普登 (UNM) 2004 Q3 法說會逐字稿

Good day everyone and welcome to UnumProvident Corporation third quarter 2004 earnings results conference call. This call is being recorded. At this time for opening remarks and introduction, I would like to turn the call over the Head of Investor Relations Mr. Tom White.

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

Statements in this conference call regarding the business of UnumProvident Corporation, which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. These forward-looking statements are made based upon management's current expectations and beliefs as of the date of this conference call, but there can be no assurance that future developments affecting the company will be those anticipated by management.

For a discussion of the risks and uncertainties that could affect actual results, please see sections entitled cautionary statement regarding forward-looking statements and risk factors in our 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 statement.

Our discussion this morning will include non-GAAP financial measures, therefore a reconciliation to GAAP is available on our web site at www.unumprovident.com. Now, I would like to turn the call over to UnumProvident President and Chief Executive Officer, Thomas Watjen.

Thank you Tom and good morning. With us this morning are several members of our management team including Dean Copeland, our General Counsel; Bob Greving, our Chief Financial Officer; Kevin McCarthy, our Chief Underwriter; Roger Edgren, our Head of Sales; Peter Madeja, who runs our GENEX operation and has responsibility for our benefits organization; and Joe Foley, our Head of Product Management.

As you know, we reported our third-quarter results yesterday and I am pleased with the quarter, which was generally in line with our expectations and consistent with the street consensus estimate and follows the pattern we have seen throughout the year. I know that there are new industry issues, which have also risen with the recent news and investigations launched by the New York attorney general's office and others into brokers' compensation practices and we will discuss these later in the call.

Regarding the third quarter, operating results, as I said, are ones, which I'm generally pleased with because they reflect the steady progress we've seen throughout the year. A few general comments on the quarter; first, operating income and the group income protection line improved to $59.9 million in the third quarter of this year, up from $49.4 million in the second quarter and $37.5 million in the year ago quarter. Both long-term income protection and short-term income protection results improved on a year-over-year basis. We had good performance in our subsidiaries and generally good results from other lines of business.

Our UK subsidiary UnumLimited had a record quarter, while Colonial continues to generate consistent results. The one exception was the recently issued individual income protection line where we saw some volatility in the quarter. Investment results continued to generally meet our expectations, both in terms of investment earnings and credit quality. We took some write-downs on our airline holdings in the quarter, but credit quality continues to improve while interest rates remain a challenge. I'll have more to say on that later.

Our statutory earnings, although down somewhat from the exceptionally strong third quarter of 2003 continued to be strong. On a trailing four-quarter basis, our after-tax operating results, excluding the impact of net realized investment losses and one time transactions, are $485 million. A very good level for us relative to historic levels. We continue to build capital strength. We estimate that our risk-based capital ratio has improved over 40 points so far this year to over 290%, its highest level ever.

And finally, I'm especially pleased that many of the metrics of performance that are not reported in our quarterly earnings release continue to show positive momentum. Lower claim litigation trends, lower complaint trends, and ongoing strong service levels continued this quarter and in my mind are strong indicators of the good work our employees are doing to serve customers and continue to protect this franchise in what is obviously a challenging time.

However, there are continue to be some challenges ahead. The very competitive market conditions continue, including aggressive pricing and negative selling we have discussed in the past. We continue to hold our own in this environment and I'm confident we will continue to do so. The economy, at least as it impacts new claims and resolution patterns, is still generally weak and interest rates have certainly shown no sustainable increase in 2004. If this level of interest rates continues, it will likely have an impact on our discount rate for new claims and again, I'll have more on that in just a minute.

And finally, we face an important test with our first-quarter of 2005 sales and persistency results. We expect to continue to remain disciplined on renewals, pricing, and our mix of business but we do expect to see gradual improvement in our sales comparisons beginning in 2005.

Before I turn the call back to Tom White , I would like to comment on the status of the multistate market conduct exam. We continue to work with the lead state regulators and others who have an interest in our claim practice including the Department Of Labor and the New York Attorney General.

Our goal is to include as many parties as possible in any resolution of the inquiries surrounding our claim practices. This adds more complexity to the discussions, but we continue to feel that we are best served by having many of these parties participate in any resolution as possible. I believe we are making progress toward a resolution, which meets the needs of all of our constituents, however, we do not yet have a final resolution at this time. Now let me turn the call back over to Tom White to review our segments operating results. Tom?

Thank you and again good morning everyone. As I review our segment results, please keep in mind that since the Canadian operations have been sold and historical results are reported as discontinued operations, those results are excluded from historical segment numbers. In addition, all segments operating results referenced here are before tax and exclude net realized investment gains and losses.

The company reported net income of $167.6 million or $0.55 per diluted common share in the third quarter of 2004, compared to $108.7 million or $0.36 per diluted common share in the third quarter 2003.

Included in the results for the third quarter of 2004 are net realized after-tax investment gains of $41.8 million or $0.14 per diluted common share compared to losses of $16.5 million or $0.05 per diluted common share in the third quarter of 2003. In the third quarter of 2003, the company also reported income from discontinued operations of $10.4 million, which is $0.03 per diluted common share.

Net realized investment gains and losses for the third quarter 2004, which totaled $64.5 million on a before-tax basis or $41.8 million on an after-tax basis include the impact from the adoption effective October 1, 2003 of the provisions of statement of Financial Accounting Standards number 133 implementation issue B36 or simply DIG issue B36, which resulted in third quarter 2004 gains of $83.8 million before tax and $54.5 million after tax to reflect the increase in the fair value of the DIG issue B36 derivatives.

Excluding net realized investment losses, income from continuing operations grew 9.6% to $125.8 million or $0.41 per diluted common share in the third quarter of 2004, compared to $114.8 million or $0.38 per diluted common share in the third quarter of 2003.

Now I would like to briefly discuss the operating segments. First, the income protection segment reported operating income of $95.2 million in the third quarter of 2004 compared to $88.1 million in the third quarter of 2003. Included in the income protection segment is our group income protection line, which reported operating earnings of $59.5 million in the third quarter of 2004 compared to $37.5 million in the third quarter of 2003.

A few highlights. First, persistency declined due to our year long efforts to reprice the more poorly performing business within our U.S. Group long-term income protection. With persistency declining to 84.6% in the first nine months of 2004 from 87.2% for full year 2003.

Second, sales of fully insured group long-term income protection products declined 23.9% to $41.1 million in the third quarter and sales of group short-term income protection products declined 42% to $8.3 million.

Third, the benefit ratio in the quarter was 88.1%, an improvement from 92.8% in the year ago quarter as well as the 89.4% experienced in the first and second quarters of this year. The key factors that impacted the improved benefit ratio in the quarter were three things; first, the risk metrics in our US Group long-term income protection showed a slight seasonal increase in new claims in the third quarter relative to levels experienced in the first half of this year, but remained below that of the second half of 2003.

Similarly, claim recovery experience was slightly off from the first half of 2004 experience, but was generally consistent with the second half of 2003. Second, our UK Group long-term income protection business continued its strong performance trend with strong premium growth and improved risk management trends.

And finally, the discount rate on new claims remained level with the prior quarter. The interest reserve margin on our US Group long-term income protection reserves widened to 66 basis points at the end of the third quarter, benefiting from the reallocation of assets retained from the sale of our Canadian business.

And fourth, the expense ratio for group income protection was 21.1% in the third quarter, an improvement from the 22.5% expense ratio experienced in the third quarter of 2003.

Next, I will review the individual income protection recently issued line of business. In this line, we had operating income in the third quarter of $21 million compared to $35.8 million in the third quarter of 2003.

Specifically in the individual income protection line; first, premium income grew by 4.9%, sales were down by 8.5% year-over-year with year-to-date multi-life sales accounting for approximately 80% of the sales activity in this line.

Secondly, the interest adjusted benefit ratio for this line increased in the third quarter compared to the year ago quarter reflecting lower claim recovery experience though new claims was relatively stable. In comparing these trends to the first half of 2004, we experienced slightly higher new claims partially offset by a slight improvement in recovery experience.

Third, the interest rate reserve margin is now 60 basis points, which is in line with our long-term target range and, fourth, the shortfall in year-over-year income also reflects the lower net investment income in this line as well as slightly higher expenses. Also within the income protection segment, our long-term care earnings were $9.9 million in the third quarter of 2004 compared to $10.5 million a year ago.

Finally, the Disability Management Services line produced income of $4.4 million in the quarter, compared to $4.3 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 $60.8 million in the third quarter, compared to $66.3 million one year ago.

Overall our group life results were down from the year ago levels reflecting lower results in our U.K. subsidiaries and the impact of the update to capitalization of acquisition costs implemented in the first-quarter of 2004. Results in the voluntary and AD&D line were slightly lower than year ago levels.

The highlights of this segment include, first, new sales for group life improved 41.3% primarily reflecting increased sales activity to in force customers. Persistency for group life improved slightly to 83.6% in the first nine months of 2004 from 83.2% for the full year 2003. And secondly, from a risk metrics perspective, new claims for group life were consistent with the year-ago levels, but improved from the second quarter of 2003 while the average claim size was slightly higher in the quarter compared to both second quarter of '04 and third quarter of 2003.

Next Colonial. Colonial reported a good quarter with operating income of $39.6 million compared to $38.5 million in the third quarter of 2003, an increase of 2.9%. For the third quarter, I would draw your attention to two things. First, sales at Colonial declined by 1% to $61.2 million in the third quarter. As we have discussed in previous quarters, we have been making some adjustments to the sales organization around such issues as regional sales leadership and people development and recruiting.

We're starting to see improvement in recruiting results, which we believe is the first step toward stronger and more consistent sales results at Colonial in the future. Secondly, Colonial's benefit ratio improved to 55.1% in the third quarter of 2004 compared to 56.3% in the third quarter of 2003. This reflects lower claim incidence and improved performance in the income protection product line.

Next the individual income protection closed block segment produced operating income in the third quarter of $33.2 million, up from the $19.2 million in the third quarter of last year. Prior year third quarter results include $17.3 million of net amortization not included in the current year's quarterly results since the segment no longer has amortization related to intangible assets.

Key highlights for this business include, first, premium income declined by 5.8% in the quarter and persistency remained stable at 94.1% for the first nine months of 2004. Second, the interest adjusted benefit ratio was slightly elevated with new claim trends remaining relatively stable with the third quarter of 2003, but slightly higher than the second quarter. Claim recovery experience was generally consistent with both the prior year and previous quarters. And also within this segment, the interest rate reserve margin is 62 basis points for this block of business and again in line with our long-term target.

Finally, the other segment reported income of $7.3 million in the third quarter when compared to $8.7 million in the third quarter last year while the corporate segment reported a loss of $44.8 million compared to a loss of $47.3 million in the third quarter of 2003. With that quick review of the quarter, I would like to turn the call back to Thomas Watjen.

Thank you, Tom. I will focus my remaining comments this morning in four areas. A few additional comments on the business trends and results. I will speak also to the general environment and the impact we think that is going to have on our business, offer a few comments on the recent focus on broker compensation and close with our outlook for the remainder of 2004.

As we have discussed before, there is no more important activity at the company today than improving the profitability of our US Group income protection business. We have had a number of actions underway since last fall, which we believe are driving the improved results that we have reported over the past few quarters. These actions include, first, implementing targeted rate increases to those cases and market segments where we are not meeting our profit objectives.

Second, adjusting our business plan to restore a more balanced mix in our sales by case size. Lastly, increasing the focus on profitability of new business we are selling. We are maintaining pricing discipline to avoid replacing terminated underpriced business with new underpriced businesses.

The year-over-year improvement in our benefit ratio in the group income protection line is encouraging with the third quarter 2004 benefit ratio at 88.1% compared to 92.8% a year ago.

Our pricing and renewal actions are having the desired positive impact. However, I might add again that we have not yet seen any meaningful impact of the economy on our new claims experience. Our sales and persistency results this quarter follow the pattern we have seen throughout the year. Persistency in all of our lines of business this quarter was generally stable with the first half of the year. The environment for new sales continues to present challenges given that the aggressive pricing and negative selling we see in our markets.

I am pleased that we are slowly reversing the trend in our US brokerage sales with total sales from that channel down 14% in the third quarter compared to a 39% decline in the second quarter. As we move to the balance of the year and into 2005, we intend to continue to aggressively pursue market segments that meet our risk and profitability targets. I would therefore expect sales comparisons to improve slightly over what we experienced in the first half of 2004.

As we have repositioned our US Group business, it is important that we not only meet our profitability target, but also maintain our strong connection with the marketplace. A vital element of that is maintaining a strong sales, service and underwriting work force. We spend a great deal of time on this. I know for some of you sales rep numbers and turnover have been an area of focus.

Let me assure you, it is for me and our management team as well. It is important to note that none of our market managers or regional sales managers have left the company during the past year and the average experience level of our sales reps is higher than a year ago. The number of sales reps leaving the company in the third quarter of 2004 was actually equal to that of the third quarter of 2003 and our annualized turnover rate remains consistent with last year's rate.

Our staffing level in the field is down, but it is in line with our sales volume. I am encouraged too that we have a strong flow of newly hired reps with 20 joining our training program in each of the last two quarters. It is tough out there and I guess I will personally always be concerned about the retention of our people in all areas including sales, service, and underwriting, but I am very pleased with how our people are reacting in this environment.

As I mentioned earlier, a big driver in our improved group income protection benefit ratio is our 2004 renewal plan, which is obviously winding down, but continues to track ahead of our expectations for the year. Persistency remains ahead of our projections for 2004 despite stronger than average expected price increases in our group long-term income protection line on renewed cases.

In addition, the business that has terminated shows a profit margin substantially below that of our in force block of business. These actions are all important drivers of the improved margins we are seeing this year and speak well for our confidence level for 2005.

One last point on operating trends pertains to our operating expenses. Last quarter, we discussed our need to better leverage our industry leadership position, both in terms of the quality and breadth of our products and services, but also in the efficiency and productivity of the organization. This has been an area of focus for us throughout 2004 and I believe we are seeing some positive results from these actions.

Our operating expense ratio declined to 20.3% this quarter from 20.8% in the second quarter of 2004 and 21.9% in the year ago quarter. We expect to continue to focus on opportunities to improve productivity throughout the company without sacrificing service to our customers.

Now, shifting to the general environment, we do not see any meaningful signs of improvement in consumer confidence, which impacts claims activities nor do we see any positive developments on the interest rate front.

Probably most challenging is the decline in long-term interest rates this quarter, which creates challenges for all us in this business. Our interest reserve margins remain stable and within our targeted ranges and we made no adjustments to the discount rates used on new income protection claims during the third quarter.

In fact, as Tom said, our group long-term income projection margin expanded to 66 basis points this quarter benefiting from the reallocation of assets retained from the sale of the Canadian business. Given this improvement in the quarter, we do not expect to make a fourth quarter adjustment to the discount rate on the new claim incurrals for group long-term income protection, though if we do not see some improvement in the interest rate environment, we will need to evaluate that change in 2005.

Our margin in our individual income protection business continues to be around the midpoint of our long-term range, which is 60 basis points and we will also be evaluating our discount rate on new claims for the individual blocks of business late this year and early next year as well.

As a reminder, the cost of a 25-basis point move in our discount rate on new claims incurrals is $5 million per quarter in the group long-term protection line, $5 million as well for the closed income protection block and $1 million in the recently issued individual protection results.

Let me shift to what has been a very visible and important topic today, broker compensation. As you know, we have previously disclosed that we have received several subpoenas from the office of the New York Attorney General requesting documents and information relating to compensation agreements between the insurance brokers and the company as well as information regarding our quoting process and placement of reinsurance coverages

We believe the requests we have received are similar to those received by other companies and we have been cooperating fully with the request to provide information. As we noted in our press release on October 19th, we are strong advocates of complete and timely disclosure of the compensation paid to a broker.

At the same time, we are also reviewing our compensation policies and procedures to be sure that we appropriately compensate our brokers and do not create any actual or perceived conflict between the broker and customer. Until we receive more clarity in this area, we have decided that we will not enter into any new incentive compensation agreements.

We hope to work closely with the New York Attorney General, our brokers, the insurance industry, and other regulators to make whatever adjustments in industry practices are needed to restore and maintain the trust and confidence of our customers.

As background, let me provide a little information on our broker compensation and relationships. First, our bonus new incentives program represent a relatively small part of our total commission. In our US brokerage business, bonuses and overrides represent just under 10% of our total annual commissions of $650 million. For purposes of this discussion, bonuses and overrides are any amounts paid above the base commission.

Secondly, our bonus incentive programs we believe are generally consistent with other companies in the life and health industry. Our compensation plans, like many others, are filed with New York so therefore companies have generally good knowledge of what others are doing in this area.

And lastly, we have a very diverse producer base for US brokerage business with no significant concentration with any individual broker, national marketing partner, or any type of producer. In 2003, 6435 producers wrote a new line of coverage with us and 1,900 of these producers received some type of bonus payment.

Now regarding the issue of price fixing or bid rigging. Obviously if these allegations prove to be true, this is wrong and neither we nor others in our industry would condone this behavior. I believe that we have controls in place in our quoting and underwriting processes that would prevent these kinds of issues from occurring within our company.

Given the seriousness of the issues, though, that certainly have been raised very broadly, we, like most others, have been conducting an internal review of our practices including our quoting process on new business opportunities, and at this point, I'm not aware of any price fixing or bid rigging schemes at our company or within our industry for that matter and we have not been accused of any.

There's been a lot of discussion in the financial community as to the ultimate impact of these allegations and discussions on UnumProvident and our industry. First, no one benefits when issues of trust have been raised around brokers and carriers. We're still in a business which is dependent on solid trust between the customer, broker, and insurance company.

In addition, we believe that all of the competitors in our markets have roughly the same bonus and incentive programs for their producers. I would think that we will all be evaluating whether compensation plan design adjustments are necessary. I would suspect the direction that we and industry head on this matter, will emerge through the ongoing discussion among brokers, regulators and others.

In our opinion, most brokers' decisions are driven primarily by product characteristics, customer service, and the expertise and market knowledge, not compensation. I would expect that to continue obviously into the future. Clearly, the burden is on us to show our value to the broker and the customer, but that's nothing new.

The greatest near-term focus should be on promoting timely and complete disclosure of compensation to our customers, who equipped with the right information are positioned to make a sound buying decision.

Now I would like to close our call this morning with a few comments on our outlook for the balance of 2004 and early 2005. Our expectation is that the trend in operating earnings will continue to be flat to up slightly with the interest rate headwind we're experiencing offsetting some of the benefits we’re seeing from the repricing of our business.

Our expectation is that sales comparisons relative to the prior year will continue to be negative in the fourth quarter, but given the momentum we see in activity levels should turn positive as we work our way through 2005. Our focus will remain on improving the profitability of our US Group income protection block while also recognizing that we need to restore profitable US Group sales growth in 2005.

Our renewal efforts for 2005 remain an important priority, obviously, for us. The overall amount of business going through the renewal process next year is less than the volume of 2004, but we will be looking for roughly the same average overall rate increase as we focus on the underperforming blocks. We expect persistency to be somewhat softer in 2005 than in 2004.

With respect to January 1 renewals in particular, early indications are that persistency is tracking on plan with the termination, mostly being concentrated amongst our large case block. Given what we're seeing so far, group long-term income protection persistency will probably decline to the 80% level, which is frankly what we expect this year as well and our other more price sensitive lines such as group life will likely decline slightly below the 80% level. We are often questioned about DAC recoverability and our recently updated DAC scenario testing showed that deferred policy acquisition costs are fully recoverable even with persistency in the group lines deteriorating to below 80% and continuing at that level.

Now briefly on our financial strength, our capital position remains strong. Our combined statutory capital and surplus including AVR is 5, is $4.5 billion today compared to $4 billion at yearend 2003 and our risk base capital has improved significantly over the past year. We estimate that our risk-based capital level is approximately 290%, about 10 points higher than our expectations for the year. Our long-term objective of 300% is well in sight.

In closing, our focus is clear, continue to generate consistently improving results, which as we do helps us build further financial strength and flexibility. Our position in the US brokerage marketplace continues to be challenged by aggressive pricing and negative selling, but the quality of our product offering, the professionalism of our people, and the quality of our relationships are serving us well.

At the same time, we continue to see outstanding results from our UK operation and consistent steady performance from our Colonial and GENEX operations. There is no doubt that we still have work ahead of us to restore shareholder value, though I am convinced that the results we are producing this year are moving us certainly very much in the right direction.

Operator, that completes our prepared comments. We will now actually go to the question and answer session.

Thank you gentleman.

[OPERATOR INSTRUCTIONS].

Gentlemen, our first question will be from David Lewis from Suntrust Robinson-Humphrey.

Good morning.

Good morning David.

You basically indicated that you paid contingent commissions, a little over $65 million. Was that in 2003 and when are those contingents paid and would you plan to pay those or continuing to pay those under the existing contracts in 2004? Does that mean that you eliminate it in 2005?

It's a good question. Maybe I will ask actually Joe Foley to answer that. Joe manages amongst other things all the producer compensation. Before I do though, I think that I misspoke when I made a comment about our DAC scenario testing. I just want to restate that's in fact persistency would need to drop below 70% and stay at that level for us to have any concerns about DAC recoverability, I think I said 80% in my comments. That is an important distinction. It would need to drop to 70% and stay at that the level before there would be any concerns about DAC recoverability. So with that Joe would you address David's question about the contingent commissions?

Sure. Thanks Tom. Good morning David.

Good morning

That number was a 2003 number. Those payments take place during the course of the year, but the bulk of the payments are triggered by annual triggers and so, you know for 2004, we'd look at what the overall business was for 2004, it would be paid out generally in the first-quarter of 2005.

In terms of the outlook going forward, a number of national brokerage firms have indicated that they do not want to take those commissions going forward. What replaces that or how we work with them remains to be determined. Whether or not local producers have the same view is still to be worked out and obviously, we are going to work closely with the regulators and the various authorities to determine, you know what the view of these is going forward.

OK, just one more question. As far as, AM Best obviously, you continue to keep them up-to-date. Any update on their feeling both on the quarter as well as, multistate review and recent subpoenas?

David, I will let them speak to that, but you are right and we keep all of the rating agencies apprised as to where we are with the multistate process. We don't have a final resolution. So, you know probably shouldn't comment further on that.

Thank you.

Thank you.

Thank you Mr. Lewis. Next we will hear from Jimmy Bhullar of JP Morgan.

I have a question on if could you just talk about your renewal efforts for next year, are there lines of business where you think that you need more rate increases than you had in 2004 and are there others where you think rates are OK where you won't have to raise as much?

It's a good question, maybe I'll ask Kevin McCarthy, the Chief Underwriter to pick up and respond to that question Kevin

Good morning Jimmy. Our 2004 plan will be basically consistent with 2003. The average rate increases in 2004 generally -- 2005 will be generally lower, slightly lower than 2004 and the amount, the size of the overall renewal program will be similar, slightly smaller because we made, I think greater progress in terms of profitability and recovery in 2004 than we had been planning on.

Just a question on, you have spoken about the state investigation. Any update on the whistleblower lawsuit that was filed in California?

I'll ask our General Counsel Dean Copeland to speak to that Jimmy.

I'm not sure there has been one, which is related in the press filed in the Southern District of California. We haven't, I think, at this point been formally served. So we will analyze it and deal with it in terms of what is appropriate. We don't have any further comment at this point until we've been able to get into it.

OK thank you.

Thank you.

Thank you Mr. Bhullar. Jason Zucker of Fox-Pit Kelton.

Thank you and good morning.

Good morning Jason.

A couple of questions. And I guess the first one is just going back to DAC recoverability in response to what you guys just have talked about. I guess I'm curious as to what changed with respect to your DAC testing for the threshold to have dropped to 70% when the indications were that it was closer to 80%, I guess, last quarter?

Jason, I will have Bob Greving to speak that. I think as you know we have done quite a bit to make some adjustments over the years and but again, I think Bob can speak to that more directly.

Jason, the testing that we did this quarter was really a formal sensitivity testing. What we indicated before was more preliminary and was more based on more recent year activity rather than the overall book of business, we didn't test the entire book of business. In the last quarter since we knew that there was going to be heavy interest, not only on the part of the investment community but also on the part of management and our board, in our persistency as we looked at 2005 we actually conducted a full sensitivity test on the in force business and that's what gave us our overall results.

And basically, we would have to drop below the 70% range and stay sustained at that below range before there would be any issues of concern about recoverability. That's not to say that we wouldn't have relative to the premium volume, obviously if we drop our , our persistency to a lower level, we don't have as much premium to amortize across and so, you know obviously that amortization becomes a larger proportion of premium and does affect profitability.

And Bob, when you say formal, does that imply also that there is an actuarial firm or an accounting firm that does that with you?

We did that internally, it is reviewed by our external auditors.

Ok. And if I could just follow up I did want to ask a question about sales

Sure.

And here is my thought. I guess what I want to know if you're concerned that with all of the increased scrutiny on brokers and that with contingent commissions going away that the brokers are just going to be obligated to sell the very best price and when we're looking at the 1/1 renewals, do you feel like you'll be at a disadvantage when you're going after higher prices?

Jason, that's a good question. There is no doubt that obviously we're in an environment now where we don't know how some of these things with broker compensation will emerge. But I do think we feel pretty strongly that brokers are still going to be in a position or should be in a position to make the best overall decision for a customer. With that, I will ask Roger Edgren who runs and manages our field organization, you may know he actually came from the brokerage business to respond to that question.

Jason, I think that this is an opportunity for brokers to take a step back and refresh their own minds and their clients' minds on why they do make the decisions to be with whatever carriers they're with and their benefit programs. So it's not just price, it is contract provisions and service as mentioned earlier, it's everything surrounding that decision. And in fact, you know my experience is that clients don't always want the lowest price because they are smart enough to realize that there are differences beyond price and even consistency in pricing. In meeting with a lot of brokers and talking with a lot of organizations over the last couple of weeks, pretty much everybody agrees with that, that it is almost a chance to take a step back and review those other items besides pricing. So, we're not getting any indication of that the all.

Last question, Tom. Any timing with respect to the multistate?

Jason, I wish I could give something precise. I think again we feel encouraged but as we said this is complicated by the fact that we're trying not just to address the issues they were embedded in multistate from an Insurance Regulatory point of view but also any issues or concerns by the Department of Labor as well as the New York attorney general, and obviously do all of that in the spirit to make sure that it is consistent, you know with our corporate goals and the things that we're doing. It is a long way of saying that it is a complex process, I am encouraged by where is, I really wouldn't want to put a line in the sand out there in terms of timing.

Great. Thank you.

Thank you.

Thank you Mr. Zucker. Vanessa Wilson of Deutsche Bank has our next question.

Tom, could you just walk through a little bit about what's happening with here with the multistate? You know in previous calls you've talked about the 44 states and the three states leading the process. At this point, it seems that you've invited the Department of Labor and the New York attorney general to join and how did that happen that, that it becomes a bigger group now that you're negotiating with and what was the catalyst for that and what do you see as the outcome?

We'll do as best we can without again, getting too far ahead of ourselves. But let me ask Dean Copeland to respond to that, I'll certainly follow up on anything else that I can on that as well, Dean?

Vanessa, taking the lead off of Tom's earlier comment. Obviously we have been working closely with the three lead regulators, lead states with regard to the multistate. And when you think about it to the extent that there were issues that were issues relating to claims handling practices that were raised by other agencies including the Department of Labor or the New York Attorney General's office, it just made a lot of sense to see if, in fact, we could get the agencies together in one arrangement, if you will or one resolution of all of that, rather than do it as one of these and have different structures for different settlements, if you will, and that had added to the complexity and probably extended the time.

As Tom said we think that we made good progress, but we're not, at this point, prepared to set a date. But that's the reasoning, I think that when most people think about it they would say, one structure arrangement with regard to the various agencies that have questions about claims practices is certainly a desirable objective and that's what we're pursuing.

And Vanessa, just to add to that I don't, I think actually interestingly enough I think ourselves and all of the regulators involved actually have a common objective. If we can find the basis that either that all can be put it together in a way that works for everyone, I think that everyone stands to benefit from that.

So, certainly, we would like it to happen that way because I do think we can wrap as many things as possible into any resolution it's good to sort of put this issue fully behind the company. But I also think these those regulators involved would prefer that we get something done that is universal, that helps everybody out. I think that everybody is pushing in the same direction for that

And Tom, once we see the outcome of this, do you think that it is a Unum specific issue or do you think this could have implications to the industry more broadly?

I think there's no doubt the energies are directed specifically to UnumProvident at this point but we believe that some of the things that we may find ourselves doing in the future I think it truly can become best practices in the industry.

I have one further questions. On the incidence rate, you know this quarter it is an improvement year-over-year. It's seasonally higher than the first half of the year. Given you have done so much repricing and effectively re-underwriting and changing of terms of policies and purging of some, you know, poor loss ratio business, wouldn't you expect the incidence rate to continue to march down because of your re-underwriting?

This is Tom White. The comment is really just more on the raw incidence numbers and I think that renewals has probably more of an impact on the premium flow. So, if you think about it, what we are charging more for the product and we are getting more premium, which is helping, but we're still seeing a kind of plateauing of the incidence. So, the absolute number of claims hasn't changed all that much. We are charging more for it. We're getting more. So that's why you're seeing some improved margin. Now, what would be nice is if incidence trends turned over and started to decline and that typically comes when consumer confidence is on the rise and job growth is strong, you know, that's when that typically happens. You know, we're not in the economic environment that is necessarily driving that right now.

We are though, I think, if you look trending wise, the incidence is coming down little bit. I mean again the third quarter is the seasonally high quarter and if you look within quarter, it was certainly more pronounced from an incident point view in July than it was in September. The other thing that I would add to what Tom said that's happening, of course, is we purged underperforming business. That tends to be business which has higher levels of claim activity. I think that you're right. The general trend, we should expect that to continue, but - what we are saying it's a cautious, we're cautiously optimistic, because again we are not seeing any lift from the economy at this point. So any improvements in incidence is largely as a result of maybe those more poorly performing cases leaving the company.

Thank you.

Thank you.

Moving on to Bob Glasspiegel of Langen-McAlenney.

Good morning. Tom Watjen, in the past couple of calls you said that you have been shifting the focus back to the small and medium case group income market from the large case market where you had gravitated a little bit more. Do you have any figures to show what your actual case count is doing relative to the sales decline to show that you are, in fact, holding on to a larger percentage of units?

That's a good question. I will ask Joe Foley to respond to it. I would say one other piece Bob, is the point that you make about business mix. When we talk persistency, for example, we're talking about the whole block. Actually persistency on the small and mid-size market case, business is actually in the mid-80's and so we have been able to retain, frankly, a lot more of that the small to mid-sized marketplace business. The persistency issues are really more geared to the large case business, which is the focal point of much of the renewal action. The other part of the question, you're right, is the sales front and Joe, would you respond to Bob on that one?

Yes we're clearly seeing not as much of a decline in case sales as we see in our premium drop. And, in fact, where we're having the biggest drop in case sales is in the large case segment. To give you orders of magnitude last year this quarter we had, I think it was about a dozen cases over $1 million, this year we had five. So, you know, we are clearly seeing the business mix shift in the right direction in terms of where we want to be.

The other thing that I would add to that, too is in terms of the case sales that we're getting we're seeing a higher percentage of case sales in our target markets, which generally has better incidence characteristics, better profitability characteristics. So it is not just the absence of the sales that -- in the segments we don't want to get, we're seeing increasing sales in the segments that we do want to get.

Thank you.

Thank you, Bob.

Eric Berg of Lehman Brothers has our next question.

Thank you and good morning to everyone. I have one question. What is happening --What would be your sense as to the outcome this year for sales people's pay? And by that I mean -- I'm interested in much -- I'm interested in knowing not just whether compensation will be up this year. I believe you have already said that over 2003.

But sort of some statistics that get to what the typical experience would be, because obviously the motivation for the question is, if sales compensation for the whole force is up, but it is concentrated among a small group of people and that the typical experience for significantly lower pay or flat pay that obviously is going to affect your retention. So I hope the spirit of my question is clear and that's it.

It is, Eric and it's a good question, and you're right we have spoken in the past about the fact that, in general, that compensation was holding in very well because our plans were adjusted in terms of the things that were important, what it's driven off of. Joe, would you want to add -- provide a little detail for Eric about just where we are at this point in terms of compensation and, frankly, again, it's a pretty good story.

Tom, we look at compensation every quarter very, very closely. We don't just look at it across the board. You're right, Eric, compensation, at least through the third quarter is up year-over-year and we project it would be up at yearend. We also take various cohorts. We will take first-year sales reps, we take experienced sales reps, we look at our group, we look at our individual and supplemental reps, we look at our managers. We are comparing all of those and looking to see whether we have any particular issues with any segment and we make adjustments if need be.

We don't. In fact if anything I would say that as we pull back on some of the large case focus that we've had that actually smoothes things out across the sales force. You don't have people getting kind of a big hit and a big income hit that way, you know, when you're in the small and kind of mid-sized market that tends to have a more favorable smoothing effect on compensation across the field force.

That's great. Thank you.

If I could ask Roger Edgren just to supplement that a little bit, because Roger is out in the field a lot with our people. Roger, maybe just add a little bit to Joe's comment.

Yeah, also a good follow-up to that is that, really the compensation mix of our people in 2004 has changed a little bit by design. We are really asking our people to manage a business much more than in the past, not just looking at top line sales growth. But they are compensated appropriately for managing their book of business for managing renewal increases and, in fact, that's one of the attractions for our sales force that we're working on right now and next year in some of our hires that they are looking at much more than -- than just top line sales growth.

Thank you.

Thank you Eric.

Thank you. Mr. Berg. Colin Devine of Smith Barney.

Good morning gentlemen.

Good morning Colin.

Couple of questions. First, I was wondering how much prepayment pays on your investments impact on operating earnings this quarter. Secondly, I just want to make sure in looking at the persistency for January 1st, I would presume in the large case market, certainly, you know who is going to renew and who is not. So at this point if I heard you correctly, are you pretty comfortable? Are you going to at least hit your 80% target if not exceed it?

Yes.

And the final one on the compensation issue. Now a big part of your plan had been, I guess, to shift compensation on the brokers where it was profitability based to sort of focused on the skin of the game idea. Obviously, the Attorney General's made some changes to that. Maybe you can add a little more to what you're doing to get around that.

Let's go back to the first question. And I'll ask Tom White to talk about the prepays..

Colin, on the prepays, we actually had a quarter that was a little below our trend line for prepays, for miscellaneous income, bond calls, things like that. On a year-over-year basis we were probably $3 or $4, $5 million lower. And I think $5 million lower and I think relative to the second quarter, kind of $3, $4, $5 million lower than normal. I know that runs kind of counter to what some other companies have said, but you know, our prepayment activity was lower.

With respect to persistency, Colin, you're right. I mean as far I said in my comments that the first-quarter is a critical point for us both from sales and from a persistency point of view. And maybe I will ask Kevin to talk about the, just what we are seeing with early indications, because you are right you tend to see a little more early indications with the large case. We're also, by the way, improving the quality of the reporting so we get earlier indications about client's directions on things like this. Kevin, could you respond to Colin's question?

I will. Good morning, Colin. We are probably about, maybe a little more than 50% of the way through sort of the feedback process on our first quarter renewal deliveries. So, you know, I think that, at this point, we're pretty cautiously optimistic that things are going better as we expected or a little bit better.

Renewal increases are tracking slightly higher than we expected. Terminations are tracking slightly lower. The profitability impact of expected terminations is a little bit better than we expected. And so, sort of, across the board we are running in all lines of businesses a little bit better than we expected to be at this point. And as Tom mentioned, we seemed it is getting earlier feedback and earlier confirmations of that business which is either going to terminate or accept the renewal increase, so looking pretty good, so far.

And just a quick follow-up before we leave that. Given that -- what you're looking at. (inaudible) Smith Barney policy here where I think my rates are going up 33%. I know these rate increases are for real. What do you think that you can do to the benefit ratio next year? Are you willing to give us any sort of guidance?

I think it little bit depends on, you know, what happens with the economy and those kinds of things. Assuming all else sort of stays equal, we'd expect to continue to move the benefit ratio down somewhere in the area of probably a half a point to a point per quarter.

Perfect. Thank you.

And Colin With your last question on compensation, you are right, I think that we and everyone else has always tried to align compensation with our own people as well as the brokers and partners that we do business with. In our case, that has meant continuing to try to -- if brokers and consultants are interested in it, is to have more incentive built around things like premium growth, things like cross-selling and things like profitability. And I think certainly, in this environment as we said earlier we are going to have to all be observant as to whether or not there needs to be some adjustments in how those compensation plans are designed.

Again, they're not by any means illegal today but, again, to the extent there is some new guidelines out there and new directions we're getting, we're going to modify those agreements. I still think, ultimately, incentive plans are going to be a part of a compensation plan and I don't think that the industry is going to go away from incentive plans, whether it's with phased commissions or whether it's some form of bonus. But I do think that there could be some adjustments in how those are all put together. But I also think, even more importantly, there will be some clear mandates and clear direction on disclosure and frankly, you know, enhance dramatically the level of disclosure that the broker provides to the customer.

Thank you.

Thank you.

Joan Zief of Goldman Sachs.

Thank you, good morning. I have a few questions. The first is could you just review with us how much your U.K. premium is that is doing so well? The second question, given the change that we're going to see potentially in the marketplace with contingent commissions that's going to evolve, do you think that favors sort of larger insurers who can actually bring to the marketplace, you know, more pricing, more services at the expense of smaller insurers or do you think it opens up the market more now to a greater variety of companies for the brokers? So that's my second question.

And the last question is could you talk about your approach to targeting different segments of the market? And how you balance that with diversification. I guess my concern is if you target certain areas of the market and then something structurally happens and that targeted sort of business doesn't have the good results that you think, are you at risk of having an exposure that you're not comfortable with?

Joan, this is Tom White. On the U.K. premiums, the U.K. generates a little over $500 million a year in premiums. You know, the bulk of that is coming through in our LPD line of business. There is a little bit in individual disability and also group life is actually growing, because of some of the acquisitions that we have done. We don't split out the profitability. You know we are looking at doing that, maybe potentially next year, because, you know it is a - now getting to be a substantial, you know business for us. But we're not quite ready to start doing that just yet.

OK.

I think that with respect to commissions, we are in a world which we don't exactly know what direction a lot of these things are going to go, but I have to say, I don't see this ending up with a situation where it favors small versus large. I think the bigger issue is again, we're still on a specialty business, where clients are looking for products. They're looking for the depth of expertise. They're looking for the service expertise. They're looking for the benefits expertise, and so as a specialized business frankly, I think that those are still the qualities that the clients are going to be looking for. Those are the things brokers are going to be testing, when they go out with a piece of business.

And so, again, I don't see it --anything happening -- an advantage between large and small. I still think the priority is going to be based -- on the expertise that's there. Obviously as we said before compensations plans could change as part of that. Disclosure could change as part of that, but I still think at the heart of this people are going to be looking -- for the value added that could be brought here and again, -- we believe we're in a business that, you know has unique value. This industry has unique value, and not everybody can be in it. So I think that's still going to be the biggest driver in the marketplace.

Now with respect to targeting segments. Before I ask Kevin just to talk to that. I think as a more macro-matter, I think, as you know, we are sort of building a little diversification within our company, right now, when you think of the fact that we have three principle big engines that are producing results in the company. Our U.S. brokerage business, which is where much of the focus is on a conference call like this. Colonial also does provide just some diversification as does, frankly, the U.K. business.

So even before we get to the U.S. brokerage business question, I think, you know, slowly we're beginning to get a little diversification, just overall as an organization, by having those other parts of our business start to become more productive, and more significant contributors. Now, within U.S. brokerage Kevin you may want to speak to your level of comfort, in terms of how you’re managing diversification, in that part of the business.

Good morning, Joan. We look at a number of factors, in terms of target marketing and diversification. We look at economic outlooks and trends by industry, and by geography. We look to manage our pricing formulas within those sectors to make sure that we achieve diversification. We look at producer diversification to make sure we're not concentrated in any one producer segment.

We look at diversification by product packaging, in particular looking to sell group life or supplemental life in conjunction with our disability lines. We look at -- we look at historical profitability in that segment and historical profit volatility, by segment. We look at renewal success by segment. Historically, our ability to place renewals in the segment if it deteriorates. And, of course, we're focusing on moving to smaller and mid-sized markets where there is a broader array of cases and therefore a broader amount of diversification. So we look at a number of factors to achieve that diversification, and to avoid that concentration.

Thank you.

Thanks Joan.

And next we will hear from Ed Spehar of Merrill Lynch.

Good morning.

Good morning Ed.

I have a few questions. I guess, first, on the DAC issue with group. I was wondering if you could address, not recoverability but, acceleration of amortization. So, I think if we go back a few years ago. You had accelerated DAC amortization on, I think, a much less decline, a much - smaller decline in persistency then dropping to the extent that you referenced in your prepared remarks. I am just wondering if you could just talk about that.

Second, on the renewal process you said that you were 50% through the feedback process on January 1. And I'm wondering if you look historically, is earlier feedback from customers more likely to be business that renews or is there no correlation between the timing of feedback and the likelihood of renewal. And then I guess the final question is Thomas Watjen you said in your remarks about the EPS outlook is flat to slightly up. Should we read that to suggest flat to slightly up for the foreseeable future, or was that a comment about the next quarter? Thank you.

Let's first, we're going to the DAC question, Ed, because you're right, there are two issues. There's recoverability plus acceleration, and Bob Greving maybe you could field that one.

Ed, you know back in, you know post merger timeframe in the 2001 timeframe, when we saw the fall off in persistency, the historical anticipated persistency in that block of business was closer to 90%, so when the persistency actually dropped off to about 84 - 85%, we saw a very dramatic change in from what was anticipated in the amortization schedules, which called for an acceleration of the DAC during that period of time.

Since then, first of all, we haven't been optimistic enough to put 89% to 90% type of persistency in our amortization schedules. We knew that we were going to be much more diligent about putting renewals through our book of business and the only way you're going to, achieve you know 90% type persistency is if you're not seeking renewals very, very much at all. And so what we did is we actually backed off on our more recent sales in the - actually 2001-2002, and later, policy sales so our anticipated persistency was much lower. And so dropping -- actually we put an element of conservatism in there as well.

We also have not been capitalizing as much as what we had anticipated, or had been doing previous to the 2001 timeframe. So, you know both the reduced capitalization as well as the less aggressive amortization has helped us in being able to absorb a more significant drop off, before we start running into accelerated DAC amortization.

Thanks Rob. The question on renewals. Kevin, maybe I can pass that to you. Because again I think, there is to a degree, where you're right about how these things can happen. But I think, we really think we have built that into some of the outlook comments, I think, Kevin has delivered earlier.

Yeah thanks Thomas, good morning Ed. I think, basically the feedback process is more of a reflection of improved renewal documentation and communication processes and stronger relationships, particularly at the account management level, in delivering renewals, and so I think we're getting the earlier feedback, probably on both terminations and renewal placement. But I don't think there is any particular correlation, you know, in terms of whether or not, you know, we are getting more information about terms than placements, for example, I think its just a better reflection of service.

With the respect to the earnings sort of outlook comment Ed, I think again that outlook is the one we've been using the last couple of quarters, I think it really is. We haven't been real clear on longer-term objectives as we have gone through the restructuring period. I think as we said earlier, we are going to probably do that in the beginning of next year. We're very comfortable, I think at this point, with the consensus, that's kind of out there and those sorts of things. So again, I think that's what, was embedded in my earlier comments in terms of outlook.

And Ed, this is Tom White. If I could just follow up, one thing to keep in mind is, you know we are going to have a share count that going to move around a little bit, based on the stock price performance, because we have the two mandatorily convertible securities, and the amount of the number of shares, we need to account for, is going to vary somewhat based on stock price level.

And we have a page in the back of the statistical supplement that shows you at what share price level, you know it's going to trigger how many shares that we account for. So I know its -- it causes a little bit of noise in people's models. So I just ask you to take a look at that as well.

Thank you, I guess, I have, just a follow up with Thomas Watjen on the earnings outlook. You said that you're feeling fairly, you know comfortable with consensus. That does imply that earnings are going to ramp, you know pretty nicely on a quarterly basis. So, I mean, am I interpreting your comment about flat to up slightly, just about the fourth quarter?

Well, I think what we are saying, I think we have always said that we would build the ramp up of about a penny a quarter sequentially and I think, that's what we're are kind of, sort of thinking of. That's the kind of guidance at this point given all the change that's still going at the company, that we - we have been trying to put out externally. Tom, anything to add to that?

No, again, you know we have talked about a number of issues that are going to play into that. Interest rates will play into it. You know growth, you know, the things that we're doing in renewals. You know again, we're - you know as Tom said, we're looking for, you know, flat to slight improvement in each quarter, as we go forward, and you know we just have to take into account the business dynamics that we're dealing with, and deal with those. And also the share count issue.

But you know from an operating earning point of view, I think we feel very good about the direction that things are going in and, you know as Tom said on sales, you know, we're looking for sales to start to work their way up next year and that should give the premium line some boost as well.

And I should say that, we're not intending through this call, to be changing any of the comments about guidance we have given in the last couple of quarters. This is fairly consistent with the guidance we have been trying to give last couple of quarters. It is cautious but with, you know some steady progress.

Thank you very much.

Thank you. I think at this point we need to probably close off the questions. But certainly I want to thank all of you, for your time and effort and at this point, I know, we know others have other things to go to, so we will call an end to this call.

And again thank you for your time and attention this morning.