普登 (UNM) 2005 Q2 法說會逐字稿

Good day, everyone. And welcome to the UnumProvident Corporation second quarter 2005 earnings results conference call. This call is being recorded. And at this time for opening remarks and introductions I'd like to turn the conference over to Mr. Tom White, Head of Investor Relations. Please go ahead, sir.

Thank you, Amber. And good morning, everyone. Welcome to our second quarter analyst and investor conference call. Before we get started let me read the Safe Harbor statement. A Safe Harbor is provided for forward-looking statements under the Private Securities Litigation Reform Act of 1995. Statements in this conference call regarding the business of UnumProvident Corporation, which are not historical 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 Statement Regarding Forward-looking Statements" and "Risk Factors" in the Company's Form 10-K for the fiscal year ended December 31, 2004, and our subsequently filed 10-Qs. 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. 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 us for this morning's call is Joe Zubretsky, who is responsible for our Finance, Investments and Corporate Development activities; Dean Copeland, our General Counsel; Kevin McCarthy, our Chief Underwriter; Bob Greving, our CFO; Roger Edgren, our Head of Sales; Peter Madeja, who runs our GENEX Operation and has responsibility for our Benefits Organization; and Joe Foley, Head of our Product Management area.

Yesterday we reported what I feel was a good second quarter with operating earnings of $0.42 per diluted common share, $0.01 better than consensus estimate and generally in-line with our expectations. We saw generally strong performance across the majority of our business segments and, importantly, showed progress in lessening the impact of the disruption in our U.S. group income protection claim operations, which adversely affected our first quarter results. We believe that the additional incurred costs that resulted from the changes we put in place in part to respond to the multistate regulatory settlement agreements we entered into in late 2004 were lower in the second quarter. We estimate the second quarter impacted approximately 15 to $20 million of pretax or $0.03 to $0.04 per diluted common share aftertax, which is primarily -- which primarily impacted our U.S. group, Long-term Income Protection business. We made good progress in the second quarter and further improving our performance in this area remains our number one priority. We continue to believe that this disruption is temporary and has, therefore, not changed our long-term expectation for claim recovery rates. We are likely to continue to incur some additional costs until we more fully restore our claims effectiveness just as we experienced in the first half of 2005. But that should continue on its downward trend. Joe Zubretsky will provide more detail on this later in our call.

Now with respect to our overall results in the quarter, I am particularly pleased with a number of things, including the following -- First, second quarter before tax operating income excluding net realized investment gains and losses improved $15.5 million or more than 8% from the first quarter to $200.3 million with good performance across most of our business lines. The $0.42 per share of operating earnings was achieved despite a higher tax rate in the quarter, as well as a higher share count relative to the first quarter.

Second, the performance of our Unum Limited and Colonial subsidiaries continues to strong levels, providing good balance to our U.S. brokerage operations. Unum Limited's earnings were up slightly -- up significantly over the second quarter of 2004, but off slightly from the first quarter reflecting currency fluctuations and the settlement of a claim dispute. Colonial also had a strong quarter and I'm especially encouraged with their sales results, which increased on a year-over-year basis this quarter after four consecutive quarters of negative sales comparisons. The actions taken by the Colonial management team over the past year to increase new sales are beginning to pay off. The margins from both of these operations remain very strong. I should add that our GENEX subsidiary, which is reported in our Disability Services business, also had a good quarter in what remains a challenging business environment.

Third, as we have discussed over the past several quarters, improving the profitability of our U.S. group business through discipline pricing, renewal, and persistency management has been a major priority, particularly for our group Income Protection line of business. I'm pleased that we continue to show improvement in this area in the second quarter, and Joe will provide more detail on the underlying trends we're seeing later in the call.

And finally, we have discussed our desire to begin to restore profitable sales growth, and we saw some encouraging trends in the second quarter. While our overall sales from continuing operations declined 4% in the quarter compared to the same period last year, we saw renewed growth in several areas that we have specifically targeted for profitable growth. Our group, Long-term Income Protection sales of fully-insured products grew 18% in total with 16% growth in the U.S. and 20% growth in the U.K. Within the U.S. results, our sales in the core market, which are cases with less than 2,000 lives, were very strong, while the more competitive large case market results were down compared to one -- to the year-ago quarter. We still remain interested in growing the large case business but in a more -- in a very disciplined manner.

As I mentioned earlier, the actions taken by our Colonial team are beginning to pay off with sales up 4%. It's still not where it needs to be, but the first positive quarterly comparison in a year. Additionally, our Voluntary Worksite Benefits sold through our U.S. Brokerage Organization had an outstanding quarter with sales up 30% and 16% for the first half of 2005. I should add that the margins on our new sales are strong and our growth is not coming at the expense of future profitability. Now, the principle area where we continue to face sales challenges is generally where very aggressive pricing activity continues, including Group Life in both the U.S. and the U.K.

Now, as unusual, there continues to be some challenges ahead and I point to three specific ones this morning. First, and most important, although we saw some improvement in our U.S. group Income Protection claim management results, we are not yet operating at the levels we feel are appropriate for this business. The actions which we have taken, it should position us to continue to reduce the level of the disruption in this area of the Company. I still expect us to have an impact on our result, albeit at a continually reduced amount each quarter.

Second, as we have commented before, the interest rate environment remains -- continues to remain a challenge. New money rates continue to pressure portfolio yields and the supply of quality, long duration investments remains low. We've made no adjustments to the new claim discount -- claim reserve discount rates this quarter, as importantly, our reserve interest margins remained at -- very much above our targeted levels. The actions we have taken in the past to reduce the discount rate on new claim incurals [sic] and the opportunistically hedging a portion of our future cash flows have positioned us relatively well in this environment. At current interest rate levels we do not perceive the need for any reserved discount rate changes in 2005, but this is still obviously an area to watch very carefully.

And finally, we are continuing to work to put the past regulatory and litigation matters behind us. And we will have more to say on that in just a few moments. Now, let me turn the call back over to Tom White to review our segment reporting results and then to Joe Zubretsky who will provide a little more detail on the review of our business trends. Tom?

Thank you, again, and let me move on to a review of the second quarter results. The Company reported net income of $171.3 million or $0.55 per diluted common share in the second quarter of 2005, compared to $7.2 million or $0.02 per diluted common share in the second quarter of 2004. Included in these results are net realized after-tax investment gains of $42.6 million or $0.13 per diluted common share in the second quarter of 2005, compared to net realized after-tax investment losses of 55.9 million or $0.18 per diluted common share in the second quarter of 2004. These net realized investment gains and loss numbers include DIG B36 aftertax gains of $40.6 million this year and after-tax losses of 48.9 million in 2004. Excluding the DIG B36 impact, we reported a small net realized after-tax investment gain of $2 million in the second quarter of 2005, the first quarterly reported gain in over five years. Also in the second quarter of 2004, the Company reported a net loss aftertax from discontinued operations of $67.8 million which is $0.23 per diluted common share resulting primarily from the sale of the Canadian branch. Adjusting for these items, the results for the second quarter were $128.7 million or $0.42 per diluted common share, compared to 130.9 million or $0.43 per diluted common share in the year-ago quarter.

Now, I'll briefly review the segment operating results. First, the Income Protection segment reported operating income of $91.8 million in the second quarter of '05, compared to 90.8 million in the second quarter of 2004. Included in the Income Protection segment is the group income protection line, which reported operating earnings of $53.6 million in the second quarter of 2005, compared to 49.4 million in the second quarter of 2004.

A few highlights -- First, persistency declined relative to 2004 due to our continuing efforts to reprice the more poorly performing business with our U.S. group Long-term Income Protection persistency declining to 83.2% in the first half, compared to 84.8% for full-year 2004. Second, the benefit ratio in the quarter was 90%, compared to 89.4% in the year-ago quarter and 90.5% in the first quarter of 2005. Joe will provide more analysis of the drivers of the benefit ratio in his comments in a moment. Third, sales of fully-insured products in the group Long-term Income Protection line increased 18% to $86.5 million in the second quarter with our U.S. operations growing approximately 16% while our U.K. operations grew by 20% in the quarter. And fourth, premium income declined by 0.9% in the quarter, compared to a year ago with declines in the U.S. long- and short-term income protection lines offsetting strong growth in the U.K.

Next I'll review our Individual Income Protection recently issued line of business. In this line, we had operating income in the second quarter of $22.3 million, compared to 24.6 million in the 2004 second quarter. Specifically, in this line, premium income grew by 9.4%. Sales were up 5.2% compared to the year-ago quarter and the multi-life sales mix was approximately 84% on a year-to-date basis. That's measured as of the activity in this line as we continue to focus on the employer market place. The interest adjusted benefit ratio and GAAP benefit ratios were improved relative to last year reflecting lower claim incidents and generally improved claims management results during the quarter.

Finally, the net investment income in this line declined to $18.3 million in the second quarter, compared to $21.1 million in the year-ago quarter reflecting lower portfolio yields and the benefit last year from the higher yielding bonds retained from the sale of the Canadian business, which have since been reallocated to the other lines of business. Also within the Income Protection segment our long-term care earnings were $12.5 million in the second quarter, compared to $12.7 million in the year-ago quarter. Finally, the disability management services line produced income of $3.4 million in the second quarter, compared to $4.1 million in the year-ago quarter.

Now, I'll move to the Life and Accident segment, which includes our Group Life, AD&D, and Voluntary Life and Other products. This segment reported income of $64.3 million in the second quarter of 2005, compared to 58.6 million one year ago. The benefit ratio improved this quarter to 75.7%, compared to 77.2% in the year-ago quarter reflecting improved performance in the AD&D, and Voluntary Life and Other lines of business, as well as the U.K. group life line. The U.S. group life results were flat relative to the year-ago quarter with generally stable claim incidents and an increased average claim size. Sales in this segment declined 27.9% over the year-ago results with the decline centered in our U.K. operation and the U.S. large case segments, both of which remain highly competitive markets. Our core market group life sales had a strong recovery of 45% from the soft year-ago sales results. Persistency for U.S. group life for the first half of 2005 was 75%, compared to 84% for full-year 2004. Again, reflecting the aggressive pricing and renewal actions being taken in the large case segment.

Moving on to Colonial. Colonial had another strong quarter with operating income of $43.6 million in the second quarter 2005, compared to 39.4 million in the year-ago quarter. Sales growth at Colonial began to show better momentum with a 4.3% increase. As we have discussed previously, 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 with new rep contracts increasing 17% in the quarter relative to a year ago and 14% for the first half of 2005. Colonial's benefit ratio improved to 53.8% in the second quarter 2005, compared to 55.2% in the year-ago quarter reflecting favorable mortality experience in the life line of business.

Next, the Individual Income Protection closed block segment produced operating income in the quarter of $27.7 million, compared to $30 million in the year-ago quarter. The interest adjusted benefit ratio increased slightly relative to the year-ago level reflecting lower claim recovery experience combined with stable incidence trends. Net investment income was generally flat relative to a year ago and expenses increased due to the payment of a judgment in a lawsuit during the quarter.

The "Other" segment reported income of $10.5 million in the second quarter of 2005 flat with the year-ago result, and the Corporate segment reported a loss of $37.6 million in the quarter, compared to a loss of $30.7 million in the year-ago quarter, which included a $9.4 million curtailment gain related to changes in the Company's retiree medical plan. Statutory earnings for our U.S. insurance operations were healthy again this quarter. Net income on a combined statutory basis totaled $105.8 million in the second quarter, while the combined net gain from operations, again, on a statutory basis was at $118.8 million. And our risk-based capital ratio remains above our 300% target. The debt-to-total capital ratio improved slightly in the quarter to 24.6%. This is assuming 80% equity treatment for our mandatory convertible securities. Not reflected in this ratio is the repayment on July 15th of a maturing $200 million Senior Note with cash previously being held at the holding company which will reduce the leverage ratio by approximately 170 basis points. And with that review of the quarter, let me now turn the call over to Joe Zubretsky for some detailed comments on the quarterly results.

Thanks, Tom. I want to focus my comments on four topics before we move to your questions. First, the impact of the claims management disruption in the second quarter and what we are doing to continue to reduce its impact. Second, the drivers of our group income protection benefit ratio in the quarter, specifically, focusing on the changes from the first to second quarter. Third, the impact of the low interest rate environment on our business, specifically, our discount rates and interest reserve margins. And fourth, the status of our claim reassessment process, as well as outstanding legal and regulatory issues.

As Tom Watjen mentioned in his introductory comments, there is no more important initiative in the near-term than to minimize the impact we are experiencing from implementing the changes to our claims management process brought on primarily by the multistate market conduct settlement and other process changes. Through a lot of hard work by many people, we reduced the impact by approximately $10 million in the second quarter compared to the first quarter with the disruption cost on a before-tax basis declining from approximately 25 to $30 million in the first quarter to an estimated 15 to $20 million in the second quarter or $0.03 to $0.04 per diluted common share aftertax.

The key drivers of our plan to address the disruption are as follows -- Inventory management, medical management, and process management. First, Inventory Management. Our claim management process after the regulatory settlement agreement became too regimented which caused slower decision making by our claims professionals creating a higher inventory of open claims. This higher inventory creates a cost, as well as a slower service time for claimants. We are addressing this inventory through a number of steps including temporarily redeploying some experienced resources to more effectively manage this claim inventory until it normalizes.

Second, our Medical Model. We are working on bringing more independence to the medical evaluation of claims through the use of independent medical exams. We experienced some operational issues with implementing certain practices agreed to as part of the Regulatory Settlement Agreement. We have instituted organizational changes for our physician group to make this function more efficient and more consistent with the use of independent medical exams.

Third, process simplification for our Disability Benefit Specialists or DBSs who are the primary claim decision makers. The changes we initially implemented and the way in which some of our DBSs applied those changes reduced an excessively regimented process. For example, we are making efforts to obtain information and at some instances continuing to wait for marginal information on claims when the source was not responding. We are also attempting to gather information on some medical conditions that had nothing to do with the disability being determined. We have simplified these and other processes in order to avoid a buildup in claim inventory while always being mindful of working within the requirements of the settlement agreements.

Additionally, we made a number of management changes and have assigned some of our most experienced managers from other parts of the organization to the claims management area. They bring a wealth of process and organizational expertise from their other roles and are having a positive impact in streamlining our decision making process. While we haven't eliminated the impact of the disruption, I am encouraged by the month-to-month progress we're seeing in our Benefit Center performance metrics. We expect to continue to feel some negative financial pressure in future quarters, but we remain comfortable that this matter is manageable and our long-term expectations for claims recovery rates are achievable.

Our second area of comment is to link this discussion of our improvement in claims management effectiveness with the improvement we experienced in our group income protection benefit ratio in the second quarter relative to the first quarter. The benefit ratio declined to 90% in the quarter from 90.5% in the prior quarter. If you eliminate the impact of the disruption, you will see that the benefit ratio rose slightly. That increase was driven by our U.K. business, which incurred additional benefit costs due to the settlement of a claim dispute, and we are also seeing the U.K. benefit ratio return to a more normal level as the temporary benefits of managing the recently acquired [plane blots] continues to decline as we expected.

In the U.S. group income protection line, excluding the impact of the claims disruption, we experienced a slight improvement in the benefit ratio as the benefits of our repricing and renewal strategies continue to emerge. New claim costs were generally flat in the second quarter with our experience in the past several quarters. Claim recovery trends were improved in the second quarter, compared to the first quarter, but remain below the levels of a year ago. Overall, we are pleased with the level of benefit ratio improvement we are seeing and believe that there is significant room for margin and profit improvement over the next two to three years.

We continue to have positive results from our renewal and persistency efforts. Our persistency levels, which Tom White mentioned in his comments, and are also in the earnings release, remain stable with the first quarter experience and are consistent with our expectations. We continue to see terminations primarily from our more poorly performing cases, which approximately -- with approximately a 15 percentage point spread and profit margin between the terminated cases and our in-force business. Rate increases on renewal business remain strong in the low double-digit range, also in-line with our expectations. And our premium per life and group long-term income protection continues to increase up 9% on a year-over-year basis. Our Field Sales Underwriting and Customer Service organizations continue to do a great job in a demanding market place.

Touching briefly on risk trends and our other primary lines of business, we saw stable to slightly improved incidence trends in our Individual Income Protection business lines. Mortality and Group Life was slightly higher than expected in the second quarter and the average claim size increased slightly in the quarter. Mortality experienced elsewhere in the Company, Colonial and the voluntary worksite benefit lines was generally positive.

The third topic on which I'd like to provide an update is the impact of the low interest rate environment on our business. Despite the low interest rate environment in the second quarter, all of the interest reserve margins in our primary business lines remained above our target range of 60 basis points. Given the hedges we have in place for the remainder of the year, which locks in targeted rates, on approximately 64% of our expected cash flows, we do not foresee any necessary changes to our discount rate on new claim incurals for the third or fourth quarters. We will continue to monitor this and model our expectations under a variety of interest rate scenarios, but are comfortable with our current position at this time.

Now, let me close my comments with a brief update on the regulatory and litigation matters surrounding our Company, including the claim reassessment process. We remain in discussions with the California Department of Insurance seeking to resolve issues raised in its market conduct examinations. One of the reasons for the delay is in reaching a settlement in California, as we have said before, relates to our efforts to resolve some California-specific issues, including our practices in administering benefits better specific to California. We have not reached a settlement at this time but the Company is making a significant effort to do so. From an operational perspective, I am very pleased that we continue to see improving trends and new claim litigation and complaints. The level of new claim-related litigation in our group and individual income protection lines in the second quarter was half the level of the year-ago quarter. In fact, new individual income protection claim-related litigation is currently running at one-fifth the levels we are experiencing in late 2000. Complaint trends also declined in the second quarter relative to last year continuing the favorable trend we have seen for several quarters.

Now, on the status of the claim reassessment process, which we entered into as part of the multistate settlement, we have essentially completed the mailing of approximately 232,000 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 for that purpose. The opt-in rate we have experienced has been approximately 27%. For those individuals who opted in and received a reassessment claim form, the return rate of completed claim forms on a timely basis has been approximately 28%. Therefore, we are experiencing a 7 to 8% rate of response of completed reassessment claim forms on the initial mailings, but I hasten to add that only about 16% of the opt-ins have been sent in information packages, so the current return rate could change. It is still early in the reassessment process, but the trends we are seeing confirm our original assumptions underlying the $127 million provision we took in the fourth quarter of 2004 and we will continue to provide you with updates on the status of this process on future conference calls.

Regarding the pending litigation against our Company, including the multi-district litigation, encompassing a number of putative class-action lawsuits arising out of claims practices and lawsuits more recently filed that relate to broker compensation and quoting issues, we'll continue our past practice of providing updates on the status of those lawsuits in our 10-Q, which we intend to file early next week. Lastly, with respect to finite reinsurance, we have received some information requests from various regulatory bodies and are currently complying with those requests. Now, I'd like to turn the call back to Tom Watjen, who will make some brief closing comments before we go to Q&A. Tom?

Thank you, Joe. Now before we do go to your Q&A, I would like to make a few final comments. First, I feel a need to comment on this weekend's Barron's article. There were a number -- there were many opinions expressed in the article that we disagree with and several factual errors that we are addressing with Barron's editors. As you know there was a reference to the Closed Block restructuring that was completed in the first quarter of 2004. As you recall, we elected to report the closed block as a separate line of business to provide greater transparency in our financial reporting. At that time we wrote-off the intangibles associated with the block, put in place the reinsurance cover with National Indemnity, and raised $300 million in capital to pay for the costs associated with this overall restructuring. We paid a substantial premium for what I would call "sleep while reinsurance," which we have appropriately accounted for as reinsurance on both a GAAP and statutory basis.

As required by accounting rules, we expensed the premium immediately for statutory purposes and are amortizing to expense that cost for GAAP purposes. This was not a surplus relief transaction, but had an initial surplus cost which we paid for at the time through the capital we raised. The transaction was thoroughly reviewed by our regulators, auditors, and rating agencies. We feel that the closed block is well protected. The reserves and surplus we hold, along with the reinsurance cover and the future profits from this block give us substantial claim paying ability. The article also referenced the Senate retransaction, which was a surplus relief transaction entered into in 1996. I'd like to point out that if we recaptured this agreement, which is entirely at our option and currently under consideration, our consolidated risk-based capital ratio would only decline to a level slightly below 300%, still obviously a very satisfactory level.

Finally, the article referenced the movement in IBNR reserves. It's important to keep in mind that IBNR reserves are a function of the size of the block of business, and current claim -- level of incurred claim incidents, and the rate of delay in reporting of claims. All these factors will cause it to fluctuate from quarter-to-quarter. You will see that the IBNR reserve actually increased by a total of $77.2 million from the first quarter of 2005 to the second quarter, yet our overall before-tax operating earnings still increased by over $15 million. Despite our progress over the past two years, we are unfortunately still vulnerable on occasion to these types of stories. Our focus remains where it should be continuing to strengthen the business and operating performance of the Company, and in doing so, we will continue to let our results speak for themselves.

To sum things up, although there still is more we can be doing, I'm pretty pleased with the execution of the majority of the key elements of our 2005 plan and the progress we have made in the first half of this year. Specifically, successfully executing our pricing and renewal strategy, and generally meeting our persistency objectives, which excluding the claim's disruption is resulting in a gradual improvement in our benefit ratio. We're also beginning to restore profitable sales growth in many of the markets we've targeted for growth. We're maintaining strong performance levels in the U.K. and our Colonial subsidiaries, and, frankly, also in our non-income protection product line. We're maintaining strong interest margins in our Company's primary lines of business despite the continuation of a challenging interest rate environment. We're generating good statutory earnings, which is further strengthening our financial position. And, although, it's not where it needs to be, we're beginning to restore claims effectiveness to a more appropriate levels.

As we close, let me say how much we look forward to seeing some of you at our September 21st Analyst and Investor Meeting in New York to discuss our plans in more detail. We are a very different company today than we were two short years ago and this meeting presents a perfect opportunity to more fully reintroduce ourselves to investors. We'll have a formal announcement out soon and the details of the meeting and the Webcast. Operator, that does complete our prepared comments and please let's now go to the question-and-answer session.

Thank you. [OPERATOR INSTRUCTIONS]. And we'll first hear from Colin Devine of Smith Barney.

Thank you very much, gentlemen. I had a couple of questions. First for, I guess Kevin McCarthy, if we could talk about long-term disability pricing trends as we're heading into another renewal season now for next year and what you're seeing? Secondly, I just want to clarify then that you have not changed the discount rate on new claims and if you could just remind us what your discount rate is on new claims? And then Joe, you mentioned that you had had some inquiries from regulatory bodies on the Company's use of finite reinsurance. Rather than just leave that open then to perhaps you could specify what regulatory bodies that was?

Okay, Colin this is Tom. Thank you. Kevin, let's start with you with the first question around Ltd pricing trends.

Good morning, Colin. In terms of the market place, I would say large cases still fairly volatile and we're pretty selective about those trends on new business. The smaller case market place, I would say that the dispersion between low and high has probably shrunk. The market place remains competitive, but I think the degree of volatility in market place pricing has probably reduced a little bit. We're pretty pleased with new business pricing. We're pretty flat year-over-year in terms of new business pricing and our mix of business in terms of target markets is improving steadily. So pricing trends there are positive for us. And that's being reflected in our growth.

On the renewal side, I expect next year's renewal program will be slightly smaller than this year's renewal program and I expect that consistent with '05 versus '04. The '06 renewal pricing increases will be less than the '05, probably in the area of 6 to 10% versus this year's 10 to 15 and last year's 15 plus.

How have the low interest rates impacted what you are doing with rates next year?

We're probably -- not too much of an impact yet, but I would say we're fairly conservative and cognizant into those interest rates. We know going in that we can't afford to be betting on; for example, interest rates going up and so we're doing our renewal pricing based on pretty conservative view.

Okay, thanks.

Tom, could you just handle the question regarding the discount rate discussion?

Yes, on the discount rate, the number we typically quote is the margin that we're seeing there. And just to run through the different blocks of business and the IDI recently issued our margin which, again, is the spread between the portfolio yield and the aggregate discount rate is 74 basis points. And in the IDI closed block it's 64 basis points. And in our U.S. and U.K. Ltd business it's 66 basis points. And, again, our target is to be at 60 basis points or better.

Now, we do not disclose the rate that we use on new claim incurals because that's part of our pricing model and we don't disclose pricing variables. But as Joe said in his comments, we feel comfortable where we are. Obviously, there's some pressure from the low interest rate environment, but the fact that we got a substantial portion of our cash flow for the second half of 2005 already hedged and some very healthy margins locked in on that gives us confidence that at this point we don't need to make an adjustment to that discount rate.

The other thing, Tom, maybe just to add with that is with the backup in the 10-year with probably 40 basis point movements in the 10-year also we're actually starting to get back into the position where perhaps some additional hedging may happen in the rest of this year as well. So all those variables I think are affecting the outlook for the rest of this year, which is positive.

Right.

Colin with respect to your question about the finite reinsurance, let me ask Joe Zubretsky to pick up on that one.

Sure, Colin. The two components, one are domiciliary regulators, our mass Maine, South Carolina and Tennessee have made very general inquiries. And we got a -- and, secondly, we got a general inquiry from the New York Attorney General's Office.

Okay. And then one quick follow-up. With respect to the U.K., how much were earnings up year-over-year in the second quarter? And is it still your intention to begin disclosing its results separately starting at the end of the year?

Colin, our plan is sometime in the second half of this year to take a look at the reporting segments and probably an outcome of that would be to report the U.K. as a separate line of business. We don't do that now so I don't want to give you a specific answer, but we did have a good, strong result in the U.K. The results were up very nicely on a year-over-year basis. As Joe mentioned, they were done a little bit from the first quarter as some of the benefit from these acquired blocks of business kind of wears off and we get to a more normal earnings run rate. But it was a good, strong quarter on a year-over-year basis.

Okay. Thank you.

Thank you, Colin.

[OPERATOR INSTRUCTIONS]. We'll now hear from Vanessa Wilson with Deutsche Bank.

Thank you. Good morning.

Good morning.

I wanted to talk about your capital position. You paid down the 200 million of debt in July and you're running at about a 450 to $500 million statutory earnings rate. Could you talk about if that plays out the statutory levels, where you would be in terms of excess capital at year-end?

Yes, I think, as you know, Vanessa, we have been fortunate enough. We've been continuing to generate capital, I think, as Tom mentioned -- or Joe mentioned in his comments. We did extinguish a piece of the debt obligation of debt coming due in July just a few weeks ago. And that's obviously our priority is continuing to reduce the leverage in the Company. Joe, anything you would want to add on just what's been happening from a capital point of view and just looking forward?

No. I think you're spot on. The statutory earnings are running nicely as you said, running at 4 to $500 million. Obviously, you need to fund the natural growth in the balance sheet that occurs at the subsidiaries, so there's an investment that needs to be made there. But as we look over the next 18 to 24 months, our statutory dividend capacity will be running 2 to $400 million. And, obviously, we will have that as available capital to put to work in a -- either by repurchasing debt or looking for investment opportunities or looking at shares. You know, one of the three things. So I think that's the way to look at it. Good statutory earnings. 2 to $400 million over the next couple of years and that should emerge as holding company cash flow, which we would have available to put to work.

And over the next -- I'm sorry, Joe, is that over the next couple of years or is that each year?

Yes, well, you can't really -- I mean, because the year-over-year effects on the capacity you have, some of our subsidiaries are not at the 300% level, we have a disparity. So the dividend capacity actually doesn't emerge perfectly with statutory earnings. But that's why I'm saying over the next 18 to 24 months on a rolling basis, that's the way to look at it.

And Vanessa, if I could add, this is Tom. Just I think as you know one of our key priorities has been to continue to delever the Company. And I think we are getting to the point where we are very close to having maybe completed that phase of things. Necessarily, this is something we'll talk about at the analyst meeting in September. But, again, for those that have followed us for a while I think you know; for example, at one point we had intercompany loans of over $750 million, it peaked at that level. That number's down to 60 million at the end of the second quarter. We intend to bring that obviously down over the next 12 months or so.

We talked about leverage extinguishing a maturing debt obligation rather than refinancing it a few weeks ago. So I think, again, I think these are all parts of our continued deleveraging, which has been, as you know, where to the extent we've had excess capital and cash, the first priority has been to continue that deleveraging process. But there is a certain point where I think we will declare to a degree victory on that. And that's where I think the issues about excess cash and questions about what we do with it are going to become more significant. And I think we'll certainly be sure there's a very significant part of the September meeting agenda, we'll talk about that.

Okay. And,Tom, on the debt-to-capital ratio that Tom White gave us pro forma for the 170 basis points paydown, it would be about 22.9%. Can you give us a little more specific number of where you want that to go or what the rating agencies are looking for?

Vanessa, this is Tom White. You're right on the 22.9%. If you look at the ratios on a -- on the basis of just a 50% equity credit, we would be at 29.9% for June 30th pro forma for the debt being paid off. That goes to roughly -- looks like about 28%, and on that basis, we'd like to see that kind of in the 25% range give or take a little bit. So there's still a little bit of room to bring that down on that basis.

Okay. Thank you very much.

Thanks, Vanessa.

And we'll now hear from Tamara Kravec of Banc of America Securities.

Hi, good morning. Thank you.

Good morning.

Three questions. The first on the benefits ratio in the group business. Given the changes you've made, and it sounds like you're making some good progress. And you talked about kind of getting that down and there's margin for room for improvement over the next couple of years. But when would you expect the noise to be completely down? You've made 10 million of improvement. But can you give us a little bit more sense of where you think that could normalize this year, potentially, and where your goal is over the next year or two on that?

And then the second question is really just on the Group Life. You mentioned that it's competitive out there and I was hoping for a little bit more information on what you're doing to kind of counter that? And then the third, just a reminder on the reassessment, how long the people received the letters, how long they have to get those back in and what the deadline is for them to fully respond in terms of their response rates that you're seeing now?

Yes, thanks Tamara. Let's go -- just with your first question, on the benefits ratio, Joe?

Sure. Obviously, we'd love for it to go a lot faster than it is. But we're happy with the performance, the improvement second quarter over first. And I guess the way to look at it is, if we can continue on this steady progress of improvement we've had in our recovery rates, we think we can cut that impact in half quarter-over-quarter and have it disappear here over the next two to four quarters and have it completely behind us. We -- as a benchmark, you certainly -- looking at certain of these statistics, these performance metrics, we actually hit our long-term recovery rate late in the second quarter, which was very -- a very, very good sign that we were returning back to our long-term expectation. So I think that's the way to think about the steady improvement, quarter-over-quarter -- cut that impact in half until it disappears early in '06.

And Tamara as it relates to Group Life, actually when you look at the Group Life sales, although they were certainly down there's kind of some themes within the theme. And, in fact, if you look at our U.S. brokerage business, those -- actually the Group Life sales were just down a little bit, but then take it the next step actually the core market sales were up and the large case sales were down. And maybe, Kevin, I could ask you just to talk a little bit about the competitive dynamics affecting the U.S. Group Life sales between the core market and the large case.

Thanks, Tom. Good morning, Tamara. The Group Life market place remains incredibly competitive at the large case end and we're focussed on being pretty disciplined there. As you know over the last couple years we have not generally been aggressive on standalone group life. We've looked for packaging opportunities where our packaging of value proposition makes sense to the customer or the broker, and we continue to be disciplined along those lines. We continue to see fairly narrow margin pricing in the large case Group Life business and we're very careful there. And I think some of our competitors are seeing some of that as well.

On the other hand, in the core market place we've been very successful this quarter generating some increased momentum both in package life and Ltd sales in our core, and also, in particular, in our target markets. And we're pretty pleased with the momentum we've got there. And then finally, we continue to see solid growth, again, in our core markets, in particular, in the voluntary benefits for Group Life. So disciplined in the large, focussed on NBOC in packages, solid growth in the core and in the targets, and increasing sales in voluntary.

And then the other piece that I would add to that, Tamara, is then, of course, the other part that rolls into our consolidated reported results is our U.K. operation, which actually had the more substantial reduction year-over-year and Group Life sales. So they have a very competitive environment over there. And it bitterly was a difficult quarterly comparison between the second quarter of last year to this -- the first and second quarter of this year. But still it is a very, very competitive market over there. It tends to be pretty much that the U.K. domicile organizations that tend to be the more significant price players at this point. So, our people are, again, very disciplined in the U.K.

Just like Kevin said in the U.S. we're certainly not chasing business if we don't find we can get the right price and so our group owners are very disciplined about not getting into that price game in the U.K. But I would say the consolidated results are more impacted in the sales side in Group Life by the U.K. operation this quarter than in perhaps the U.S. operation. I would remind you, though, that as I said in my comments, our U.K. operation had a tremendous quarter in terms of Ltd sales. Sales were up 20%. So, again, that part of the business is growing, but they're staying very disciplined on the Group Life side. Now, Tom, with respect to the question on reassessments?

The process is there, Tamara, that first of all, the mailings are staggered out over several weeks. And once the information packets are sent out, those individuals have 60 days and there's also a 10-day grace period for them to complete the forms and send them back. So kind of to summarize what we've seen so far with the initial mailings of the 232,000 letters, we have roughly between 62 and 63,000 opt-ins. And those opt-ins over the next several weeks will be mailed the reassessment forms and they will each have 60 days to complete those and send them back. And what we're seeing so far with, I guess about 16% that the mailings haven't gone out and run through their period is that we're getting about 28% of those back. So again, the --.

And those are the information packets, not the letters?

Yes, though are the information packets. So of individuals who have opted in and their 60-day time frame for returning the reassessment packets run through, we're seeing, again, about a 7 to 8% return rate on those. And we are just now beginning to make some of the reassessment decisions and, again, that process will run through the end of next year. Again, the idea was to spread this out over time so that we can review the claims properly and make the appropriate decision and not kind of jam-up the process, but do it in a very orderly way.

Great. Thank you.

Okay, Tamara.

And we'll now hear from Bob Glasspiegel with Langen.

Good morning.

Good morning, Bob.

The center retransaction which you're thinking about, I know you haven't done it yet, so you'll have to give us sketchy details at best, but you said it would be bad for statutory capital. I assume it would be good for future GAAP earnings with recapture of investment income. Am I thinking about that correctly? And what would the rough magnitude?

Hey, Bob, let me ask Joe Zubretsky to pick up on that one.

Yes, the -- I mean it was as Tom said a surplus relieve transaction, so obviously we would give up the capital loan. But as we said with our risk-based capital being comfortably above 300% is just a nonissue. On a GAAP basis, we really -- it will be slightly accretive to GAAP earnings as we're paying fees for that capital loan and we'll stop paying those fees. The only other aspect of GAAP reporting that is important is because of the deposit accounting that is used, this -- the accounting for this is condensed to one line in our closed disability block. When the agreement is recaptured, that one line will be exploded back out into the income statements so you'll see premiums, claims, investment income, et cetera. So actually the major change on GAAP is actually a presentation issue, rather than it being hurting or helping earnings on way or the other significantly.

You're saying the fee recovery is immaterial?

It's 10 -- [multiple speakers].

10 or $11 million a year.

Gotcha. And the other question is, I think over the last few years you've been sort of cutting back your excursion into the large case market place and you seemed to suggest that you still sort of not enticed at going back in that. Have we played out the maximum impact of turning out the digested large cases that you didn't want? And to what extent -- I just want to make sure with the sales growth there wasn't any sort of elephant hunting elements to that in the quarter?

Yes. I'll take a piece of that, Bob, and then we'll ask Kevin to talk about just how where we are in the renewal activities. Because we have been pretty disciplined the last couple of years as you know in renewals in general. But certainly a big piece of that renewal activity has been around large cases where we felt the pricing wasn't perhaps where it needed to be. But let me do step back and say one thing is we are active and interested in a large case business. It's a very important market segment. We can actually bring value to certain customers that are prepared to pay for it and actually we wrote a lot of business. Even though it's down it's still a substantial part of our business, but isn't the dominant theme of the Company at this particular point. So I just want to say that this is a business that if we can get the profitability at the right levels and the right cases and the right risk characteristics, that's a business that we want to build and grow.

So I think what you see with our results the last couple of years is really trying to put the brakes on growth at all costs and being more disciplined and more careful to be sure that we take on this business, we've taken on the right price. But then also being very thorough in the renewal process to be sure that we're putting the right rate on the right case and if we can't get that rate, as you know, we're prepared to let that case leave. But maybe Kevin McCarthy, I'd ask you to speak a little bit more to it in terms of where you sense we are in the renewal activities. Because we've been through quite a bit of purging the book-of-business the last couple of years. And you gave us a little -- a few glimpses into the 2006 program. But maybe just speak to a little bit to how much of that may be large case.

Yes, thanks, Tom. Hi, Bob. The large case renewal plan is considerably smaller in '05 than it was in '04, probably in terms of profit impact maybe a little more than half of its impact over the prior year. And I expect that will continue to go down in '06. The average size of the increase that we are seeking will be smaller. The number of cases that we will be hitting will be smaller. And, of course, we didn't write nearly as much large case business in '04 and in the latter half of '03 as we had in '01 and '02. So as those cases come up for renewal we're talking about a smaller inventory to begin with. Which is not to say that we're not active in the large case market as Tom said, it's just that we're being disciplined about making sure we know exactly what we're shooting for; what the pricing level is; what the bid profile of that prospect is likely to be over time; how successful we can place renewals; who's the consultant, and what's the nature of the business, et cetera. So we're just being continually disciplined there, but the size and impact of that block of business on the renewal program is definitely shrinking.

Gotcha. Just -- are you saying large case sales were up or down? I missed the --.

Large case sales were actually down. So, again, I mentioned the -- I'm just going to use Ltd. I said earlier 17% sales growth in U.S. Ltd sales, but that was really coming primarily from our core market sales.

Thank you.

That growth rate was not stimulated, Bob, by an acceleration in large case sales.

Okay. Appreciate it, thank you.

[OPERATOR INSTRUCTIONS]. We'll now here from Eric Berg with Lehman Brothers.

Yes, thanks very much. One of the points that was raised in the Barron's article, that I don't think you referenced, I think this was towards the end of the article, is that somehow the multistate accord has implications for existing claims reserves. In other words, my take on this is that the journalist was suggesting that if a claimant had his claim approved for payment that he might somehow have the right to come at you again for being unduly stingy and that, therefore, there's a potential of addition to claims reserves on existing claims. Is there any truth to that? Thank you.

It's a good question, Eric. We did -- that was referenced in the article or implied in the article. Let me ask Joe Zubretsky to sort of pick up on that one.

Well, I think buried in that is really the phenomena that if you are experiencing disruption in a claims management area due to process changes, whether they are due to the multistate or not, that could put your long-term recovery rates and assumptions at risk. That's probably at -- I don't know what he intended, but that's probably the inference he was making. As I said before, we've had very steady improvement in our recovery rates from the first quarter to the second quarter and, in fact, hit our long-term recovery rate assumption in the month of June. And, obviously, we're very hopeful that we maintain that level. So while the inference was, I guess, a technically correct statement, our information in our metrics are suggesting that we're back to our long-term assumption and that's not a risk for us.

And I think in short, Eric, just as Joe said, I think what -- it would be a risk if, in fact, we hadn't improved performance and dealt with some of the disruption that we were going through is permanent. But as you heard from our comments we don't believe that disruption was permanent. And, in fact, the results each month throughout the quarter is strong indications that it is not permanent.

Thank you.

Thank you.

And we'll now hear from David Lewis of SunTrust Robinson Humphrey. Mr. Lewis, your line is open. Please go ahead, sir.

Can you hear me?

David, yes we can, yes.

Yes, we can.

All right, thank you.

Sure.

Kevin, you talked a little bit about the sales trends, but I'm not sure if you talked about the opportunity you might get from some of your competitors that took business from you two and three years ago that probably comes back to the market and whether you think the pricing is going to be much more rational this go around?

Kevin, you want to pick that up on David's comment?

Yes, thanks, Tom. Hi, David. We're definitely seeing some levels of increased renewal activity by competitors. We're getting a chance to take a look at cases that we purged a few years ago. We're pretty active in assessing those cases in terms of whether or not their claim performance since we lost those cases has gone as we had projected it to or differently. And I would say, in general, as '06 as we get into '06, we're going to see more of that and I think so far, we're seeing that those cases are performing closer to where we predicted them to be, probably, then to where they were priced when we lost them.

And David if we could add a little to what Kevin said. Let me ask Roger Edgren, who runs our Field Sales organization just to talk about the flow because I think, as you know, there's a timing issue here in terms of getting in the flow, feeling as though you are getting at bat, so to speak. And maybe Roger you could speak to where you feel we are at this point.

Sure, thanks Tom. actually as we look at opportunities we got ahead of us for the balance of the year we're feeling pretty good about that inventory compared to last year. To answer maybe the question a little bit differently as well, we continue to take business as we do every year, from various competitors. I don't think we're seeing any trends with any one particular carrier, but around the country, we have good successes where we are picking up both core market business and also large market business from some of those competitors. But not always necessarily on price, but certainly the overall value proposition and what we bring to the table.

That's helpful. And just a final question on Colonial with the improvement in the benefit ratio. Is that mortality do you think sustainable or do you think that was just some favorable mortality in the quarter that may normalize?

It's a good question, David. Let me ask Joe Zubretsky to pick up on that one.

David, it actually is a lot better than we expected, and Bob Greving, and some of our actuaries here are working with Colonial to really try to figure that out. We don't know yet is the short answer. It was very, very favorable. Obviously, we're hoping that the book-of-business is a lot better than we thought. But we'll be updating you in future quarters if that snaps back.

I would say, David, that certainly the principle story at Colonial has been focussed on sales growth. And, obviously, a lot of the changes that have happened at the Company have been very much around position and sales organization to get recruiting levels up, to get sales activity up. But actually there's been a secondary initiative, which has been risk management-related, which is very different from North American brokerage. There was some large case sales and profitability issues there which the Company has also been moving through.

So I think to a degree some of what we're seeing with some of the performance from an underwriting point of view and a risk management point of view is playing itself out. But I think Joe gave the right long-term answer. But I do think that that group has been pretty sensitive to shrinking parts of its business and it had also got a little out of hand and, frankly, where the profitability wasn't where it should have been. And we're seeing some of the fruits of that effort as well.

Thank you very much.

Thanks, David. Again, Operator, I'm sensitive to time. Perhaps if we could just limit it to one more question, please.

Thank you. That question will come from Randy Simpson with Goldman Sachs.

Good morning.

Good morning.

I just wanted to see if we could speak to the voluntary benefits market. I was wondering if you could size the voluntary benefits sales in the first six months and give a little more color on margins? My understanding was that these were higher margin products. And then real briefly if we could speak to competition in that market and over the next few years how important this business is to Unum's growth profile? Thank you very much.

Sure, I'll start and maybe ask Joe Foley to speak a little to the market and maybe Kevin to talk a little bit to the profitability. But as you know we really have two vehicles within the UnumProvident family that focuses on voluntary. We've got the Colonial operation, which we just talked about, which as I mentioned had good -- the beginnings of some sales momentum building there, up 4% over last year. As we said before the margins are very strong and that seems very sustainable.

The other part of the story is the voluntary benefit business within our U.S. brokerage business where sales in the quarter were up 30%. But maybe again, Joe, you could speak a little bit to the environment in the market because we, obviously, are getting a little bit of benefit from what's obviously some market demand. Then maybe Kevin, you could speak to the U.S. brokerage profitability point. Joe?

Thanks, Tom. I think there's a couple of things that's fueling demand out there. One certainly is the increase in healthcare costs and the continued growth in that. It's providing opportunities for some of our products, some of our med subproducts and things in the voluntary segment. And it's also creating opportunities where employers are saying, "I can't afford to pay for these benefits as much as maybe I have in the past, but I would like to offer voluntary programs." You've also got revenue demands on the brokerage side where they are looking to increase revenues and voluntary fits real well into that.

So the conversations that we're now having, particularly, with traditional group brokers that may not have maybe focussed on the voluntary business have definitely increased over the last 12 to 18 months. At the same time, I think they're -- beginning to be more competitors talking about voluntary benefits and I think at this stage of the market that's probably a good thing for us because it gets the concept out there. We expect voluntary to be a higher percentage of our sales going forward in the first half of the year. Between Colonial and U.S. it was roughly $200 million of sales. So it's a significant portion of our business and we expect it to grow. Kevin, you want to add to that?

Well, in terms of profitability of the business, we're pretty pleased with the business in general. We've priced it for sort of high double-digit kind of returns as an immature market. The risk benefits, if you will, in that market place are lower generally per person than they would be in the employer paid or the more mature group life and disability market places. The key to that business is our participation levels. We continue to invest in enrollment and service capabilities to improve participation levels and we're pleased with momentum there. And our results are remarkably consistent across whether it's a life claims or disability-related claims or even critical illness claims. Pretty consistent performance from a profitability standpoint.

If I could add, Kevin, to what you just said; you and Joe said. I think that this certainly is a market segment that's attracting a lot of attention. I would say, though that it is a business that requires a fairly significant investment infrastructure to be supportive of this business. It's a heavy enrollment components. Heavy benefit communication components. A very significant technology investments. And so, obviously, even though we know competitors are eyeing this market and are actually in some cases dabbling in this market, that's where we are going to continue to make significant investments is in that infrastructure. Because that's a big, big part of the selling process. Well, thank you again all for taking the time. And I think at this point, Operator, I think that concludes our second quarter call.

Thank you. That does conclude today's conference. We do appreciate your participation. You may now disconnect and have a great afternoon.