普登 (UNM) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to this UnumProvident Corporation second quarter 2004 earnings results conference call. This call being recorded. This time for opening remarks and introductions I would like to turn the call over to the Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead, sir.

Thank you, Eric, and good morning everyone. Welcome to the second quarter analyst and investor conference call.

Before we get is 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 facts are forward-looking statements that involve risks and uncertainties and that could cause actual results to differ materially from those contained in the forward-looking statements. These forward-looking statements are made based upon management's current expectations and beliefs, as of the date of this conference call, that 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, and our subsequently filed Form 10-Qs. 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 to you to our website www.UnumProvident.com.

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

Thank you, Tom, and good morning. Joining me this morning on the call in addition to Tom White are Dean Copeland, our General Counsel; Kevin McCarthy, our Chief Underwriter; Joe Foley from our Marketing Organization; and Bob Greving, our Chief Financial Officer who is on the phone, but suffering from a back injury, so has a more limited role in this morning's call than he normally would.

As you know we reported our second quarter results yesterday afternoon, and I'm generally pleased with our progress, which to me reflects our focus over the past 12 months on building financial strength and improving operating performance, particularly in our U.S. Group Income Protection line of business. Our pretax operating income from continuing operations grew 21% over the results in the second quarter last year, and almost 16% from our first quarter results. A higher tax rate and an increase in the number of common shares lowered our per share growth over these periods.

From my perspective, the things I'd ask you to focus on include the following. First, we made progress in improving the profitability of our Group Income Protection line by executing our plan developed last fall. The benefit ratio in this line improved relative to last year, reflecting the impact of our renewal efforts, improve incidence, and improved recoveries. In addition, we have experienced better than expected persistency despite a very challenging market environment. Although we are not yet satisfied with the level of profitability in this line, we are very pleased to see that the actions we have taken are having a positive impact on our results.

Secondly, the performance of our other operations continue to generally meet our expectations. Our UK operation had an outstanding quarter with another excellent contribution to earnings, as well as continued strong sales trends. Income at Colonial increased 11% over the year-ago quarter driven by an improvement in the benefit ratio and good premium growth. Our other lines generally met our expectations as well. Also our investment results continue to improve as before-tax net realized investment losses, excluding the accounting impact of DIG Issue B36, declining to $11.2 million in the second quarter from $15.5 million in the first quarter and $26.5 million in the year-ago quarter. Our high yield bond exposure also declined further to 6.6% of invested assets on a market value basis, down from its peak of 10.4%, a further indication of the improved investment portfolio quality and the steps we've taken to reduce investment risk.

Thirdly, we had another excellent statutory earning quarter, with after tax operating income of $178.9 million in the second quarter, which excludes the gain on the Canadian transaction and the reinsurance premium paid for the Close Block reinsurance transaction. This result is well ahead of the $57 million reported in the year-ago quarter. Over the past four quarters, our statutory operating earnings total $525 million, a strong indication of our improved business fundamentals and a significant recovery from the results experienced in 2002 and early 2003.

Finally, we completed our Canadian transaction in April, the last significant restructuring action we had planned. This transaction had a significant positive impact on our statutory results, something which is difficult to see in the way this transaction is reported under GAAP accounting. As expected in this transaction, we realized an after tax statutory gain of $251 million, which added approximately 30 points to our combined risk-based capital ratio. In addition, the assets we retained from this transaction had a market value of $733 million, and a yield of 7.14%, which actually increased in our portfolio yield in our continuing operations by a few basis points. These assets, which are currently held in our corporate segment, will be redeployed to our other lines in the next few months. These assets are not reflected in the reported GAAP accounting treatment for the transaction, but are an important element in the economic benefit to our Company.

Now clearly, not all indicators are so positive. We face a very competitive U.S. Group environment, which along with our committment to maintain pricing discipline and a continued negative publicity around our Company has adversely affected our sales comparison. However, in this environment, we are clearly willing to trade top line for better future profitability. Although we do not want to minimize the importance of sales, sales need to be put in perspective with our business mix objectives, persistency goals, renewal, and the maintenance of new business pricing disciplines, all of which are important factors in positioning us to achieve our corporate objectives. I'm very pleased with how our organization has responded to the need to focus on all of these elements, not just sales, and I believe the course we have set will lead to more sustainable, consistent long-term results. All in all, I'm pleased with the progress we've made over the past year, but there's still more to be done.

I've a few additional comments on our results. Before sharing those, I will turn the call over to Tom White for a more detailed review of the quarter. Tom?

Thank you, and good morning everyone. As I review our segment results, please keep in mind that since our Canadian operations are reported as discontinued operations, their results are not included in current and historical segment numbers. Also with the first quarter of 2004 resegmentation, the results of the Closed Block Individual Income Protection business are reported as a separate segment and had been reclassified from the historical results reported for the Income Protection segment. In addition, all segment operating results referenced here this morning are before tax and exclude net realized investment gains and losses.

The Company reported net income from continuing operations of $75 million or 25 cents per diluted common share for the second quarter 2004, compared to $94.1 million or 34 cents per diluted common share in the second quarter of 2003. These results include after tax net realized investment losses that were $55.9 million or 18 cents per diluted common share in the second quarter 2004, compared to 17.3 million, or 7 cents per diluted common share in the second quarter 2003. These investment results are heavily influenced by the accounting for DIG Issue B36, which, if excluded, shows the lowest level of quarterly net realized investment losses from the investment portfolio since 2001. Excluding net realized investment losses, income from continuing operations was $130.9 million or 43 cents per diluted common share in the second quarter of 2004, compared to 111.4 million or 41 cents per diluted common share in the second quarter of 2003.

As Tom mentioned in the second quarter we completed the sale of our Canadian branch, which we initially announced in the fourth quarter of 2003. This transaction involved the sale of a branch of Provident Life and Accident Insurance Company, rather than the sale of a stand-alone legal entity, and as a result the assets that we retained are not reported as a part of the transaction, but are simply retained by UnumProvident. The economics of the transaction are very compelling with $250.6 million after tax statutory gain plus the retention of $733 million of bonds thats market value of April 30th, which have a yield of 7.14%.

Now I would like to turn to a discussion of operating segments. First, the income protection segment reported operating income of $90.8 million in the second quarter of 2004, compared to 98.5 million for the second quarter of 2003. Included in the Income Protection segment is our Group Income Protection line, which reported operating earnings of $49.4 million in the second quarter, compared to $47.7 million in the second quarter 2003. Here are a few highlights. First, premium income grew 3.2% often year-over-year basis. 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 84.9% in the first half of 2004 from 87.2% for full year 2003. Tom will discuss the positive trends we ares seeing in our renewal efforts more fully in a moment, as well as the slight improvement we experienced in persistency from the first quarter to second quarter. Secondly, sales of fully insured group long-term income protection products declined 32.1% to $73.3 million in the second quarter and sales of group short-term income protection products declined 35.2% to $16.9 million, and again, Tom will provide additional analysis on sales in his comments.

The benefit ratio in the quarter was 89.4% an improvement from 90.7% in the second quarter of 2003 and flat with the first quarter of 2004. The key factors that impacted the improved benefit ratio in the second quarter were the risk metrics in our U.S. group long-term income protection showed improvement in the second quarter with paid incidence lower relative to both the year-ago quarter and the first quarter of 2004. In addition, claim recovery experience was higher for the second quarter of 2004 compared to the second quarter of 2003, and generally flat with the first quarter of 2004. We did experience lower mortality than expected in the quarter, compared to the first quarter, as well as a lower average size of recoveries. The second, the discount rate on new claims remained level with the prior quarter. The interest reserve margin on U.S. group long-term income protection reserves was 61 basis points at the end of the second quarter. The expense ratio for Group Income Protection was 21.3% in the second quarter, in line with expense ratio for the second quarter of 2003, but improved from the 22.6% expense ratio in the first quarter.

Next I will review the income -- excuse me, the Individual Income Protection recently issued line of business. In this line we had operating income in the second quarter of $24.6 million compared to $35.4 million in the 2003 second quarter. Specifically in the Individual Income Protection line, our premium income grew 3.7%, sales were down 17% year-over-year with multi-life sales accounting for 79% of the activity in this line. Second, the GAAP benefit ratio for the line improved to 57.3% in the second quarter; this compares to 62 .1% in the year-ago quarter, reflecting lower incidence trends offset somewhat by lower claim recovery experience. Third, the shortfall in year-over-year income is due to lower net investment income and also higher expenses in this line. Also within the Income Protection segment, our long-term care results improved to $12.7 million in the second quarter of 2004 from $10.6 million in the year-ago quarter, with improved income in both group and individual businesses compared to last year. Strong revenue growth of 13.2% in the quarter and continued emphasis on expense management offset an increase in the benefit ratio in long-term care. And finally, the Disability Management Services line produced income of 4.1 million in the second quarter of 2004, compared to 4.8 million in the year-ago quarter.

Now I will 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 $58.6 million in the second quarter 2004, compared to $63.1 million one year ago. Overall our Group Life results were generally flat with the year-ago quarter, but improved from the seasonally weak first quarter results. Results in the AD&D and Voluntary lines were below the year ago levels. Highlights in this segment include: first, premium income for the segment grew 2.2% on year-over-year basis. New sales declined 10.2% overall, a reflection the lack of significant large case activity in the quarter and our continued focus on pricing discipline in this competitive market. Persistency for Group Life improved slightly to 84.1% in the first half of 2004, from 83.2% for full year 2003. Secondly, claim incidence improved from the seasonally weak first quarter results, but was slightly higher than the year-ago levels. And finally, the Colonial operation reported a strong quarter with operating income of $39.4 million in the second quarter 2004, compared to $35.4 million in the second quarter 2003, an improvement of 11.3%.

For the first quarter I would draw your attention to the following: first, sales at Colonial declined 3.7% to $63.2 million in the second quarter. This decline reflects the slower large case sales activity compared to last year, as well as the discontinuance of new sales of Group Long-Term Income Protection. In addition, we have had been making some adjustments to the sales organization around such issues as people development, recruiting, and incentives, which we feel will pay off in stronger and more consistent sales results at Colonial in the future. Secondly, Colonial's benefit ratio improved to 55.2% in the second quarter 2004, compared to 56.8% in the second quarter of 2003, reflecting the completion of our exit of the underperforming Group Long-term Income Protection block within Colonial's operations. Next, the Individual Income Protection Closed Block segment produced operating income in the second quarter of $30 million, up from the $5.3 million in the second quarter of last year. Prior year's second quarter results include $19.3 million of amortization, not included in the current year's quarterly results, since the segment no longer has amortization related to intangible assets.

The key highlights of this business include premium income declined 4.3% in the quarter and persistency remaining stable at 94% for the first half of the 2004. Second, incidence trends remained relatively stable with the levels experienced in the year-ago quarter, as well as first quarter of 2004, while recovery trends were generally improved. Three, our interest reserve margin is 63 basis points for the block of business and in line with our long-term target. And four, the other income revenue line within this segment, which primarily includes the results of a block of business reinsured to [inaudible] showed a decline to $20.2 million in the second quarter, compared to $33.4 million in the year-ago quarter. The Other segment, which includes results of remaining products no longer actively marketed by the Company, reported income of $10.5 million in the second quarter, compared to 6.8 million in the year-ago quarter. Finally, the Corporate segment reported a loss of $30.7 million versus a loss of 45.2 million in the second quarter of 2003. These results include interest and debt expense, which total $51.5 million in the second quarter of 2004, compared to $45.9 million in the second quarter last year. This segment includes a one-time gain of $9.4 million or 2 cents per diluted common share from a change in the retiring medical program. In addition, the Corporate segment has a higher level of net investment income resulting from the assets retained from the Canadian branch sale, which will decline over the remainder of the year as these assets are deployed to our ongoing business operations.

For statutory earnings -- our statutory -- our second quarter statutory results were exceptionally strong with after tax operating income of $178.9 million, excluding the gain on the Canadian disposition and the one time reinsurance premium for the closed block. This compares to $57 million in the year-ago quarter. Net income, again excluding the Canadian transaction and the reinsurance premium, totaled $171 million in the second quarter of 2004, compared to 49.6 million in the year-ago quarter. The statutory net after tax gain from the Canadian disposition totaled $250.6 million, while the one-time reinsurance premium was $123 million after tax. Our combined statutory capital and surplus, and this would include ABR, was approximately $4.6 billion at the end of the second quarter, compared to approximately $4 billion at the end of 2003.

With that review of the quarter, I would like to turn the call back to Tom Watjen.

Thank you, Tom. I'm going to focus my remaining comments in a few areas. Certainly our Group Income Protection line of business results, as well as outlook in our investment and operating performance in the quarter, and certainly a brief update on the regulatory and legal activities and also close with a comment on our guidance for the balance of the year.

As I've mentioned before, there is no more important activity at the Company today than improving the profitability of our U.S. group long-term Income Protection business. We have had a number of actions underway since last fall which we believe are driving the improving results we have reported over the past couple of quarters. These actions included: first, implementing targeted rate increases to those cases and market segments where we are not meeting our profit objectives. While we don't like to see any business leave the Company, we are prepared to lose unprofitable business if it can't be renewed at a profitable level. Second was adjusting our business plan to restore a more balanced mix in our sales by case side. As we have noted on prior calls, the results in our U.S. Group Long-term Income Protection line of business have been adversely impacted by small portions of our large case block of business. And lastly, was the increase to focus on the profitability of the new business we're selling. We intend to maintain pricing discipline and avoid replacing terminated underpriced business with new underpriced business.

As I mentioned earlier, I'm very pleased with the results we've generated thus far through these actions, and I want to acknowledge the tremendous response of our sales, service, and underwriting organization with the challenge that's associated with executing this plan. I would draw your attention this morning to several important trends. First, we exceeded our renewal program objectives for the first half of 2004. As anticipated, our persistency in U.S. Group Long-Term Income Protection line dropped from 87.2% for full year 2003 to 84.9% in the first half of 2004. Importantly, the business which was terminated thus far this year has produced substantially worse results than our block as a whole. Additionally persistency decline which is less than we anticipated is primarily concentrated in our large [inaudible] block where the greatest renewal and pricing actions are being taken. The persistency in our under 2000 life business is actually running higher than last year. An important element of our renewal plan is to just focus on those cases not achieving our targeted profitability and our retention of profitable cases. And our first half results indicate we have been successful in executing this part of our strategy.

The second point is that our average rate an increase on renewed business for Group Long-Term Income Protection continues to exceed our expectations. On average, our rate increases have been slightly less than 15% in the first half of the year. And finally, we have continued to maintain discipline in our new business pricing that should have a positive impact on future earnings. The market is presently very competitive, but we are committed to staying the course and maintaining pricing discipline on both new cases and renewals. We are prepared to let our top line shrink if this is what it takes to improve margins in our business. A combination of a competitive market place, the continued challenges we face managing the adverse publicity in the market, and most importantly our commitment to maintaining pricing discipline is unquestionably impacting our U.S. brokerage sales activity.

As I mentioned earlier, I'm very pleased with the quality of our new sales, as well as our ability to maintain strong relationships with our customers and brokers in this tough market environment. Let me give you a few examples of why although we may be losing an occasional battle, thus far, I believe we are winning the war. First, as I stated earlier, pricing on our new sales is in line with our target and since the end of 2002, we have raised new case pricing an average of 10-15%, depending on case size. These price increases have obviously had an impact on our sales, but quote activity has continued to be generally strong. We are generally getting looks at the business, but are experiencing lower close ratios because of our pricing discipline and the competitive market environment. Secondly, developing a better balance in the mix of business between small, medium, and large cases is an important factor in meeting our longer term profitability target. We have clearly seen reduction in our large case sales, and we've also actually seen a small reduction in our small case business, but we've seen a double digit sales growth thus far this year in those segments we refer to as target markets, or segments which have attractive risks and pricing characteristics.

Our sales activity in these markets remain strong, and the close rate ratios are actually very encouraging. Again, I see this as another signal we are maintaining our grip on the market, but remaining also very disciplined. Thirdly, our sales force and service organizations have done an outstanding job of placing renewals, which has led to better than expected persistency levels and to me, again, is an indication of the strong value we bring to our customers and producers. These rate actions, coupled with higher new sales pricing has led to premium for life increases in our Group Long-Term Income Protection block of 6%, and in our Group Short-Term Income Protection block of about 5%. Finally, we are seeing a good level of activity from the national marketing partners or our large producer groups, with group sales up 24% over last year. Our strong relationships and ability to communicate efficiently and effectively with these partners led to a quick rebound after the negative news hit the market in early May.

Please don't be mistaken, though. The adverse attention created by the actions taken by 2 rating agencies this past quarter has added to our challenges in the market. A significant amount time and energy was devoted this quarter to help address this adverse publicity with our producers and customers. However, our franchise remains solid and generally, our customers and producers are responding well to the quality of our product and service offering, our expertise in the business, and overall value of our offering, in addition to our improving financial strength. We are gradually easing the concerns about our ratings, and activity levels are returning to more normal levels. In this environment, we clearly need to work harder for the business but I'm very pleased, as I said earlier, for how our people have responded to the challenge.

For the balance of 2004, I do not expect U.S. brokerage sales comparison -- I do expect U.S. brokerage sales comparisons to continue the trends we saw in the first half of the year as we maintain our pricing discipline and focus on profitability growth. As I mentioned, sales is only a part of the picture, and we expect to see a general continuation of the persistency, renewal, and new business pricing tends we have seen in the first half of the year. The next critical period for us is the first quarter of 2005, when we have a heavy January 1st renewal schedule, and certainly also a traditionally significant new sales period as well. There's obviously a great deal of focus on assuring that we successfully navigate this important period.

As both Tom and I noted earlier, our investment results for the quarter remained strong. Net realized investment losses continued to climb with pretax realized investment losses, excluding the impact of DIG 36 accounting for imbedded derivatives of -- the 11.2 million, compared to a loss of $26.5 million a year ago, and a loss of $15.5 million in the first quarter. Our interest reserve margins remained stable and within our targets ranges, and we made no adjustments to the discount rates used on our new disability claims. Although interest rates have improved somewhat, we need to see higher rates for a sustained period of time before we would feel comfortable adjusting our new claim discount rates. As a reminder, a 25 basis point move in our discount rate has a significant impact on our pretax operating results. $4 million in our Group Income Protection line and $6 million per quarter in our Individual Income Protection line.

As you may have noticed, net investment income declined slightly this quarter when compared to both the first quarter and the same period last year. In addition, you may have also seen where the income statement allocated to the various segments may look a little unusual. In short, the sale of the Canadian branch and the reinsurance of our closed block of business cost a reduction in invested assets and a change in the allocation among the lines. The Corporate segment will continue to have a higher than normal level of assets, and therefore have a higher level of net investment income until the retained Canadian assets are redeployed to our other lines.

The reinsurance transaction as I mentioned earlier closed in May, on our closed block of individual disability policies that was effective as of April 1st. Prior to the announcement, we began to accumulate cash to be transferred to the reinsurer. There was an opportunity cost associated with holding cash for the reserve transfer and not being fully invested. This cost was approximately $5.5 million in lower net investment income for the second quarter. Both of these trends were planned and we do not expect these trends to continue into the second half of the year.

Now moving to operating results. We continue to be encouraged by our benefit results, both in terms of claimed incidence levels and our recovery experience. At this point we would attribute the improvement in incidence to the renewal and repricing actions we have taken and very little thus far from the improving economic conditions, that should come later. There's a lag between a pick up in consumer confidence and a meaningful decline in incidence. Now, I spoke last quarter about our need to better leverage our industry leadership position both in terms of the quality and breadth of our products and services, which is evident today, but also in the efficiency and productivity of the organization. This has been an area of focus for us this year and I believe we are beginning to see the impact of our actions in our operating expense ratio, which declined to 20.8% this quarter from 21.6% in both the first quarter and the same period last year. This course experience ratio is the lowest we have seen is in the last 3 years. We expect to continue to focus on opportunities to improve productivity throughout the Company, while continuing to deliver improved service and value to our customers. Productivity improvement and sound cost management remained a very, very high priority at our Company today, especially in the environment we're operating in.

Now one final comment on our connection with the market during this challenging period of time. In addition to being encouraged by the persistency and renewal trends, I am also very encouraged by the results of our most recent independent third-party research of our in force group customers. This study was conducted from mid-May through mid-June, which was after the ratings down grade in early May. And a couple observations I bring to your attention. First, a customer's likelihood to renew with us appears unchanged from one year ago. In fact, the small and mid-sized employers were slightly higher while larger cases were lower, undoubtedly driven by the rate increases and the purging of poor performers in the large case segment. And secondly, our ratings held at historically high levels for how customers valued our customer service, our products, quality, and the value they see in doing business with our Company. I believe these speak to the exceptional service levels and the strong relationships we built over the years which I think are really holding us in a very good position as we move through these relatively challenging periods of time.

Let me shift now to an update on the status of our regulatory reviews. We are continuing to work through the multi-state market conduct exam process being undertaken under the leadership of our primary domestic state regulators Massachusetts, Maine, and Tennessee. As I said before we are very supportive of this coordinated approach and the process that the lead states are using to conduct the review. As it provides a much more efficient and effective exam process than having numerous separate state exams. We expect the multi-state process will be concluded sometime over the next couple of months. As I said many times we'll learn from this experience and intend to make changes to be responsive to the exam process and the changing needs of our customers. I continue to believe that we can get this behind us in a manner which balances the needs of all of our constituents.

Now with respect to the class action litigation. You may recall that judicial panel on multi-district litigation ordered a group of related alleged class action and stockholder suits to be transferred for pretrial proceedings to the federal district court in the Eastern District of Tennessee. Again, we are highly in support of this process as it provides a more efficient means for dealing with the various class actions and derivative lawsuits. We requested that any subsequently filed lawsuits of a similar nature also be transferred under the multi-district order. These actions remain in the very early stages, and I encourage you to review our 10-Q filing for more complete updates on these matters and their current status.

In summary, our focus remains on continuing to build financial strength and flexibility and to take the actions needed to position this Company to deliver improved operating results in the future. I believe that our statutory results show we have made tremendous progress towards these objectives, specifically as Tom said earlier, our combined statutory capital and surplus has increased approximately 15% from year-end levels from $4 billion to about $4.6 billion today. Our risk-based capital has improved to nearly 290%, up from 210% at year-end 2003. And our statutory operating income has increased significantly. In fact, the trailing 4 quarters' statutory operating income of $525 million is our strongest level of statutory earnings ever. I believe we are doing what is needed to improve operating results while also protecting our franchise. Although our position in the marketplace is certainly being challenged by aggressive pricing and negative selling, the quality of our offering, the quality of our people, and the quality of our relationships are serving us well. We still have challenges ahead and much work to do to restore the full valuation of this Company, but I'm convinced with the results we've seen in the first half we are on the right course.

As for our earnings outlook for the balance of 2004, it's unchanged as we look for operating earnings per share to be flat to slightly higher on a sequential basis, which includes the impact of our higher number of share outstanding following our capital raising this past year and a half. Our focus is, and will continue to be, on profitable growth.

Operator, this completes our prepared comments and we'll now go to the question and answer session. I also would acknowledge I know there's a call at ten o'clock and so we'll be very mindful of trying to wrap up our call before the ten o'clock call that follows ours. So, operator, thank you. If you could please open up the call to questions.

[Caller Instructions]. We'll first hear from David Lewis of SunTrust Robinson-Humphrey.

Good morning and thank you. Could you go into a little more detail on kind of sales trends. I think you indicated that your target market sales were up double digit. Obviously the large case down significantly, small case down modestly. Can you give us figures on that. As you look at the competition, what would you expect in the second half since you are pretty much out of the market in May, wouldn't you anticipate, barring any changes in competition, that the overall consolidate sales trends might improve on a -- down 22% to maybe down 15% in the second half of the year?

Good question, David, and maybe I'll ask Joe Foley, who as I mentioned earlier is responsible for all of marketing functions just respond to that question and perhaps even also Kevin McCarthy whose underwriting organization's obviously in the middle of a lot of that. But maybe Joe to get us started

To give you a flavor of what we saw in the quarter, David, we did see declines in all market segments , but it was certainly greater in the large case segment, where we were down over 50%. To give that comparison, for the first half in the year in small case it was down 15%. We would expect in terms of trends looking forward to probably see more return to what we saw in the first quarter of the year. We certainly had a distraction impact in the month of May, in the second quarter, which I think hurt our sales, particularly in the small and mid market more. We saw quote activity bounce back in the second half of the quarter, so I think if you are looking for indications of what we see going forward, I would say that overall, it would be closer to what we saw for the overall first half or more pointed towards the first quarter and not so much the second quarter. I don't know Kevin if you want to add it to that?

Couple of things to reiterate. Sales in our target markets have been trending positive. We have had a really positive shift toward markets that we think have better profitability potential, lower incidence potential, less volatility in terms of claims impact on us, and that trend and the efforts in our field force to accomplish that have been terrific and will continue. Our national marketing partners have had solid sales results year-to-date and getting away from the distraction that Joe referred to, we should see a pickup a little bit in the non-national marketing partners end of the business. Closing ratios I think will pick up a little bit in the second half of the year and I think prices also could be hardening a little bit in the marketplace. We see some indications from several competitors that they are paying attention to our pricing, that they're recognizing that we are staying disciplined our our pricing, that they are maybe moving in that direction as well, and that shows up in some of the down trend in sales with some of the competitors, so I think all of that could help our second half.

That is helpful, but can you clarify if you would what your target market is, because if you indicate all the cases where small, mid, and large were down what does your target market consist of?

The target markets tend to be what I would call professional services, education, health care, technology, and probably away to some degree from harder core manufacturing, wholesale, retail, and transportation.

That is helpful, thank you.

Thank you, David.

Moving on, we'll next hear from Jason Zucker of Fox-Pitt Kelton.

Good morning, Jason.

Thanks and good morning to everybody. A couple of things, one time -- I was hoping that could you touch a little bit more with respect to some of the regulatory issues and in particular, has there been any action, anything been coming out of the Spitzer subpoena for the California state review?

Yeah, I think there's obviously, Jason, limits to what we can share, but again on the multi-state, as I said in my comments we feel good about the process and we think that we are moving forward on a basis where I believe first we are going to have some resolutions that work for everybody and as it relates to California, I think our great hope is that California will participate in the multi-state, so again I think at that I would just leave it at that It's making good progress -- our hope and intent and believe that the multi-states -- the 3 states I mentioned in the comments very much would like to see as many states as possible participate as we would we, so we are working down the path that we hope to be able to be sure that they are part of the process. The discussions with the attorney general in New York is a different matter. As you know, there's been some questions at [inaudible] insurance companies around their compensation payments and how they make those payments to the brokers and producers. We obviously are complying with those requests and I look to Dean Copeland. I don't think there's really more that could be said about that. I think as much as anything, we're I think using this source of information around some questions that they have around the just general strategy that brokers and consultants use for compensation purposes.

Jason and will be filed today the 10-Q to keep these updated so everyone has the same level of information. I don't know whether you are referring to what Tom just referred to that has gone to a lot of the industry [inaudible] broker's commission or one that started about a year ago that related to claims operations and we have been providing information to the office over the course of that time. But it's been -- our cooperating with providing the information and that's where both of those stand at this time.

Okay. Great and one question on some of the fundamentals. How are you guys thinking about morale in the sales force with sales being down? Is it an issue that you need to address and are you addressing it in any particular way right now?

That is a great question, Jason and I will offer a comment and ask if Joe or Kevin want to add to it. But it's a very important thing obviously is to be sure as we move through the changes we talked about earlier that people understand why those changes are necessary. What their role in helping to support those changes are and that people can actually feel good about that, and actually we have done some things to change our compensation plans, and some other things where actually our field organization, service organization are very much encouraged and reward on the basis of not just sales, but as I said before, delivering renewals, being sure we keep persistency at relatively high levels and so it's a more holistic view of the marketplace that they can now help participate in and be compensated for. So, again, I think we have done a lot to try to be sure that we take the burden off of just rewarding people on the basis of sales, but also rewarded on the basis of some of those other things that are very, very important to improving margin. Now again do we know our people are being called by competitors? Absolutely. So no one's going to take any of this for granted. This is a time, whether it's with customers, employees, field people, whether it's with producers to stay very much, and I use the word "high touch" to stay very much in front of our people to be sure again they continue to feel good the business, the Company, the direction, and the contribution they can make to that, plus the rewards they can make for helping us deliver on the commitments that we make to the street. And with that, maybe, Joe, anything else you want to add, because again there were some specific compensation plans put in place very much to line up with our business objectives, and actually, I think that's helping enormously in terms of keeping people's morale up to good levels.

From a compensation standpoint, we certainly anticipated the direction we were moving with the business plan at the beginning of the year and as I think I've spoken before, we shifted a significant amount of our compensation from new sales into renewals, into rate increases, and profitability. We made a second adjustment in the second quarter to move even more emphasis to our 1-1 renewals, because we know the importance of those in the marketplace and going forward and we'll continue to make adjustments if we feel it's necessary. From an overall staffing standpoint, our turnover is consistent with where it was a year ago, and I think most significantly I would point to our manager group that is really the group that holds us together. We have had no turnover in that group this year at all, and I think that speaks to how people view the franchise, how they view the opportunities here, and frankly, how they view us compared to competitors and what we offer versus them, so I think we are holding up very well.

That is great. Thank you.

Thank you, Jason.

Next we'll hear from Vanessa Wilson from Deutsche Bank.

Thank you and good morning. We have heard from yourselves and some of your competitors that sales are down quite a bit this quarter and I'm just curious, are the sales moving to 1 or 2 companies or are they just not moving?

Good question. Maybe, Kevin, I know you and the underwriting team keep a pretty good finger on business flows there and maybe I'll ask to you address Vanessa's question.

Thanks, Tom, good morning, Vanessa. I think maybe what I'll point to is maybe the activity on our in force book of business and the significant amount of increase we've been placing on the renewal block and where that business is going. We track the larger end case of the business, and our worst performing 20%, we terminated 35 very, very large cases in the first half of the year. $60 million worth of in force premium. $50 million of that business went to 4 carriers. Those 4 carriers, at least 3 of those carriers reported upticks in sales. And the rate increase that we were looking for in that business was in excess of 60%. We keep track of it. I think you've got to take a look at who's reporting upticks in sales and versus who is not, and who is talking about hardening prices and who is not.

Okay, and also I have heard sort of talk in the market that you have been very disciplined on prices but that very recently you've backed away on small case prices. Have you done anything to changing prices in a downward direction or flattening direction over the last 3-6 months?

No, we have not. Small case pricing is actually probably ticked up slightly from the first quarter to the second quarter. Our field organization has showed remarkable discipline in terms of managing small case pricing. What you may be seeing is the movement in differentiation between target markets and non-target markets. What we have shifted business mix steadily during the course of the year toward our target markets, I think about 70% or so of our sales are in target markets in the second quarter and those markets are the ones we expect average prices generally to be lower because they have lower incidence levels, low claim levels, and better profitability levels for us.

Thank you and my last question relates to the UK. This is the second quarter that you've have very favorable UK results. If you strip those away and just look at core U.S. long-term disabilities business, could you give us a sense what the sequential trend looks like?

Good question, Vanessa, and maybe I'll ask Tom White to field that one.

Vanessa, we actually had a very nice improvement in our U.S. results. Our U.S. results kind of bottomed out in the third quarter last year. Had a nice improvement to the fourth quarter, first quarter, and here in the second quarter. I would say our UK results have been consistently good over the last, really, several years. There really hasn't been much impact from the economic conditions or incident trends over there. That has been very steady. Obviously very good growth from the acquisitions, but our U.S. LTD and even our STD business kind of bottomed in the third quarter and has been improving pretty nicely since then.

And one more numbers thing, Tom, the yield on the recently issued reserve fell from 712 in the first quarter to 691, so the margin there fell as well. Is there something going on there with the assets?

Yes, there is a little bit of asset movement. We have had a corporate-owned [inaudible] asset in there where the crediting yield dropped, and we've actually taken that asset out so it won't be in there in the future and I think it will be in the corporate segment. I think what you'll see for that block of business -- we're down to roughly a 60 basis point margin and it will stay right around that level. Our other lines of business were basically maintaining right around the 60 basis point margin, so you will see that one right around that range as well.

So there's no prepayment or impairment issues or anything like that?

No, actually the prepayment activity this quarter was a little lower than what we saw certainly in the second quarter of a year-ago. But nothing out of the ordinary this quarter.

Thanks very much and congratulations.

Next we'll hear from Bob Glasspeigel of Langen McAlenney.

Good morning. I'm going to pile on the sales questions with -- as I sort of work out the math on Group Protection, if the persistency and sales trends sort of stay where they are, revenues are going to flatten out and possibly go negative looking out 2 or 3 quarters. Are there any expense actions additionally that need to be taken, I guess is the first question. And second question, maybe you could comment on how the change on the head of sales feeds into addressing those trends?

Yeah, again I think we are very conscious, especially now, Bob, that this is the environment that we have got to be carefully mounting top line and expense side so we can actually protect the bottom line, and so especially when you're going through the challenging environment like the one we have right now, I just want to start with the fact we are keenly aware of the importance of the connection between the top line and the as I said the expense base. That is why I mentioned in my comments we've been working very hard on being sure that we have -- we're raising expense conscious around the Company and we're continuing to find ways to do things more cheaply and more effectively. There's been a number of things under way since the first of the year as I said, I think we are being to see that filter its way through our operating expense ratio, and -- not that there is there is not more room for improvement because there certainly is, I just feel that there's -- the organization is much better positioned today to manage expenses on a more realtime basis in relationship to revenue than it's ever been before, and again there is plenty of work still to be done to improve on that.

So, I just want to be sure you and the others know full well we know we have to manage that expense line much, much more carefully today in response to what you just talked about in terms of the sales and persistency trends that could emerge in the first part of next year As it relates to the head of sales, I think there's a couple of ways I'd ask you to look at that, and for those who don't know we announced a couple of weeks ago that Roger Edgren had joined us to take over our sales organization. I think -- I start by saying we have an incredibly strong sales organization, at the manager level, the rep level, and as Joe and Kevin pointed out in their comments that has been tremendously important to our ability to navigate, so far successfully, through this challenging environment. I think that one of the things we're trying to look for at every turn is how we continue to do things to raise the bar of expectations higher, take us from probably playing a little defense, which we have had to do the last couple of years to even being more offensive if you will, and do it in a profitable basis. And so, Roger's arrive I think should be a signal that frankly, we are on with -- doing business and growing and growing profitably again and his background is the more in the brokerage and consultant side, which I think is going to be an interesting new perspective to bring to what is already a very successful sales organization. And again, this was his first week, so he is not on the call, but we look forward to, over time, for having people to get a chance to meet Roger, and I think you'll be as impressed as I was in having him in that kind of role, Bob.

Thank you.

[Caller Instructions]. We'll next hear from Liz Werner of Sandler O'Neill.

Good morning and thank you and I had a couple of questions. I wanted to ask you a little bit more about your comments about incidences which has obviously improved nicely, but I think you mentioned that the benefits of an improving economy have yet to impact your claims incidence. So I was just wondering is there any way to get a sense for how that could -- you know if you could quantify a potential impact from a more normal economy, or even from the economic trends we've seen recently. And just secondly, your talk about it the 25 basis point move in your discount rate and I know you haven't changed discount rates this quarter. Is it -- given where your discount rates are right now, if we were to see a 25 basis point change in tenure A rated corporates, would that imply a 25 basis point change in your discount rate assumption, given where you are right now?

Couple of very good questions, Liz. On the incidence -- and I will ask Kevin to supplement my comment, yeah, I think again what we said earlier was that we believe that much of the improvement that we've seen the incidence and block of business has come through the repricing actions and frankly, the purging of the block of business from some pretty poorly performing business and again, I think that's -- we feel pretty strongly that we have not yet begun to see the benefits coming from a stronger economy. Kevin, I don't know if there's anything you want to add to how you look at that and the underwriters look at that in terms of what's happening and where we're going?

I think you are right on the money, Tom, in terms of just -- it's really mix of business that is influences our overall incident level. As we shift some of our activities in large case away from manufacturing, for example, as we shift from large to small, as we shift within small from wholesale-retail to professional services you're going to get a natural downtick I think a little bit in overall aggregate incidents, and I think that is what is showing up in our numbers. Customer confidence has been bouncing around during the course of the year and it does show a generally positive trend. Don't think that we'll really see the effects of that until probably after the election, maybe the beginning part of next year if that plays out.

Well, if I look at your group benefit ratio and recognize that it doesn't fully reflect the shift and the change in mix of your existing in force business, how much of a difference is there between the benefit ratio of say the business that you have non-renewed and what you're targeting? Because my sense is that the benefit ratio doesn't change much for the rest of the this year, but I don't have a great handle on how much improvement is realistic for next year.

Kevin, you want to pick up on that or -- ?

Yeah. I think we'll see steady improvement generally over the course of the year and into next year in terms of loss ratio, all else being equal. Price increases will continue to flow through -- they flow through at a rate on the loss ratio affect of maybe about 1 % or so per quarter. If incidence stays stable, that should continue as we go through the renewal block. The mix of business shift, if continues will also affect the block because our target markets tend to have lower loss ratios than the business of course that we're blowing off the books in terms of hard renewals. So also shift from large case to small will positively affects our loss ratio. So I think in general, you know, we should see a slow a and steady, continuous improvement in loss ratio, but unless and until the economy makes a fairly significant shift, you won't see dramatic moves.

And Kevin, you mentioned earlier too that the business that left us had a substantially worse set of results than the business retained. As I recall, that loss ratio in that business may have been 20-30 points higher than our corporate loss ratio.

The margin difference, Tom, the profit margin difference on terminated versus remaining business is 20 point in LTD.

So, I think Liz that gives you a sense of the leverage that just comes by -- forget the economy for a second but just simply business that has such poor performing characteristics leaving the Company.

That is very helpful, and just to follow-up on the 25 basis point change -- potential change in your discount rate, is that --

I would caution being too -- too much interest decision around discount rates to any index like the ten-year, for example, I think again, what I was trying to say in my comments is we are going to be cautious about lowering the rate, we want to be sure the rates are sustainable at those levels before we make those decisions so we don't have rate decisions bouncing around. There is no doubt there's -- looking forward there's certainly a bias to lower rates -- or to higher rates which means -- which is good for us and lowering the discount rate, but again I think we are going to be cautious about the speed by which we do that. I think if you tie your 2 questions together, both in terms of the economy and incidence, as well as interest rates and discount rate I think what we have tried to do is build a business plan that almost regardless of what happens in improving environment we should see some lift in just by the actions we are taking in terms of repricing, better expense management, and improved just basic operational performance, and if we see some uplift in the economy, if we see some up lift in the interest environment, and that is going to be icing on the cake. But we've not really built our plan around solely those actions happening.

Okay. Great. Thank you very much.

And we'll next hear from of Aroun Kamar [ph] of J.P. Morgan.

Good morning and couple of quick questions and one is in terms of the improvement in the statutory capital over the past 4 quarters as you stated, up to 4.5 billion or 4.6 billion now, and the RBC's [inaudible] at 290, what are the prognosis for the [inaudible] clearly the A - is not something you want to be and that could impact your product sales of individual group even more. Could you tell us the status of that? And second question I have is looking ahead for the rest of 2004 and you mentioned sales likely to be down given the ratings and the negative publicity. Is there any guidance as to how much you expect sales to be down in the group business?

Let me just ask Tom to speak to the statutory capital and the ratings, but I would say in that sense I think all of our ratings are probably more of a function of just operating performance today and delivering results than they are in capital. We have obviously done a lot over the last 12-18 months to shore up the balance sheet and to restore capital, and obviously want to continue to do that, but the more primary focus of management and the rating agencies is on just delivering operating performance. And putting a couple of remaining issues like the multi-state behind us in a fashion that's acceptable for the Company.

Yeah I think those are the -- getting the multi-state behind us and probably getting past the first -- the renewals for January 1 are the main things that the rating agencies are looking at. Also, kind of the things that they've held out for us are better statutory results and better U.S. LTD results, and we feel we that we've definitely delivered on that. We mentioned in the script the -- our statutory operating earnings for the last 4 quarters are over $500 million, which is a very, very strong improvement from where we were in the early part of 2003. So operationally and fundamentally the business is doing well, but I think we have to get a couple of these issues behind us before we can make a solid case for a ratings upgrade.

And as it relates to sales comment, I guess I first step back and said -- I think what you heard us say this morning is that we attribute the majority of the sales sort of falloff, not so much to ratings or adverse publicity, but more to our pricing discipline. We have taken a very stern position around our pricing levels and what we have to get for us to write business and our organization has very much embraced that and we're walking away from the business where frankly we can't get that pricing target. So I guess before I answer your question, be sure I clarify that we really fully believe that the vast majority of the sales impact is really being driven primarily by pricing discipline and less so from the adverse attention, which is primarily the rating agency issues. I think, Joe, you talked earlier in your comment about just an outlook for the balance of the year and maybe just -- would you like to pick you up just the outlook for the second half part of Aroun's question?

I mean I really think if you look at the overall results for the first half of the year, you could expect a similar results through the second half. Now that does suggest that there would be an improvement over the results we saw in this most recent quarter, because we had this distraction factor. But absent any changes in the competitive landscape or significant firming of pricing, which, you know, could happen and that could obviously be positive for us, and we are going to maintain the discipline and, Tom, to your point that that's what is driving our results today, I would say that continues during the second half of the year.

Okay. Terrific, thank you.

The next question comes from the Scott Frost [ph] of HSBC Securities.

Sorry if you've covered this, but could you give some more colored on the realized losses? Did all of that relate to derivatives and what kind were they and what were unrealized gains or losses for the period?

I will ask Tom to walk through those results.

Yeah, the unrealized -- excuse me, the reported realized investment losses off the investment portfolio were about $11.2 million. That compares to about $15 million in the first quarter and about $25-26 million in the year-ago. Now keep in mind what we have to report, you know, the influence is this accounting rule DIG B36, and it's going to cause some noise in the results, because we have a couple of modified co-insurance agreements and the way the accounting works for that, the assets are held off our books, and we in effect have to flow through the unrealized gain or loss through our realized gain or loss. And we are going to split that out so you can see what is actually going on with our portfolio and what's going on with those reinsurance arrangements.

And that actually was a gain last quarter and was a loss this quarter. But again, when you pull that piece out, the realized capital loss position actually improved between the first and second quarter, so vastly improved the second quarter of last year.

Exactly.

And now maybe, Tom, just on unrealized gain position.

The unrealized gain was $1.7 billion, so it came down to just basically a function of interest rate movement in the quarter, but we're [inaudible] about 3.8 billion to first quarter and we're sitting at about 1.7 billion right now. So that is basically interest rate movements that are driving that. We are not looking to take gains out of the portfolio. If we try to take those unrealized gains we are go to distort margins going forward, and yields going forward and we don't want to do that, so we're not looking to harvest those gains. They are nice to have, but we what we really want to do is protect the interest reserve margins in our business.

Okay. Thank you.

And with that, I think, again mindful of the call which has just commenced for another company and want to thank everybody for taking the time to participate in this morning's UnumProvident call, and this completes our second quarter call. Thank you.

And that concludes today's conference and we thank everyone for your participation.