and it was a lot more turmoil back at that time. That's why I came back to the earlier point that one of the things that seems so simple, but it is a focus as a result of that rating decision is being sure we keep our people focused on our customers, that we retain the people that have those quality relationships, and those I think help us buy some time to be sure that we take the actions and do the things necessary to improve the rating

Great. Thanks.

Thanks, Jason.

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

Good morning. Thank you. I had a couple of questions. First I just wanted to make sure I understood the sales force or the broker's interpretation of ratings. Is it true that there's any impact to pricing flexibility based on ratings? So in other words a B-rated carrier would have to be maybe a little more competitive on price than an A-rated? I just want to know if that's true or not.

Secondly, I appreciate all the steps that have been taken to improve the balance sheet, but I was just wondering at what point would you draw the conclusion that the Unum franchise could be more valuable if it were part of a larger higher-rated company, and how much time do you think it would take to reach that type of conclusion?

Two good questions, Liz. Just with respect to rate, and I'll maybe pass it to Joe to maybe fill in a few of the gaps, but when you think about when a customer makes a buying decision or the customer continues to stay with us or somebody else, there's a number of factors that influence that decision, it's everything from the products and services and the quality of those, it's the relationship with the producer, it's very importantly the service commitment, it's the claim capability. My point is there's a number of factors that enter into that decision, the price we charge and the ratings of the Company are certainly in that list of things that buyers use to make decisions, and certainly there could be situation where ratings become an issue and, therefore, we may get pushed in terms of price.

But I want to come back to the fact that we are taking an attitude of much more discipline around that. If that happens to be a situation that happens on occasion in the marketplace, we're not going to go get the price just to get the business, so I think you need to hear that is that this will not charge our commitment to the discipline around protecting and building margins and not using price as the principal way in which we compete in the marketplace because there's a lot of other things that could be done there. Again, I'll maybe ask Joe if there's anything else, or Kevin that you'd add to that.

Tom, as I said, it's not at all simplistic like that. We've competed in situations against carriers where we've had higher ratings and they pay no attention to that, it's not a particular focus in terms of you have to pay more if you're B-rated company, that isn't the way things work out there in the marketplace, and, we've just never seen any evidence of that. They want to know your whole story, and once they see the whole story, I mean, we generally win those battles.

I gotta tell you it's a very competitive marketplace out there and for the last year or so we have very aggressive competitors that have been waving every newspaper article, analyst report about financial condition and everything in front of our customers and we just have to go tell our story and we've got a better story to tell today in my view than we did then. That's what we'll do.

That's great. Thanks.

Liz, with respect to your second question, we have taken a number of steps, as you mentioned, that I think have certainly positioned us far better for the future. And as Joe said in one of his earlier comments, in some respects our people and our customers and our producers have a lot easier sort of view of the Company and a lot less uncertainty around the Company today than they've ever actually had. So, again, we feel very good that we've got a much stronger independent business plan.

Yes, we have some challenges, yes we've got to deal with some of the things like the S&P announcement, but we've got a very strong presence in the marketplace and a strong commitment to execute the business plan. Having said all that, every public company I think has to recognize that if the shareholder value is created in a different form then we've got to be open to that. I'm sure the Board will be open to that, but we don't feel a gun to our head to do anything, because again, we feel so much stronger than we did 12 months ago. I think the organization is more confident in the future and we feel pretty good that we're going to work our way through this very successfully. But, again, every board and every executive management has to be prepared, if things can be done to enhance shareholder value we're all part of that.

Okay, great. Thanks a lot.

Thank you.

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

Thanks very much and good morning.

Good morning, Eric.

Good morning. Tom Watjen, would your comments earlier that your ability to sell would be certainly hamstrung a little bit but by no mean impaired by the S&P downgrade, do you feel that you could similarly be effective in the marketplace still if Moody's responded in kind following in S&P's foot steps? Could you still get out there and sell contracts even if that were to happen?

Yes, Eric, I think we can. I hope that doesn't happen, I mean we're taking every step to be sure that we protect the other ratings, and so again, I want to be sure people know we want to retain the ratings, we think that the actions we've taken and the things we've done to stabilize this Company, and now it's successful offering of the $300 million, what we've done in terms of even strengthening liquidity well beyond what it needs to be are all good signs from a rating point of view. But if things happen like you just alluded to, yes it will create another thing we've got to deal with in terms of perception of the Company, it will create another issue for our people to have to talk through, so it's certainly not going to help but I think we're still in business. There certainly will be some people that will simply not do business with us.

But again I think, as Joe said in his comments, we don't want to be overly confident or appear arrogant about it, because it creates some challenges, but we think they're not insurmountable challenges. I will say that when you think about the environment that you're operating with, with what you just described, what happens, I think happened to us about a year ago, and that is the most difficult thing to deal with is new sales, because, again, you're dealing with a new piece of business and the issues of whether it's ratings or products or all that comes up most with a new sale.

When you have an in-force customer it can come up at renewal but it's a different issue. An existing customer has a good relationship with you and so I don't want to ignore things like ratings and things like that, but it's a much different dynamic. If I had to characterize things, when you go through periods of uncertainty, where you go through periods where there's a lot of sort of negative selling, it really affects your new sales more than it affects your in-force relationships, and so that's why a lot of our attention is focused on those selling situations and being sure information is out there. But, again, Joe, I just ask if you want to fill in a little bit there?

Yeah, I mean again, I don't want to be overly simplistic and I certainly don't want to suggest that there wouldn't be challenges that we'd have to face, but I don't particularly see that being a great issue at all, the fact whether it's one or two.

If I could follow up by switching gears and asking a question about the closed block, it's my sense that the reinsurance protection that you've purchased from Berkshire is kind of what's called a catastrophic or excess of loss coverage, and that therefore the Company still faces the risk of or the possible benefits from deterioration in morbidity on or improving morbidity on the closed block.

My question is, what's going on with the -- I apologize if I don't have all the numbers in front of me, the interest adjusted loss ratio? And relatedly, in that closed block, and the trend of the interest adjusted loss ratio and relatedly I think Tom White said that earnings were helped a lot in that business in the quarter by what I thought he said was a more than doubling of earnings out of the center ree related block. If I heard that right, what would cause a doubling of earnings and should we expect the level of earnings out of the center ree block that was reported last night to continue? Thank you.

I'll ask to Bob to -- let me just set the context a little bit just because I think it is important. When we thought through this closed block decision, this decision was not driven by a feeling this block was deteriorating. If anything, this whole block has actually behaved relatively predictably over the last couple of years. When I say "predictably" I'm looking at things like the level of new claims, that level of new claims has been very predictable, actually probably is even probably closer to three years. So it was really this decision about financially restructuring how we owned this block. It wasn't driven by a fear in a short term if something seems to be misbehaving, it was more just a sense that this continues to be a cloud that hangs over the Company and the more that we can do to separate it and isolate it financially and put some protection around it to the extent down the road something begins to deteriorate, that was the motivation to do this.

I just want to emphasize again, it didn't have to be done, it wasn't driven by incidence, and in fact, as you can see, what we did, Eric, at the time of this restructuring was even true up the reserves a little bit to be sure everything was at a position where it stood on its own and I think in a very conservative way. With that, Bob, maybe you can give a little more detail into Eric's question.

Eric, this is Bob. The reinsurance basically, as you have observed, is basically a protection that kicks in above our retention levels so, our concern with this block of business and basically the market's concern with this block of business is not its current position and its current performance, because as Tom indicated, it's actually been performing fairly stably, the concern is that we're sitting on this block of business that could somehow in the future deteriorate further and encroach in the core line of business and have an impact on our capital or on our reserve needs in the core line of business sometime in the future, with either reserve increases or losses that would encroach into and have an impact on our core business.

So the whole idea behind the reinsurance is to protect for potential future loss deterioration of the closed block. What the reinsurance does is it places a growing reinsurance layer, it doesn't start out very high right now, about $783 million, and that layer of reinsurance actually grows to nearly $2.6 billion over time. And what's happening over that same period of time is our retained portion of the business, the nearly $8 billion of reserves that we're currently sitting on and that retention actually starts coming down. As that business runs off at about 5 to 6% per year, our portion of the coverage and our retention actually goes down, at the same time that the reinsurer's protection actually goes up.

So if you look at it from the that perspective, the concern is not for today's loss deterioration obviously we're sitting on $8 billion of retained reserves that basically serve as our retention but, the concern is in the future, not 5 years from now, but I'm talking 15/20/25 years from now that somehow this business could potentially come back and encroach in the Company's core line of business. And so this business is basically lifelong business for this block of business and it provides that excess loss as you observed.

How about the center ree issue, did I hear Tom white correctly?

Let me touch on two pieces that you tried to cover there. One was the center ree, and let me touch on the one that really impacted the quarter and the reason for the substantial increase in the individual income protection closed block BTOE. The BTOE actually went up substantially in that closed block of business. Part of that is the fact that during the period the DAC and VOBA amortization is no longer needed with the write-off of those intangibles and so that actually helped the earnings of the period by about $16.1 million. And I'll let Tom maybe touch base on the center ree portion, but we're not seeing a doubling, I don't believe, of the overall BTOE as a result of center ree.

Eric, there's kind of quarter-to-quarter volatility in that, and the results were down somewhat in the first quarter a year ago and improved here in the first quarter this year.

And getting back to your other question with regard to the interest adjusted loss ratio, a significant portion of that interest adjusted loss ratio is simply the lower discount rate that we've got on our new claims going into that business relative to where we were a year ago.

Thank you.

Thank you. And, operator, I think we'll just do one more question. I know we don't want to run this too long given all the pieces of our announcement this past quarter, we wanted to be sure we gave some extra time, but perhaps we could handle one more question.

We'll take our final question from Ed Spehar from Merrill Lynch.

Good morning.

Good morning, Ed.

Just two quick questions. What is the cost of the reinsurance in your estimation including the loss net investment income? I think you gave us the 4 cents, but I think that's just the amortization of the prepaid reinsurance cost.

Actually, Ed, the 4 cents does include that $13 million -- the 4 cents per share does include the lost amortization or the lost net investment income. The actual amortization of the cost I believe is about $3.6 million in 2004 and about $5 million in subsequent years for the actual amortization of the cost of the reinsurance. The additional amount is the lost spread on the reserves that have been transferred

Okay. And then finally, I was wondering, you talked about the interest margin on the new versus the old ID, and the interest margin now on the closed block is 64 basis points and it's 85 basis points on the new block. You said that the 85 basis points represents a desire to have a conservative approach. I guess I'm just a little confused as to why a conservative approach makes sense for the newly issued but doesn't make sense for closed block

Ed, I think if you thick back, one of the things we've been targeting is about a 60 basis point spread on most of our lines of business, including our LTD line, that's really what we've also targeted on the closed block individual income protection line. The recently-issued -- the jump up to the 85 basis points is really more of a result of the segmentation of the assets between the recently-issued block and the closed block. It's probably a little bit higher than what we would have for our normal long-term view.

A lot of what has happened between these two blocks of business is a result of the segmentation and having to split virtually everything. Asset portfolios got split, expense allocations got split. Everything got split between the this recently issued and the closed block, as a result of that asset allocation split we actually did expand the spread from the year-end 2003 margin that was more applicable to the entire block of business. It actually widened out for the recently issued and it narrowed if we had not done the reserve adjustment, the $110 million it would have narrowed for the closed block and so what the reserve adjustment basically did was basically bring that back up to our long-term target. I think our long-term target for these lines is in the 60/65 type of basis point range for these businesses.

Thanks.

I'd add too as a closed block, Bob, that old business will not have quite the variability as we see perhaps with the new business because there's really no new cash flows per se coming in.

Right. It's very simple. You don't have the new cash flow so it's fairly simple to do a pretty decent asset liability management and match up the cash flows fairly straightforward with that block.

Thank you.

Good. Thank you. Let me just thank all of those that participated and certainly appreciate you taking a little more time this morning for our informed, but somewhat complex review of the quarter. And that completes our first quarter call. Thank you.

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