普登 (UNM) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the UnumProvident Corporation first quarter 2005 earnings results conference call. This call is being recorded. At this time, for opening remarks and introductions I'd like to turn the call over to Tom White, head of investor relations. Please go ahead, sir.

Thank you, Audra, and good morning, everyone. Welcome to our first quarter analyst and investor conference call. Before we get started, let me read the safe harbor statement. 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, see the sections entitled "cautionary statements regarding forward-looking statements" and "risk factors" in the Company's Form 10-K for the fiscal year ended December 31, 2004. The Company expressly disclaims any duty to update any forward-looking statements. Our discussion this morning will include non-GAAP financial measures. Therefore, reconciliations to the corresponding GAAP measures will be available on our website at 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 for the call are Joe Zubretsky, who recently joined us and is responsible for our finance, investments and corporate development functions; Dean Copeland, our General Counsel; Bob Greving, our CFO; Kevin McCarthy, our Chief Underwriter; Roger Edgren, who has responsibility for our sales; Peter Madeja, who runs our GENEX operation and also has responsibility for our benefits organization; and Joe Foley, head of our product management area.

As you know, yesterday we reported first quarter operating earnings and excluding -- excluding an income tax liability release and a small net realized investment loss, our operating earnings were $0.40 per diluted share which, although $0.01 per share higher than the year-ago first quarter, was the -- was at the lower end of analysts' estimates and somewhat below our internal plans. We saw generally strong performance across many of our business areas, but the -- but that performance was more than offset by the adverse claims experience in our U.S. long-term income protection line of business. The procedural and organizational changes we have put in place, in part to respond to the multistate regulatory settlement agreements we entered into last year, as well as other process improvements initiated in 2004, were disruptive to our claim operations and -- and have temporarily reduced our claim management effectiveness. We estimate that the additional incurred losses as a result of that -- of the disruption cost us approximately $25 million before tax, or approximately $0.05 per diluted common share in the first quarter. This cost resulted in a temporary increase in the benefit ratio, primarily for our group long-term income protection line. This is obviously the number one priority for us, and I'm working very closely with our claims management team to assure that we are taking the necessary steps to restore our performance to appropriate levels, while continuing to be in full compliance with the multistate agreements.

Our early experience in April was improving, and once we move through this transition period, we expect the claim management effectiveness to reflect greater consistency in the timing of claim decisions, while maintaining the desired level of quality. We do not believe that this temporary reduction of operating effectiveness impacts our long-term expectation for claim recovery rates. To the extent that operational improvements we have projected occur at a low slower rate, we could incur additional costs as part of our claims operations in future quarters, just as we did this past quarter, and I'll have more to say on that in a few moments.

As I mentioned earlier, though, there were a number of very positive developments in the quarter, and I would specifically like to point to -- to several. First, excluding the net realized investment gains and losses, the income tax -- the income tax liability release this year and the income -- the impact on last year's results from our closed disability block transaction and our discontinued operations, operating income increased almost 8% to $184.8 million in the first quarter of 2005, compared to $171.4 million a year ago. Second, our statutory earnings were solid again this quarter. Combined statutory income was $146.1 million, compared to $99.1 million in the year-ago first quarter, despite the lower claim recovery experienced in the quarter, and continued the trend of improving results in capital strength begun over two years ago. Our combined statutory capital and surplus, including ABR, at the end of the first quarter was $4.6 billion versus 4.1 billion one year ago. Our preliminary estimate of our weighted-average risk-based capital ratio for March 31 exceeds 300%, the highest level in our Company's history, and slightly above our capital plan targets.

Third, the performance of our -- of our Unum Limited and Colonial subsidiaries remains strong and is providing good balance to our U.S. brokerage operation. We recognize that as a specialty carrier, we are view as lacking diversification in our business. The strong performance of these two subsidiaries certainly had a positive impact in helping us partially offset the lower-than-expected results in our U.S. group long-term income protection operations. I would also add that within our U.S. brokerage business our other lines, group life, voluntary benefits and long-term care, met or exceeded our profit expectations.

Fourth, as we have discussed in the past, improving the profitability of our U.S. group business through our renewal and persistency management efforts has been a major priority of this Company and particularly our group income protection line of business. I am pleased to say that we are off to a good start in the first quarter of 2005, particularly in our group -- our U.S. group long-term income protection line. The average rate increase on renewed business in the quarter was in the 11 to 12% range. and our persistency was 82.6%, which exceeded our earlier estimated range, and we'll have more detail on that in just a moment. And finally, this year we began to -- to restore profitable sales growth, and there are early indications that momentum is gradually building. Our total sales from continuing operations were down 4.2% in the first quarter, following declines of 27% in the fourth quarter of 2004 and 19% for all of 2004.

Focusing on just the U.S. brokerage operation, first quarter sales were down 3%, compared to declines of 34% in the fourth quarter and 30% for all of 2004. Within the U.S. brokerage sales, our voluntary benefit sales, a market that offers good growth prospects and added diversification to our business, grew by 11% in the first quarter, following an 8% increase for all of 2004. And I'm pleased to say that these sales results have come while maintaining pricing discipline.

Now, as always, there continue to be challenges ahead, and I'd point to three. First and most importantly is restoring our claims management results to appropriate levels. As I said earlier, we do not -- we do not believe our expectations -- we did not achieve our expectations this quarter, and I'll -- again, I'll come back to make a few further comments on that in just a moment. Second, although I'm encouraged by some of the trends we're seeing in sales activity, we are not yet where we need to be. Our U.S. brokerage business, with the possible exception of our voluntary benefit line of business and Colonial in particular, are below expectations. Although we continue to face the competitive market, we would hope to see -- see a gradual improvement in sales as we move through the year. Continued lower levels of sales and the lower persistency in -- in the U.S. brokerage business created by our renewal action impacted premium growth, which in turn places pressure on our expenses. This is an issue I believe we have managed well to this point, but it is certainly easier to manage an environment of some top-line growth. And specifically with respect to Colonial, I believe we have taken the right steps to position us to generate better sales, but we -- we -- but must now deliver.

And finally, the interest rate environment continues to present a challenge for us, and the industry as well. New money ranks -- new money rates, as well as the supply of quality long-duration investments, continue at low-than-desired levels. We made no adjustments to the new claim discount rate -- new claim incurral discount rates this quarter, and importantly, our -- our reserve interest margins are above our targeted -- our targeted levels, due to the actions we have taken in the past to reduce the discount rate on new claim incurrals and opportunistically hedge a portion of our future cash flows. At the current interest rate levels, we do not foresee any discount rate changes in 2005, but this is still an area to watch.

Now let me turn the call over to Tom White to review the segment operating results, and then I'll provide a more -- provide a little more detail on some of our business trends. Tom?

Thank you. The Company reported net income of $152.2 million, or $0.49 per diluted common share in the first quarter of 2005, compared to a loss of 562.3 million, or $1.91 per diluted common share in the first quarter of 2004. Included in these results are net realized after-tax investment losses of $2.1 million, or $0.01 per diluted common share in first quarter of 2005, compared to net realized after-tax investment gains of 16.1 million, or $0.05 per diluted common share in first quarter of 2004.

Also in the quarter of 2005, the Company recorded a reduction of $32 million, or $0.10 per diluted common share, to common -- to -- to income tax expense related to the release of income tax liability that relate primarily to interest on the timing of expense deductions. As a reminder, the first quarter of 2004 included the impact of the restructuring of our closed block individual income protection segment, which included a charge -- excuse me, for reserve strengthening of $71.9 million after tax, and a writeoff of the intangible assets associated with this block of business, which totaled $629.1 million after tax, for a total of $2.37 per diluted common share. Also, the first quarter of 2004 included income from our discontinued Canadian branch operations totaling $7 million after tax, or $0.02 per diluted common share. Adjusting for these items, the results for the first quarter were $122.3 million, or $0.40 per diluted common share, compared to 115.6 million, or $0.39 per diluted common share in the first quarter of 2004.

Now I'll briefly review the segment operating results. First, the income protection segment reported operating income of $79.7 million in the first quarter of 2005, compared to 74.3 million in the first quarter of 2004. Included in the income protection segment is the group income protection line, which reported earnings -- operating earnings of $42.3 million in the first quarter, compared to $30.3 million a year ago.

A few highlights. First, persistency declined, due to our continuing efforts to reprice the more poorly performing business, with our U.S. group long-term income protection persistency declining to 82.6% in the first quarter, compared to 84.8% for full-year 2004 and our previous guidance of 80 to 82%. And Tom will provide more information on our first quarter renewal results later in the call.

Second, the benefit ratio in the quarter was 90.5%, compared to 89.4%, in the year-ago quarter and 88% in the fourth quarter 2004. This is excluding the fourth quarter charges related to the settlement of the multistate market conduct examinations. The higher benefit ratio was driven by the U.S. claims management results, specifically claimed recovery rates and the timing of claim decisions, which resulted in increased incurred benefits in the first quarter. The benefit ratio in the U.K. operation was essentially unchanged from a year ago and improved in the U.S. short-term group income protection line, where paid claim incidence declined in the first quarter. While Tom will provide more detail on the U.S. long-term income protection experience later in the call, I will point out that submitted incidence trends were generally flat compared with a year ago and up slightly relative to the fourth quarter of 2004, as is seasonally expected. The interest reserve margin on the U.S. group income protection reserve is 67 basis points, comfortably above our -- our target range of 50 to 60 basis points.

Thirdly, sales for our group long-term income protection line declined by 15.8% to $54.8 million in the first quarter. Within this total, our U.S. operations grew by approximately 4% to $37.1 million in the quarter, while our U.K. operations declined by approximately 40% to $17.7 million of new sales in the quarter. The U.K. decline was driven by the inclusion of a large single sale of approximately $11 million in the year-ago quarter.

Next, I'll review the individual income protection recently issued line of business. In this line, we had operating income in the first quarter of $21.2 million, compared to 29.3 million in the -- in the year-ago quarter. Specifically in this line, first of all, premium income -- income grew by 8.2%, sales were up 3.7% compared to the year-ago quarter, and the multilife sales mix was approximately 86% of the activity in this line, as we focus more on the employer market. Secondly, the interest adjusted benefit ratio and gap benefit ratios were generally consistent with last year, reflecting stable claim incidence and generally consistent claims management results during the quarter.

Thirdly, the interest rate reserve margin widened to 73 basis points, comfortably above our long-term target range of 50 to 60 basis points. And fourth, net investment income in this line declined to $16.7 million in the first quarter, compared to 22.6 million in the year-ago quarter, reflecting the benefit in the year-ago quarter from the bonds retained from the sales of our Canadian business which have since been reallocated to other lines of business, as well as generally lower levels of miscellaneous investment income. Also within the income protection segment, our long-term care earnings were $13 million in the first quarter, compared to $11 million in the year-ago quarter. And finally, the disability management services line produced income of $3.2 million in the first quarter of 2005, compared to 3.7 million in the year-ago quarter.

Now I'll move to the life and accident segment -- excuse me, which includes our group life, AD&D and voluntary life and other products. This segment reported income of $71.3 million in the first quarter, compared to $56.9 million one year ago. The benefit ratio improved this quarter to 74.1%, compared to 76.5% in the year-ago quarter, reflecting lower paid incidence levels in the group life line. The voluntary life and other lines of business also reported improved results, with 12% growth in premium incomes and stable benefit ratios. Sales in this segment increased 12.9% over the year-ago results.

Moving to Colonial, Colonial continued to make a strong contribution to overall corporate results with operating income of $43.8 million in the first quarter of 2005, compared to $36.6 million in the year-ago quarter. Sales growth at Colonial continued below our long-range expectations, but did show better momentum compared to the trends in the fourth quarter of 2004. Sales declined by 0.6% to $61.3 million in the first quarter, following a decline of 2.3% for all of 2004.

As we have discussed in previous conference calls, we have been making adjustments to the sales organization, primarily around regional sales leadership, people development and recruiting. We are seeing more encouraging trends recently, especially with recruiting, which increased 11% in the first quarter relative to a year ago. The Colonial benefit ratio improved 53.8% -- improved to 53.8% in the first quarter, compared to 55.5% in the first quarter of 2004, reflecting favorable mortality experience in the life line of business. Overall, the profit margin at Colonial this quarter was the highest in over three years.

Next, the individual income protection closed block segment produced operating income in the first quarter of $23.1 million, compared to the reported last -- loss last year which included the impact of the structuring of this segment. The interest-adjusted benefit ratio increased slightly relative to the year-ago level, this excluding the restructuring charge, driven by a -- an increase in paid claims. Net investment income was lower in the quarter, due to a decline in the portfolio yield, lower prepayments on mortgage-backed securities, and a decrease in bond calls. The interest reserve margin of 68 basis points in this line remains comfortably above our target. The other segment reported income of $6.1 million in the first quarter, compared to 7.1 million a year ago, and the corporate segment reported a loss of $39.2 million in the first quarter, compared to a loss of $46.7 million in the year-ago quarter.

As Tom indicated, statutory earnings were solid again this quarter. Net income on a combined statutory basis totaled $146.1 million in the first quarter, compared to $99.1 million in the year-ago quarter. This improvement in statutory net income improved our risk-based capital ratio, thereby achieving and surpassing our 300% target level. The debt to total capital ratio declined slightly in the quarter, with the repayment of $25 million of debt that matured in the quarter. Assuming a conservative 50% equity credit for our convertible securities our leverage ratio declined to 30.4% in quarter-end, from 31.2% at year-end 2004. Our plans are to further reduce our leverage with the repayment of $202 million of debt maturities in the second and third quarters of 2005, which we expect will reduce the leverage ratio to slightly less than 28% by year-end 2005.

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

Thank you, Tom, and I'll close my comments with -- with making a few brief comments about four area -- four areas before we open it up to your questions, starting in the claims recovery experience in the first quarter and our expectations for the balance of this year, a little more about the first quarter renewal persistency and sale -- sales results and the impact those will all have on our premium growth. I obviously want to update you on the status of our outstanding litigation and regulatory matters, including the update on the discussions with the state of California. And as I said, I'll close a little bit with a little further update on the -- on our guidance for the balance of the year.

Now first, regarding our first quarter U.S. group income protection claim experience, on a positive note, as Tom mentioned, our claims incidence improved very slightly from the first quarter of last year. Unfortunately, our claims recovery experience was below our recent historic results, not completely unexpected, given the organizational -- organizational and procedural changes that we implemented.

As you know, following a regulatory review of our claims practices, we entered into -- into a settlement agree -- settlement -- settlement agreements with 48 state insurance departments and the Department of Labor. The New York Attorney General's office, which had been conducting an investigation of our claims-handling operations, also supported the settlement agreements. Among other things, we agreed to make certain changes to our claims management process, and the changes were intended to improve the quality of our claims division. These changes include new guidelines for the use of independent medical assessments and our own medical review process, guidelines for evaluate -- evaluating claims with multiple medical conditions, guidelines for establishing who has responsibility for establishing proof of loss on a claim, and a -- and a new quality compliance consultant position in the benefit operations as an additional resource.

In addition to the changes made to implement the regulatory settlement agreements, we also made some organizational changes to the benefit center operations in late 2004 as part -- as -- as part of a process improvement initiative in the Company. I think we are seeing the effects on our claims operations of -- of trying to absorb perhaps too much change in a short period. We anticipated some disruption in claim processing and the timing of claims decisions, but we experienced more in the first quarter than we expected. As I said earlier, we estimated that the costs in the quarter from higher incurred benefits was approximately $25 million before tax, or $0.05 per diluted common share. Of this amount, we estimate that this -- that this primarily impacted our group income protection line and elevated the benefit ratio by approximately 3 points in the quarter. The impact on the individual income protection lines was minimal and generally offset by lower new claims in the period.

I'm -- I'm working very closely which our claims management team to help ensure that we are taking the steps necessary to bring our performance back in line with our long-term expectations. I have personally spent a great deal of time with our claims people, and I am confident was can improve upon the results of this quarter. I do, however, believe that there are some modifications in procedures that will -- that will be required, as well as further training of our people, which will take some time to implement. As this point , I fully expect that through the actions we have underway and have contemplated, we should see improvement in our claims effectiveness as -- as we move over the balance of this year.

Shifting to premium trends, you'll see that we experienced a small drop in premium income over the past quarter. This reflects the continued emphasis on taking aggressive actions to reprice existing business which is not achieving our profitability targets, and our continued willingness to lose business if we cannot achieve our pricing targets. It also reflects our disciplined approach to growing new sales.

With respect to our renewal program, I am extremely pleased with our renewal results in the quarter, which are somewhat ahead of our plan at this point. This will obviously have a favorable impact on our future premium income and profitability. As indicated earlier, persistency was generally consistent with our expectations for the first quarter, with -- with U.S. group long-term income protection at -- at 82.6%, better than our expectation of 80 -- 80 to 82% , but below the 84.8% for full-year 2004. Our U.S. group -- group short-term income protection persistency was 78.3% , and group life was 72.5%, both slightly below our expectations and reflective of the competitiveness of these products and the competitiveness in those markets. The lower persistency level in group live was driven by a handful of jumbo stand-alone life cases that terminated, representing over $100 million of in-force premiums. In aggregate, these cases were in a loss position and we are -- we were unable to renew them to profitable levels.

We continue to see terminations coming primarily from the poorly performing parts of our business. In fact, the underwriting profit margin on the block of group long-term income protection business that terminated in the first quarter was approximately 15 percentage points lower than our in-force block, similar to the experience we saw in 2004. In addition, the average rate increases we recorded on renewed business for the first quarter were in the 11 to 12% range, also consistent with our internal plans. These measures were important drivers of margin improvement in 2004 and, we believe, will continue to drive improvement in the future as we work with the claims management effectiveness issue. In fact, we estimate that our group income protection benefit ratio would have improved by roughly 50 basis points, relative to the fourth quarter of 2004 levels, if the claim recovery disruption had not occurred.

I mentioned as well that our premium growth is being impacted by our more modest sales activities. Although we are focused this -- this year on restoring sales growth, we remain committed to doing so profitably. There are few encouraging sales trends I believe are sustainable through the balance of this year. First, our U.S. brokerage voluntary benefit sales increased 11% in the first quarter, following growth of 8% for all of 2004. In addition, our group sales activity appears to be turning slightly. Our U.S. -- our U.S. long-term income protection sales increased 4% in the first quarter 2005, compared to a decline of 40% for all of 2004. Quote activity in our target markets is encouraging, but will likely take some time to emerge into stronger reported sales. Our pricing power in the market remains solid. The increase in premium per life on new sales in the group long-term income protection line was 7 -- was up -- was 7 -- 9.4% in total, and was -- was up 12.4% in the large-case segment. Now, while the environment -- the environment remains clearly competitive, we are seeing some stability in the market, and we are comfortable that our -- that our more focused, disciplined approach to the business will lead to sustainable profitable growth as we move through the balance of this year.

Now let me provide a brief update on the regulatory and litigation matters surrounding our Company. First, around claims-related actions, as you know, two states, California and Montana, chose not to join the multistate settlement agreements, and we remain in discussions with the California Department of Insurance, seeking to resolve the issues raised in its examinations and to resolve some issues relating to our income protection policies and practices -- practices in administering benefits under those policies. Predicting when we will reach closure on something like this is always difficult, you I believe all parties are working diligently at this time to resolve any outstanding issues as quickly as possible From an operational perspective, I'm very pleased that we continue to see improving trends in new claim litigation and complaints. The level of claim-related litigation in our group long-term income protection line is down 24% relative to lat year on an annualized basis, and down 40% in the individual income protection line. Complaint trends also declined in the first quarter, relative to last year, continuing the -- continuing the trend we have seen for the past several quarters.

In a related matter, I'm sure that you're also curious about the status of the claim reassessment process which we entered into as part of the multistate agreement. We have completed the mailing of approximately 215,000 letters to past claimants who are eligible for reassessment, and we are now in the process of mailing reassessment information packets to those individuals who have opted in, that is, chosen to have their claim reassessed by a special unit set up by that -- for that purpose. It is very early in the reassessment process, but we have not seen anything at this point to lead us to believe that we need to change our original assumptions underlying the $127 million charge we took in the fourth quarter. Our separate reassessment unit is ready to -- to reassess claims as the information packets are turned in -- returned to us, but we are not likely to have any meaningful information on the reassessment process until probably the third quarter of this year.

Now, regarding the pending litigation -- other pending litigation around the Company, whether it relates to the multidistrict litigation encompassing a number of the punitive class-action lawsuits arising out of claim practices or lawsuits more recently filed that relate to broker compensation and quoting issues, we will continue, as we have done in the past, to provide an update of the status of those lawsuits in our 10-Q, which will be -- which will be filed early next week.

Now, before we go to your questions, I'd like to close with a few comments on our outlook for the balance of 2005. Clearly, I'm disappointed in missing the consensus estimate this is quarter, as well as our internal plans. It's clear what's behind our shortfall: the disruptions in our -- our U.S. group income protection claims performance, which occurred primarily as -- as we implemented process enhancements. We know what needs to be done in order to address these issues, and we have already begun to take the steps necessary to restore our performance to an acceptable level. This is something --something which I have taken -- taken a direct and personal involvement in, and will continue to do so until performance improves.

As I mentioned earlier, while our April results suggest we are making some progress in returning to acceptable performance levels, to the extent that we did not reach these levels for the quarter, we will continue to incur additional costs, just as we did this past quarter. Let me repeat, though, that I'm pleased with the execution of the other elements of our 2005 plan, specifically the successful implementation of our renewal strategy, persistency management and -- and sales growth, while retaining pricing discipline. Obviously also, the continued strong performance of our U.K. and our Colonial subsidiaries, and our other non-income protection product lines. I'm also very pleased to see we're -- we're maintaining strong interest margins in our primary lines of business portfolios, despite a challenging interest rate environment, and obviously very encouraged by the -- the -- by -- by generating strong statutory results and maintaining, obviously, a very strong and -- and flexible capital position. From this much stronger operating and financial platform, we -- we -- we -- we fully intend to get back on the path started two years ago of generating steadily improving returns each quarter.

Now, operate -- Operator, that completes our prepared comments and we'll now open up for the question-and-answer session.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit 1 on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star, 1 to ask a question. We'll go first to Vanessa Wilson at Deutsche Bank.

Thank you. Good morning.

Good morning.

Tom, could we -- could we get a little bit down in the weeds here on this claims disruption issue and talk about exactly how this works. You're -- you're articulating that the number of claims that are being submitted is actually down year-over-year, but you're saying the length of claims or recovery rates are changed, and -- and how does that happen in just one quarter? Are you posting reserves, assuming these claims are going to be on the books longer? And -- and can you give us maybe some numbers about the average size of claim, and -- and sort of help -- help us to understand the numbers, because 25 million is a pretty big number, and -- and where does that exactly come from? And -- and I think that will help us understand a little better your confidence that you can work it back down.

It's a great question, Vanessa. Let me just start out, just to ground everybody operationally, how -- what happens when a claim comes in and then some of the initial processes we put in place and why, frankly, it's delayed the -- the ultimate timing decision on the claim. But when -- when a disability claim comes in, actually oftentimes we actually pay that claim, even though we may not have fully investigated the claim in terms of having all the information to make a final determination. And so we actually have what's called reservation rights, which allow that as we get that additional information, we can then -- if -- if the -- if the information justifies it, can actually close the claim. So my point of saying that is it's very different from others -- other types of businesses where, in fact, you make that determination before you begin to pay. In many cases, we begin to pay first and then actually proceed to actually to try to accumulate that information to -- to make a final determination on the claim.

And then, Tom, do you get that money back?

We don't, actually. That -- that's -- that's an added cost, and that's why we actually bore that cost, Vanessa, in this period. And what I was going to says is then -- I think Joe, then, can talk a little bit about how that actually went through the -- went through the -- what we did this quarter in terms of the financial side of that. But the point is that -- that -- that -- that basically we incur that -- that expense. We don't have a chance to get that back. We are taking additional time and putting additional effort into -- to looking at claims, obviously in part because of the multistate, so it ultimately delays the final determination, but while we're -- we're trying to reach that final determination, we are making payments on that claim, and as Joe will talk about in a second, establishing a little bit of a reserve and making an estimate as to when that -- that claim may be finally -- finally determined. Joe?

Thanks Tom. The first thing I would like to mention is that from an operational point of view, in a quarter, in our group LTD line of business, the -- the claim operation makes about 150,000 decisions a quarter. And there is very subtle disruption in -- in operational terms, where really less than 1% of those decisions went one way or another. So the -- the -- the program to get this thing back on track is certainly manageable, and we think with strong performance management techniques and the management team we have place, we can get it back on track. The financial effect, as Tom said, while those claims are in inventory, we are making payments. So certainly the paid benefits in that line of business was over-planned for the quarter. In addition, if we think we are going to continue to make a few payments on those plans until they will be closed, we have to record the present value of the future payments in our reserves, and we certainly did that. And the net effect of all that was the $25 million pre-tax that Tom referred to.

Vanessa, I could add just a little more to that, just to -- again, this is where I think, in many respects, part of this is a timing issue where, again, if we're taking some additional steps to -- to evaluate that claim, some of those steps may, for example, require getting outside medical reports as part of that -- that investigation. Those can take some additional time, so again, that's where you can find some of those decisions are being pushed out a little bit in terms of their ultimate decision, but, in fact, the Company is incurring a cost while that process is being pushed out.

In your commentary on incidence, I want to understand this. Are you saying that the gross submitted incidence was down year-over-year and the paid incidence was higher, or are you saying paid incidence is also down?

The -- the -- Vanessa, this is Tom White. The -- the submitted incidence was flat with a year ago. The submitted incidence was slightly higher than the fourth quarter, and that's a -- a seasonal trend. Now, the paid incidence is up a little bit, and the difference being that that acceptance rate of claims is a little bit higher. So the -- the -- the volume of claims coming in the door isn't any higher, but we're accepting a few more on a short-term basis like -- as Tom suggested, and we're bearing the -- the financial impact from the payment of benefits, plus holding the reserves on those.

Okay, so what number do we divide the 25 million by to understand the number of claims that's being paid here that you perceive to be excess?

I don't -- we -- I don't think we can get into a -- into a number of the excess claims, I think, Vanessa, in the way you like us to do. I think what we're say is that -- that we certainly know that the -- the recovery experience quarter wasn't consistent with the historic patterns. I think we have a general idea of -- of what needs to get done to -- to -- to address that -- that higher inventory, but we don't have a discreet level of number of claims, I think, Joe, that we want to put out there as an example for what -- what we're sort -- we have in that inventory that you could do that math by.

No, I think that's right, but I will say that when you look at the decision points, all the decision points that would point to that are -- are done at claim operation. Our best estimate, as the number of decisions that really impacted us, was less than 1% of those decisions. It's very subtle from an operational point of view, but obviously, as -- as you understand, the financial leverage of that decision is -- is fairly significant.

Okay. Thank you.

Thank you, Vanessa.

And we'll go next to Collin Devine of Smith Barney.

Good morning, gentlemen.

Good morning, Collin.

Two -- tow quick ones. Just on a followup as to why it's taking longer, I guess, to sort of assess claims, is that for things like under the new rules when do you call in a independent medical assessment and -- and things like that, and it's just sort of finding the new equilibrium? And then secondly, I assume Kevin is around, if you can talk about new business trends, I think there is a general perception out there that without the ratings, Unum is basically out of the large-case market today. Is that true, or are you still seeing a lot of business? And perhaps, Kevin, if you could just comment on the overall competitive environment that's going on out there?

I'll be happy -- we -- I'll get things started, Collin, and just -- definitely ask Kevin to -- to follow up to your second question. But I think in -- in the question of why, I think it -- you -- you hit on it. It's -- really is the additional steps that we're being asked -- that we're taking as -- as part of the -- the -- the agreement we reached with -- with the multistates, steps that hopefully lead to better-quality decision, because we -- we've sought additional outside medical advice. When we do that, of course, that adds time, because it -- it delays the decision because there's -- there's a something referred to as an independent medical exam, an IME. You're dependent on somebody else to provide you that. So all those things can be things that -- that lead to delays in the -- in the process. Again, the hope is through all of this we end up with a higher-quality decision, but again, it does push out some of the decisions on some -- some claims. Now, again, what we're going to continue to look at is what can we do to continue to tighten the process up but yet still stay consistent with the multistate exam, so I wouldn't want to suggest that this is just a timing issue, because I think there's things we can do a little differently. We're -- we're certainly, as a management team, very focused on that. But it really comes down to it pushing out that decision, where again, the hope is we end up with a better-quality decision, but we've got to [inaudible] that a little bit as well, as a result of the results this quarter. Now, as it relates to the -- the business environment, Kevin, do you want to pick up on -- on Collin's question in general? But also just -- there's some general comments I think you can make about the competitive environment.

Thanks, Tom. Good morning, Collin. Yes, the -- the large case market, I think, is -- is pretty -- pretty much from an activity standpoint where we historically had it, slightly down year-over-year in terms of the amount of activity, but picking up as we entered the RFP season here in February and March, and I expect it to be on track as we -- as we enter the second and third quarter. In terms of sales, large-case sales are -- we're still writing 20-plus large cases per quarter. I do think we're -- we're somewhat more disciplined about the way we look at those large cases. We -- we've, over the last several years, gotten fairly tight on large, standalone commodity-style group life cases. That's reflective both in our -- in our sales and in our persistency experience in life. The competitive environment in life in particular is -- is still very, very aggressive pricing. In our in-force life business, we walked away from a fair amount of large-case in-force group life business during the first quarter, as a result of cases that wouldn't accept the rate increases, were in loss positions or wanted risk concessions that we were unwilling to concede to. And so that's the marketplace out there. We're still writing a fair amount of life large business, but we're trying to balance our business mix. We have a long-term objective of that 40/20/40 small/medium/large business mix and, in fact, in the first quarter if you took a look at our -- our LTD sales, we were sort of right in that ball park, I think something like 43/14/43, so staying disciplined and focused about the mix of business and the -- and the size mix and the industry mix.

Okay, Kevin. Then just to followup as well on -- on sort of the -- I guess the pickup in the benefit ratio, the impact of your rate increases, the impact of running out the bad business. Your previous goal was that you could drop the benefit ratio 100 points from where it ended the year, so 87 by the fourth quarter. Is that still a reasonable goal? It -- it would seem to me, based on what Tom said, I think, what, the 90.5% was 300 points up from the delay in the claims processing. So can we still hold you to the 87% number for the fourth quarter?

Well, as Tom said, I think in the -- in the -- if we had eliminated the disruption, we would have been about 87.5. Price increases will continue to flow through on the in-force book of business, as well as adding new business at higher -- higher prices than we had previously, and that would flow through as well during the remaining part of the year. I think the key question there is -- is -- is our recovery on the claims management side, and maybe I'll have -- have Tom and Joe address that.

Yes, I think, Collin, what I would add to what -- what Kevin said is I think you almost have to bifurcate the two. I think the fundamental underwriting piece that we've -- that Kevin talked about, the pricing activities, the persistency management, the sales management, I think we do expect that continued improvement in the -- what I would call almost the underlying fundamentals of the business, because as I mentioned in my comments, we actually had a very good quarter in terms of renewals, and especially on the LTD side, some very good results on the persistency front. So that -- that path would be leading us to continued improvement in the loss ratio. The -- obviously, the one thing that -- that's counteracted that which is significant is what we saw with the claims disruption. And I think once we talk to the Street, we'll want to be sure we -- we separate those two, because we feel very good, as I say, about the fundamental side of the business, in terms what we are doing price-wise and discipline-wise on the persistency management side. I'd say the other issue that I'm referring to in terms of claims is more of an operational issue, and I'm not minimizing it, because it's -- it's very, very important that we get our hands around that and improve the operational performance, but from a underwriting point of view, we're very pleased with the performance that's come out of that and which would have led to the kind of results that -- that you referred to.

Thank you.

Thanks.

Next we'll go to David Lewis at SunTrust Robinson Humphrey.

Good morning.

Hi, David.

A couple of questions. Tom, you -- if I understood you correctly as far as kind of your quarterly results being pretty much online with your expectations, except for the group, where you had the -- the higher -- or lower claims recoveries, if you had taken out the unusual claims issues you would have reported something in the $0.45 range. It seems to me that there is another area that might have been actually a little better than what you originally anticipated. Is that correct?

Yes, we -- we did. We saw some -- I think Tom mentioned and I mentioned our U.K. operation had a very strong quarter. Colonial had -- had a strong -- a stronger-than-expected quarter, and then our non-disability lines within our U.S. brokerage business all meet or exceeded expectations, David. So again, that's where I feel pretty good about the actions that we're taking around the other parts of the Company and the results that we're delivering there. But clearly this other piece that -- that I referred to has been the thing that -- that's offset that, and that's why it's such a -- something that we're obviously very, very focused on, because it's distracting from some very strong performance elsewhere.

Okay, just a final question. I you're focused on your capital position and -- and maintaining your -- improving sights with the rating agencies, but do you think that there is a potential for stock repurchases in late 2005 or 2006, as you continue to build that excess capital?

David, it's Tom White. I'll handle that one. It -- it's not in our plans right now. I mean, clearly what we want to do is build back ratings, build back capital, and I -- I think a share repurchase program would probably work against that. Our -- our objective has been to get risk-based capital above the 300% level, and -- and we're a few points above that right now, so we feel good about that. We probably our leaning right now would be more to -- to bring leverage down here in the near-term. But I -- I think as we -- we get out into 2006, and that's probably a -- a -- a discussion point that we'll look to have, because we feel very good about where we're going from a capital point of view. Having met some of these objectives, and with $146 million of statutory net income we're going to be building some excess capital, and so I think that's more of a conversation to have in the early part of 2006 than it is to have right now. But -- but we're very pleased with the capital formation, the direction that we're going in, and despite a little hiccup here with -- with some claim results, it was still a very good statutory quarter, which drives risk-based capital, which drives the whole capital picture, which we feel very encouraged about as we look out the next couple years.

Great. Thanks very much.

Thanks David.

Next, we'll move to Joan Zief at Goldman Sachs.

Thank you. Good morning.

Good morning, Joan.

I have just two questions. First, Tom, could you talk a little bit more about expense management? You alluded to the fact that with premium -- with revenue growth still a little bit sluggish, that it may be more difficult to manage expenses, so just what you're doing to keep everything in relationship. And then the second thing is on the investment side. I mean, it is a difficult environment, and I'm just curious as to what your investment strategy is here, given the current interest rate environment.

That's a good question, Joan. Let me take the first one and maybe have Joe to supplement my comment on expense management. I -- I think for those that have followed -- and you have as closely for the last few years -- we've actually been working this very quietly. I think over the last couple of years we have reduced our expenses pretty dramatically, probably reduced our expense ratio over that period of time probably over a point. We have reduced our headcount probably a little over 1,000, but not with a big splash, but just quiet reengineering of some of our core processes. We have all of our employees involved in that, actually, now. So I think, again, we've pretty quietly but very, I think, proficiently have begun -- have -- began a process just to be much more mindful of bringing the expenses down, being more consistent in terms of how we -- we manage expenses around the whole company. Always room for improvement there, but again, as we see premiums sort of now flat to down, that's going to put more pressure on the things that we've already -- the kind of things we've been doing in the past but we actually do more of it, so we continue to bring that expense down. Even though the ratio was up, I think, Joan, a little bit slightly this quarter, I think dollar amount of expenses actually are down, and in fact are down below our plan numbers. But maybe, Joe, you could pick up a little bit on just -- just where the expense ratio is and where we may -- might expect it to go a little bit.

Well, Joan, I think that's right. You know, we've had to have a cultural shift here in the Company, from an expense budget at the beginning of the year in U.S. brokerage of a $1 billion plus, and $1.5 billion company-wide, as you know. But the cultural shift is really you don't have a budget, you have -- in dollar terms you have a percentage of premium to spend. And so every time we look forward in terms of our persistency rate, where rates are going, we're dynamically adjusting that budget going forward, while obviously trying to maintain the service levels and the -- and the corroborations. So, I mean, the answer to your question, we have a dynamic budgeting process where we're -- we're really focusing on a percentage of premium and really trying to focus those dollars where we get the most leverage with our customers.

And I'll add, too, to Joe's comment, we -- we really have adopted more of a unit cost approach, and so I think as volumes are down, I think we've got more of our structure that's now more variable. Again, there is plenty of room for improvement there. As it relates to the investment strategy, I think you're right, it's just a -- it's a generally difficult environment. As I mentioned in my comments, certainly the level of interest rates, the lack of supply of securities that -- that -- that achieve our credit and our quality and our durational guidelines certainly are a challenge, but the good news is, I think the steps we took the last couple of years to lower the discount rate on new claim incurrals, that's -- that's allowed us to actually continue to maintain a pretty healthy interest rate margin. And as you know, we buy long assets, and so those things don't move around a lot quarter to quarter, so again, we feel pretty good about where we are now. Again, I think, Joan, is -- we're saying we're going to continue to look for new -- new -- new pockets of opportunity in the investment marketplace, but probably not dealing -- deviating materially from the sorts of things that got to where we are right now.

And I think we -- we have a core strategy. Core strategy is clearly to drive for yield at an appropriate amount of risk. We do need to look at our alternative asset classes, because the -- the -- the core portfolio, at a -- at an average single A rating provides a yield that needs to be enhanced with the high-yield portfolio, with private placements, with our modest foray into mortgage loans. So around the edges, we'll be -- we'll be looking for those opportunities. We do have, as you know, a very, very disciplined cash flow hedging strategy, where we find out when we find opportunities in the marketplace, we look forward and hedge the reinvested -- the reinvestment cash flows, particularly in the long-duration portfolios like IDI and long-term care. So we're very well hedged, and so we're -- we're hedged against reinvestment risk, and as Tom said, with the bulk of the portfolio being in long-term assets, we can look forward and feel comfortable about our -- our forecast of investment results for a year or two out.

What percentage of your cash flow have you hedged forward?

Joan, we're about 50% hedged for our cash flows in 2005.

For 2005, yes.

Thank you.

Thanks, Joan.

Next, we'll move to Jason Zucker at Fox-Pitt Kelton.

Great. Thanks, and good morning, everybody.

Good morning.

Tom, I was hoping you could give us a little bit more on the multistate, 215,000 letters went out. Could you tell us how many people have responded and then how many reassessment packages you're sending out?

Yes, let me ask Tom White to pick up on that, Jason.

Great.

It's just that we're -- we really haven't closed out the first phase of this. We have completed the mailings. Now, keep in mind, the mailings were -- were done over a several-week period and the recipients of these mailing have 60 days plus a 10-day grace period to respond back. And so we haven't really closed out that first phase of this, and so we don't want to start to throw numbers out there, not having completed that. Keep in mind the second phase -- it's -- people are going to either -- they'll either opt in or they won't opt in. If they do opt in, they will receive a -- a reassessment information packet, which then they'll have 60 days to complete and mail back to us. And we have -- probably have just a couple of thousand reassessment packets in-house, where we've literally done a couple of dozen reassessments at this point, but we're in the very, very early stages of -- of this. You know, as Tom said, we haven't seen anything in the response rate or the opt-in rate that's -- that's deviating much from the -- the assumptions underlying our reserve charge, but it's really going to be kind out in the summer months before we've completed the mailings, we've got the reassessments back, and all of the -- the 60-day time windows have expired, to see exactly what we're dealing with in -- in terms of the reassessments. So I think we would prefer to wait until we get out to that point in time and we've closed off each of these different steps in the process, and we can provide some better detail at that point.

Tom, is it -- is it fair to say from your comments, then, that you wouldn't be expecting more than a couple of thousand reassessment -- ?

No, I -- I wouldn't -- wouldn't draw that conclusion, no.

And a couple other quicker questions. Group life and Colonial, they both had really nice loss ratios in the quarter, and I was just wondering whether or not you thought those lower loss ratios could be sustainable? And then with respect to STD and life, where persistency was down a little bit, any updated thoughts there on where you think they might come in for the year?

Tom, you want to take the question on the -- on the margins, or the [inaudible] ratio?

Yes, sure. The -- the group life and Colonial were -- were slightly better. I think in Tom's response to a prior question he talked about a -- a couple of three lines of business that did slightly better, and I think group life was a touch better. I think Colonial was a touch better. It doesn't round to a penny a share, but -- but they -- they were generally good quarters. Now, again, a lot of the things that we've done in the last couple of years, particularly in group life to reprice business, and I think the discipline we're showing around not renewing a $100 million plus of premium on some of these jumbo group life cases is going to help that margin and that -- that benefit ratio going forward. So I think the underlying profitability and the profit margin should hold up pretty well. I think it's going to be a question of what kind of growth we can -- we can sustain, and I think we've got a better growth forecast for Colonial going forward than we would for group life, but again, the -- the risk management characteristics look very, very good at this point. We think they're sustainable. It's just a question of getting the -- the appropriate level of growth.

Tom, if I could add, too, just on -- on Colonial. We don't talk about it a lot, but Colonial did go through its own assessment of some of its block of business, and it had a much smaller set of issues, but has been either making rate increase -- applying rate increases and/or exiting certain blocks of business that don't fit with certain profitability and return characteristics as well. I think that's begun to start working its way to the benefit ratio, so there's been a pretty diligent effort over at Colonial, just from a risk management point of view, and I think we're starting to see some of the benefits of that.

Thanks. And then just on persistency?

Yes, I think -- I think the issue on persistency is that the group life and the STD markets are a bit more competitive. They're a bit more of a commodity kind of product. We feel like we can differentiate ourselves with LTD to -- to a greater extent, and again the -- the big group life cases that are terminated were standalone group life, which is just not a market that we're -- we're focused on. And I think as Kevin pointed out in his comments, these were -- these were cases that were not profitable, and so it's -- it's a -- again, with our -- our strategy and focus on profitability as opposed to top line, it's a quick decision on what direction we're going to go on those. We don't see any DAC implications. The -- the -- keep in mind the persistency number that we're reporting is a first quarter actual, plus what our expectations for the balance of the year is, given the normal patterns that we see. So we wouldn't expect our persistency to change very much. It might move around a few tenths of a percent, but it shouldn't have a dramatic change, and so therefore, we look -- we take that information and -- and we look at how -- how the DAC amortization works, and we just don't see any negative issues with that at this time.

Great. Thank you.

Thanks, Jason.

And our next question comes from Jeff Schuman at Keefe, Bruyette, Woods.

Good morning.

Good morning, Jeff.

Tom, I was wondering if we could come back a little bit more to -- to this claims management process. I mean, you are going down sort of an uncharted path here, and in part you -- you talked about the dependence on third-party reviewers as maybe contributing to -- to some delays here. What -- what is the risk that even after you retrain and -- and improve the efficiency of the process, that you're still maybe stuck with a longer claim decision process that -- that embeds some additional costs?

I think, Jeff, we -- we anticipated that to a degree. I think what we saw in the first quarter is that happened more widely than we anticipated, and I'm -- and -- and I do believe at this point, based on what we've done looking, obviously, into this in -- with great -- in great detail, is that there are some claim decisions that, even when we perfect this process, are going to be delayed because of those additional steps that we take. I think in a -- in a short version, I think what happened this past quarter is we -- we delayed more decisions than -- than probably were necessary and that's why, again, we're going to continue to look at the processes we have in place, the procedures, the training, because, again, it -- it -- it -- there are some portion that should be delayed and that was always expected in the way we looked at this decision, but it looks as though it affected a much broader part of our -- of our decision making than we anticipated, and that's obviously the focus of the remedial actions that we plan to take. So again, I don't think we'll ever get to the point where there aren't going to be those cases that are -- that are pushed out. That was -- that was always expected. It just -- it just captured a bigger part of the block than we anticipated, and that's where we're rolling up our sleeves and -- and taking the actions to try to get back to being sure it affects just the portion of the block that it should have affected.

And you mentioned taking several actions, but I guess you didn't talk about staffing levels. You were talking earlier about the importance of -- of cost management, expense management, but -- but given that you're leaving at this point $25 million a quarter on the table in additional claims, is there any thought just to maybe throwing some additional staffing at this problem to eat into that 25 million?

We are, and again, just let me maybe say very clearly, we're not -- there -- we're not taking big expense reductions in that part of our business. There's other -- there's no more leverage point in our business than being sure we've got the right resources in the right spots in that part of our business. So I think the way I would like at it is we are absolutely scrounging through the Company, looking for experienced people who can help us better manage that part of our business, be sure we provide additional resources so those people on the front lines that are experienced, that can help with those judgments and those decisions. And so we are absolutely diverting the best and brightest that understand this part of our business, take them off of things that are nonessential and get them to this part of our business, because we need the experienced people helping our -- what we call DBSs, make those kinds of decisions and to manage through process. So we are certainly not pulling resources out of that area. If anything, we are perhaps even temporarily putting some additional resources in there.

Okay, and -- and lastly on Colonial, I think you said that there's been some improvement in recruiting, but we haven't yet really seen the turn in sales growth. Do you have any, I guess, agent or recruiting metrics or anything that we can look to, to maybe give us a little visibility towards that turn?

Yes, I'll just add a little bit and then sort of pass it over to Tom, but I think -- just again, to ground everybody, we made a leadership change there in Colonial a little over a year ago. There's no doubt that the -- the -- the -- that the initial focus was on sort of evaluating the sales infrastructure in the organization. It had been a company, as we all know, that historically had not grown up to -- to industry standards and at industry levels. The -- the new leadership that has come in made a number of changes in the sales organization, starting at the more senior levels. There's something called a regional sales manager, there's probably five or six of those that are new in -- out of a total of seven or eight.. There's a district sales manager level below that, where there has been an enormous amount of new recruiting and additional staffing and, as you know, that -- that -- that sort of trickles down even to lower levels.

So I think the starting point, I think, Jeff, is that we've made some fairly dramatic changes in both levels and maybe more importantly, experience at those more senior sales management levels in the Colonial organization, and also to your point, have put a very high priority on reciting. Historically, recruiting had not been as much of a focal point at Colonial as it now has become, and sort of with that new sales management infrastructure in place, they have a very heavy incentive to -- to recruit and bring in new agents. And so I think probably for future calls we ought to -- that ought to be a part of our discussion, is how well we're doing in terms of adding new -- new recruits and producing agents to the Company. I think the infrastructure has been put in place, the new compensation plan has been put in place, and as I said in my comments, now the proof needs to be in the pudding. But, Tom, anything you'd add to that?

Yes, I -- Jeff, just to throw a couple of numbers out there, again, we've had about an 11% increase in recruiting. That's better than what we were seeing last year, and -- and right now we've got have roughly 5,300 to 5,400 sales reps within that Colonial sales force. That -- that's pretty flat with a year ago.

Flat from a year ago, okay. Thank you.

I will say, Jeff, just -- we actually do prune every year, so in fact, there's a pretty -- not every company does this. There's a pretty aggressive process underway at Colonial to be sure that we don't just tally agents and have a big agent number, but, in fact, the ones we have are producing agents and we're, in fact, actually getting some production out of them. So at the end of every year there's a -- a process to access the performance of the agents, and some of those contracts are -- are withdrawn, so that number, I think, Tom, is -- may sound small in comparison to some of the other companies that report, but those are very active agents, as opposed to just simply somebody who happens to have a contract.

Very good. Thanks a lot.

Operator, I think we have time for one more question.

And we'll take that question from Tamara Kravig at Banc of America Securities

Hi. Thanks.

Good morning, Tamara.

Good morning. Actually most of my questions have been answered, but if I missed it, what are your current rate increases on your new business running?

Kevin McCarthy, you want to sort of take that question?

Yes, good morning. Rate increases on new business I would say are -- are fairly small. We -- we did a lot of work last year to move pricing increases up on new business, still moving up in large case. As Tom mentioned, our large-case pricing in LTD was up 12% or so versus last year on our new large-case business.. But -- but largely our pricing is otherwise stable by line of business and by product. We -- we got our rates where we needed them to be last year.

Okay.

And just to add to that, I think as a result, Kevin, we have some -- the premium for life numbers that went through certainly up pretty dramatically year-over-year, and obviously are at the high end of the market marketplace.

Absolutely.

Great.

Again, thank you all for your time this morning. We obviously covered a lot of territory, and we're all certainly all around the rest of the day if we can answer any -- any question. But -- but, Operator, that completes our -- our first quarter call.

Thank you. And again, does conclude today's conference. Again, thank you for your participation.