普登 (UNM) 2005 Q3 法說會逐字稿

Good day and welcome to the Unum Provident Corporation third quarter 2005 earning results conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Head of Investor Relations, Mr. Tom White. Go ahead, sir.

That you and good morning everyone. Welcome to our third quarter analyst and Investor conference call. Before we get started let me read the "Safe Harbor Statement". The safe harbor is provided for forward-looking statements under the private securities reform act of 1995. Statements in this conference call regarding the business of UnumProvident Corporation which are not historical facts or 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 belief as of the date of this conference call. But there can been no assurance that future developments affecting the Company will be those anticipated by management.

For 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 subsequently filed 10Q's The Company expressly disclaims and duty to update any forward-looking statements.

Our discussion this morning will include, non-GAAP financial measures therefore, reconciliation to the corresponding GAAP measures will be available on our website at www.unumprovident.com.

Representing the Company this morning or on this morning's call will be Joe Zubretsky, who is responsible for finance, investments, and corporate development, Bob Greving , our CFO, Kevin McCarthy our Chief Underwriter, Roger Edgren our Head of Sales, Joe Foley, Head of product Management Area, and our President and Chief Executive Officer Tom Watjen. And now I'd like to turn the call over to Tom.

Thank you Tom and good morning. Yesterday afternoon we reported what I feel was a solid third quarter for our Company. With operating earnings adjusted for the California settlement and two other special items of $0.43 per diluted common share. Which is in line with the consensus estimate and our expectation.

GAAP after tax operating income excluding the special items was up 7.9% over a year ago third quarter and increased 5.4% over the second quarter of this year. Statutory income was strong as well. Above our plan and year ago result. This contributed to our close in the quarter ones again with our strongest capital position ever.

During the quarter, we were also able to resolve the uncertain of one of the last remaining issues over hanging the Company as we reached an agreement on the California market conduct exam. And made certain related adjustments to the multi state regulatory settlement agreements we entered into last year.

Now, I draw your attention to several things this past quarter. First, although our U.S. Brokerage results were generally flat with the third quarter last year and the second quarter this year, I am pleased with the trend in improving profitability of our U.S. Brokerage group income protection line of business which has been our number one priority this year, as well as frankly the sales amendment which were beginning to build in certain parts of our business.

Joe Zubretsky, will provide more detail on our group income protection profitability. I wanted to be sure that I say, that the continued focus on maintain pricing discipline and our renewal in persisting management initiative are clearly having an positive impact on profitability. We still have more work ahead of us but I'm encouraged with our progress so far. As I also said, I'm pleased with our sales performance in this segment. Total sales are up 4.9% relative to last year. But we a 19.2% increase in group long-term income protection sales and a 19% increase in our voluntary benefit sales.

Our core market sales with sales in less than 2,000 like market, a group long-term and short-term income protection and group life increased 14.6%, while large case sales declined 11.8%. This trend contributed to the more favorable sale mix we had discussed in the past with approximately 66% of our sales coming from the core market compared to 60% in the third quarter last year. Long-term care also continued to show positive mix shift as well. With group long-term care sales increasing 19.4%, while individual long-term sales declined 16.7%. An 84% of our individual income protection sales were in the multi-life market for this quarter.

Again reflecting our emphases away from single life sales. Second, our subsidiary performance continued to remain very strong this quarter. Excluding the gain from the sale of it's Netherlands Branch, Unum Limited has had a strong third quarter with growth and before tax operating income of 15.7% compared to the year ago quarter. Premium growth is strong as well.

While the benefit ratio remains stable and expense ratio declined. The sales environment remains very challenging in the UK, especially in the group market life place. Our negative sales comparison in that line is testimony to our disciplined approach to the market place. Colonial also reported a solid quarter with before tax operating income growth of -- excuse me, before tax operating income 6.1% higher than the third quarter of 2004. While sales only increased 1.1% in the quarter and part due to the negative impact from the hurricanes in the golf region, I'm encouraged in the progress we made our recruiting activities, which is an early indicator of future sales activity.

While, I believe that the hurricane in the golf coast and now Florida two very for Colonial have delayed sales, I do expect sales momentum to build as we move into 2006. In the meantime, Colonial remains highly profitable predictable business for us and and provides good source of earnings diversification. And finally I'm pleased with the progress we made to continue to reduce the risk in our business. Our mix of business, financial flexibility, asset quality and interest rate margin in particular are very encouraging. We remain committed to continue to pursue a discipline back to basic strategy and I'm very please with how our people have responded to help create this, "quote/unquote", new Company.

As always, there continues to be some areas for focus and challenge ahead and I point to three on this call. First and most important, although we saw additional improvement in our U.S. group income protection claim management results in the third quarter relative to second quarter, we are not operating at the level of effectiveness we feel is appropriate. Two of our three group disability locations are now performing at our long-term expectations while the other is not yet at those levels. I believe that our teams are focused on the right issues and I'm personally staying close to this area of the Company.

Our over all results will be adversely impacted until all of our locations are meeting our long-term expectations. There is significant pressure on this part of our organization to meet the new regulatory requirements, managed the claim reassessment process, maintain service level and operating within -- operate within pricing parameters and I'm proud of how our people have responded.

Second, as we commented before, the low level of interest rate continues present a challenge. The actions we have taken in the past, to reduce the discount rate on new claim [INAUDIBLE] and opportunistic hedge a portion of our future cash flows have positioned us well in this environment.

At current interest rate levels we do not foresee the need for any reserve discount re-adjustments and we are encouraged by the recent economic and interest rate news. And finally, although, we are pleased to have put the uncertain of the number of issues in the past, like the California Market Conduct Exam behind us, we still have several issues remaining, particularly the class action lawsuit. Which we are obviously anxious to get behind us. We have again updated the status of those in our 10-Q ,which will able filed on Monday.

In addition, we are still vulnerable to periodic adverse media reports, surrounding our claim practices but I'm pleased to say these are generally not affecting our business operations. Now, let me turn the call over to Tom White to review our segment operating results and Joe Zubretsky will provide more detail on certain business trend before I make some closing comments. Tom?

Thank you, Tom. The Company reported net income of $ 52.6 million or $0.17 per diluted common share in the third quarter of 2005. This is compared to $ 167.6 million or $0.55 per diluted common share in the third quarter 2004.

Included in the results, are net realized after tax investment losses of 46.3 million or $0.14 per diluted common share in the third quarter 2005 compared to net realized after tax investment gains of 41.8 million or $0.14 per diluted common share in the third quarter, 2004. These net realized investment gain and loss numbers include DIG B 36 after tax losses of 47.6 million this quarter and after tax gains of 54.5 million in the in the third quarter of 2004.

Excluding the DIG B 36 impact, we reported a small net realized after tax investment gain of $1.3 million in the third quarter 2005, the second consecutive quarterly reported gain. Also in the third quarter 2005, we recorded a before tax charge of $75 million or 51.6 million after tax ,which is $ 0.16 per diluted common share. Related to the previously disclosed settlement of the California Department of Insurance market conduct exam, an amendment to the multi-state regulatory settlement agreement, and a reassessment claim process for a block of claims not covered by regulatory settlements. This $75 million charge is relevant in three lines of business; 37.4 million in the U.S. Brokerage group insurance protection line, 3.3 million in the U.S. Brokerage supplemental and voluntary line, and 34.3 million in the individual income protection closed block segment.

Keep in mind this is split between the benefits and reserve line and the expense line as well. Excluding these charges, the result for the third quarter were 150.5 million or $0.47 per diluted common share compared to 125.8 million or $0.41 per diluted common share in the year ago quarter.

To enhance the comparability and understanding of our financial results, the exclusion of a tax benefit of $ 10.8 million which is $0.03 per diluted common share which is related to the finalization of income tax reviews of our UK subsidiaries and the exclusion of the gain on the sale of UnnumLimited Netherlands branch of $ 5.7 million before tax or $ 4 million after tax which is $ 0.01 per diluted common share. This provides a third quarter 2005 operating result of $135.7 million after tax which is $0.43 per diluted common share.

Now, I'll briefly review the segment operating results which, as you know now reflect our new reporting format. First, the U.S. Brokerage segment reported operating income of $ 71.9 million in the third quarter of 2005 compared to 113.5 million in the third quarter 2004. Excluding the charges for the California settlement agreement and related matters which was $47 million in the quarter, operating income was $ 112.6 million. Within this segment, group income protection line of business reported an operating loss of $ 6.2 million.

Excluding the charge of $ 37.4 million related to the settlement agreement and related matters, operating income was $ 31.2 million in the third quarter 2005, compared to $ 16.7 million in the year ago quarter. A few highlights include, first, persistency remains fractionally lower than last year due to our continuing effort to reprice the more poorly performing business which continues to run -- but continues to run well ahead of our expectation.

Our U.S. group long-term income protection persistency is 84.4% for the first nine months of 2005,compared to 84.8% for full year 2004 but above our 2005 plan of 80 to 82%. Again this, reflects the power of our franchise, our market relationships and the value of our service. Second, the benefit ratio in the quarter, excluding the impact of the California settlement was 92.4% compared to 93.5% in the second quarter of 2005. And 92.9% in the year ago quarter.

Joe Zubretsky will provide more analysis of the drivers of the benefit ratio in his comments in a moment. But the impact of the disruption, was further reduced in the third quarter to an estimate of $ 14.6 million. This compares to $ 20.6 million in the second quarter and $30 million in the first quarter. And third, premium income declined by 4.9% in the quarter compared to a year ago, reflecting the past sales trends and lower persistency which are now both moving in a more positive direction.

Next, the U.S. Brokerage group life and accidental death and dismemberment line reported a decline in operating income to $ 41.9 million in the third quarter of 2005 compared to 54.6 million in the 2004 third quarter. Specifically in this line, first of all premium income you'll see declined by 10.6% reflecting slower sales and lower persistency experience over past several quarters. As our focus has been on managing the profit margin in this line of business.

Group life is persistency 77.3% for the first nine months of 2005. And below the 2004 full year level of 84% but has improved from the first half of 2005 level of 75%. Second, the benefit ratio remains stable at 76.6% in the third quarter this year compared to 76.7% in the year ago quarter. A separating the two lines of business, claim incidents for group life was stable relative to last year while claim incident in the ADD line was higher line was higher which caused a decline in year-over-year earnings from this line of business.

Thirdly, you'll see that the operating expense ratio increased to 13.2% in the third quarter from 11.2% last year. We remain focused on bringing that expense ratio down to reflect the lower premium levels.

Also, within the U.S. Brokerage segment is the supplemental and voluntary line of business which reported third quarter 2005 operating income of $ 36.2 million. Excluding the charge of $ 3.3 million related to the settlement agreement, and related matters. Operating income was 39.5 million in the third quarter 2005, compared to 42.2 million in the year ago quarter.

A couple of highlights include first premium income increased 6.7% in the third quarter compared to a year ago. With each line of business and that would be the individual income protection, long-term care and voluntary work place benefits line showing growth in premiums. Secondly, the benefit ratio was slightly higher at 74.9% in the quarter. This excludes the California settlement compared to 73.3% in the year ago quarter primarily reflecting a higher benefit ratio in the long-term care block of business.

Moving to the Unum Limited segment, this segment reported a very strong quarter with income of $ 49.8 million dollars in the third quarter of '05 compared to 38.1 million in the year ago quarter. Excluding the $ 5.7 million before tax gain on the sale of the Netherlands Brach in the third quarter of '05, which is reported in the other income line within this segment. Income for this segment was $ 44.1 million. The increased operating income reflects strong premium growth of 19.9%, a generally stable benefit ratio reflecting favorable claims experience, and a lower expense ratio reflecting improved economy to scale.

Sales in this segment were lower in the quarter by 37.5 % compared to a year ago with decline primarily due to lower group life sales reflecting the competitive environment in the UK and Unum Limited decision to maintain a pricing discipline. Sales in the group income protection line at Unum Limited were down 1.2% in the third quarter compared to a year ago.

As Tom said, Colonial had another solid quarter with operating income of $42 million in the third quarter compared to $ 39.6 million in the third quarter 2004. Premium growth in the quarter were 5.9% and the benefit ratio was fractionally higher than a year ago at 55.9% compared to 55.1%, reflecting a higher benefit ratio in the life-line of business. Sales increased 1.1% in the third quarter but we remain confident that Colonial sales will accelerate over time as many of our sales indicators are showing positive momentum.

New [REC] contracts have increased 7% on a year-to-date basis and our district managers and these are the people who are responsible for recruiting and developing agents at the local level, but district managers have increased by 16.4% on the year-over-year basis. In total, our Colonial agency sales force stands at approximately 6200. Next, the individual income protection closed block segment produced an operating lost in the third quarter of $ 4.6 million compared to operating income of $ 33.2 million in the year ago quarter. Excluding the charge of $ 34.3 million related to the settlement agreement, operating income was 29.7 million in the third quarter 2005.

The interest adjusted benefit ratio for this segment declined relatively to the third quarter 2004, reflecting lower incident trend. With the recapture of the center reinsurance arrangement during the quarter, we are beginning to reflect the results of that block of business on each lean of the income statement rather than in a single entry in the other income line.

For the third quarter 2005, the recapture added $ 24.5 million of premium income and $ 12.5 million of net investment. The recapture had no material impact on the third quarter results for this segment at the under lying results had previously been included in the other income lines. The other segment which now includes the results of the disability management services line along with the former other segments lines of business, reported income of $13.6 million in the third quarter compared to $ 11.7 million in the third quarter 2004.

The corporate segment reported a loss of $33 million in the third quarter, compared to a loss of $ 44.8 million in the year ago quarter. You'll see the interest expense reported in the corporate segment declined by $ 3.6 million in the third quarter relative to the second quarter of 2005 reflecting the repayment at maturity of $200 million of senior notes during the quarter. This death retirement reduce the leverage ratio to 27.5% at September 30, compared to 30.6% a year ago. And this is calculated on a basis that provides 50% equity credit for our mandatory convertible securities.

As we said at our in investor meeting our goal is to reduce our leverage ratio to approximately 25% at the end of 2006. And finally, statutory earnings were as I mentioned healthy this quarter. Net income on a combined statutory basis total $ 243.4 million in the third quarter of 2005. Excluding the charges related to the California settlement agreement and related matters. And the statutory gain on the center reinsurance recapture. The combined net gain from operations was $ 169.1 million compared to 84.1 million in the year ago quarter.

And with that review, I'll turn let call over to Joseph Zubretsky, for detailed comments on the quarterly current results. Joe?

Thanks, Tom. I meant to focus my comments on four topics before we move to your questions.

First, the impact of the claims management disruption in the third quarter and the improvement we experience relative to the second quarter.

Second, the drivers of our U.S. Brokerage group income protection benefit ratio in the quarter, specifically focusing on some improving trend we are seeing.

Third, the impact of the low interest rate environment on our business, specifically our discounts rates and interest reserve margins. And lastly an update on some capital initiatives. As previously mentioned we continue to see disruption. Some disruption in fact, in the claims management area resulting from the implementation of process changes brought on by let multi-state conduct settlement. We estimate the impact of this disruption to be approximately $ 14.6 million before taxes in the third quarter compared to $ 20.6 million in the second quarter and approximately $30 million in the first quarter. This impact continue to decline in the third quarter as we are gradually returning to our long-range expectations for claim and management experience.

In fact, two or three group claim sites have returned to the long range expectation and we expect the fourth to do so over the next quarter. The monthly metrics we track are encouraging and we remain comfortable that this is manageable and our long-term expectation for claim recovery rates are achievable. As we discussed in our second quarter conference call, the key drivers of our plan to address this disruption are inventory management, medical management, and process management.

With the temporary redeployment of some experienced resources to more effectively manage the inventory of claims as well as simplifying our claim management process, to avoid further build up of claim inventory, we have been able to reduce the impacted disruption while always working within the requirements of the settlement agreements. My secondary area of comment is the improvement in our US Brokerage group income protection benefit ratio in the third quarter relative to the first half of the year.

As we said previously, the benefit ratio excluding the California settlement improved to 92.4% in the third quarter, from 93.5% in the second quarter, and 95.3% in the first quarter. Taking this analysis a step further to exclude the impact of the disruption, from each of the quarter's, the benefit ratio improved slightly to 90.1% in the third quarter from 90.2% in the second quarter and 90.6% in the first quarter. As we stated in our investor meeting, our near-term goal is to reduce the benefit ratio, to a range of 87 to 88% and we believe we have a sounds plan to get there.

In looking at the under lying claim trends in the U.S. Brokerage group long-term income protection line, submitted incidents in the third quarter of '05 was generally in line with the experience of the prior quarter, as well as the year ago quarter. And claim recovery experience over all, was slightly below our long range expectations. The margin improvements we are seeing is emerging from our repricing renewal strategies and the premium per life on enforce group long-term income protection block, increasing 8.4% in the third quarter, relative to the year ago quarter. And the margin on our terminated business is substantially lower than the margin on the aggregate block.

Overall, we are pleased with the level of benefit ratio improvement we experienced in the third quarter as it is a significant lever for margin profit improvement in the U.S. Brokerage segment over the next two to three years. In the group income protection line of business, the before tax margin relative to premiums for third quarter was 7.3%, excluding the impact of the California settlement and the disruption impact. Our goal is to improve this margin to 9.5% in 2007. Touching briefly on risk trend and our other primary lines of income protection business.

We saw stable to improve incident trend in our individual income protection business, both recently issued and closed block. Claim recovery experience was slightly improved in the recently issued block of business but slightly negative for the closed block business relative to the year ago experience. All in all, our risk trend in the third quarter were consistent with our long-term views for each business line. We do not believe we will have a material impact from the hurricane activity in the golf coast during the third quarter as direct claims activity have not been significant.

It is likely that we will experience some persistency in premium collection reduction, as a result. And sales for U.S. Brokerage and Colonial will be lower in this region until the economic recovery begins. The third topic I'd like to comment on, is an update on our interest reserve margins. Despite the continued low interest rate environment in the quarter, all of the interest reserved margins in our primary business lines remained above our target range of 60 basis points.

The over all portfolio yield increased by 2 basis point in the third quarter relative to the second quarter. As we had a significant percentage of our cash flows hedge and we're able to invest our cash and unwind our hedges early in the quarter to get national benefit. With the hedges we have in place and in any reasonable interest rate volatility scenario , we do not foresee any necessary changes to our discounts rate on new claims in perils for the remainder of '05 or 2006.

We have a dynamic process in place to manage interest rate risen and are comfortable with our current position. Finally, we have made great progress in building financial flexibility this year, maintaining a risk base capital ratio, in excess of 300%, while reducing debt by $ 227 million. Further reducing our intercompany loan balance, recapturing the center re-agreement and absorbing the cost of the California settlement.

As I alluded to at our investor meeting, we are also continuing to explore the idea of repatriation a portion of our retained earnings and tax advantage manner. This could be partially funded by a debt issuance from our UK subsidiary. The dividend would be used for purposes specified in the American job creation act which was enacted late in 2004. Because we remain focused on did deleveraging our balance sheet over the next year, any issuance of debt related the UK would be accompanied by a dollar-for-dollar reduction of currently outstanding debt.

As you can see from our new reporting format, our UK operations produce very strong cash flow and have strong dividends capacity which will improve our corporate financial flexibility in the future. If we do choose to execute this initiative, we will do so before year end and only with a neutral depositive view from the rating agencies. Now I'd like to turn the call back to Tom Watjen, we'll make some brief closing comments before Q & A. Tom?

Thank you, Joe. Now we go to our questions, let me say again how pleased I am with the our results for the quarter, which I believe reaffirm many of the objectives we set for ourselves for 2005 and discuss with you are our investor meetings.

Specifically in our US Brokerage business we saw improved US Brokerage group income protection operating results and the restoration of sales momentum. And our Colonial and UK continue to produce solid results. I'm confident that we are on the right issues to improve future performance including, restoring our claims management effectiveness at our locations to appropriate levels.

I believe that with our results for the quarter, we have taken another step toward our goal to create a more stable diversified company, as we mentioned at our investor meeting, in producing a 9 to 11% return in equity from operating results by the end of 2007, while also generating significant excess capital. That completes our prepared comment. If we could, let's go to the question and answer session.

Thank you, sir. [OPERATOR INSTRUCTIONS] We'll take our first question from Vanessa Wilson with Deutsche Bank.

Good morning. You said your accessory earnings were ahead of expectations. Was that the accessory earnings excluding the one time item and does that in any way change your capital management plan that you laid out during your analyst.

I'm Joe. I'll answer that. No, the statutory earnings after reducing the one time impact from those special items were ahead of our expectations.

They do bounce a little bit from quarter-to-quarter but if you add up the last three quarters we're we will over $400 million. Which pretends well for $500 million year on a statutory basis and that is right at about the level we had outlined to you for our capital plan on investor day.

And the accessory earnings seem to bounce more strongly than the gap earnings this quarter. Could you give us a sense why that was.

On after tax basis, where you don't get the offset of deferred taxes of uses of NOl and things like that. Seasonality and reserves patterns out differently than it does on a GAAP basis, but obviously, we understand all of that and we look at it. That's why we presented to you on a rolling 12 basis, a rolling fourth quarter basis because it actually paint a more correct picture of what happens there. So we're very comfortable with the position we out line, 400 million for the first three quarters, on way to $500 million a year.

Joe, you gave us guidance on a margin of 9.5%, exactly what business is that on?

Vanessa, that's on the U.S. Group Income business.

Okay. And so is that swing driven entirely by the lost ratio or is there some expense ratio in there as well?

As we outlined to you on investor day, the line share is in the benefit ratio line and there's a bit of -- about 50 basis we're going to pick up in the expense line.

And so as we -- you hadn't given us that specific guidance before. Should we read that as increased confidence in the loss ratio at this point?

Vanessa, this is Tom White. That was a part of the discussion at the investor day so that's consistent with the message we delivered then.

Okay. Thank you.

Thanks.

And we'll go next to Colin Devine with CitiGroup.

Good morning, guys.

Good morning, Colin.

Mr. McCarthy expressive strategy continues to gain momentum on group L. T. D. perhaps you could layout just sort of a time line as to how we should continue to expect the improvements heading through '06. Obviously, i don't think it's going to a 110 basis points. [INAUDIBLE] In the benefit ratio per quarter, I thought that'd be nice but to set the stage as it were, talk a little bit about repricing trends for next year now that you're pretty much through the season. And then Tom, if we could talk a little bit about Colonial. Clearly, you've made a lot of management changes there. The weakest earnings quarter of the year. That is the one area -- it seems is still struggling despite a lot of initiatives.

Good question, Colin. Let's go to your first one on U.S. Brokerage. Maybe Kevin could give an update on where we are on the renewal and repricing, the forecast for '06 and we'll translate that into benefit discussion. Kevin.

Great. Thanks. Good morning Colin. Renewal program for '06 is similar to the '05 program. The average rate increases probably in the more 6 to 10% range.

Since the renewals our heavily loaded to the front end of the year, you tend to get sort of a bigger impact, think, in the first couple of quarters on lost ratio than you may be in the latter quarters. New business pricing, the effect of new business prices would be in the same 6 to 10% range, although not necessarily priced increases as much as continue to manage our mix of business and so, in the effect on the new sales part would more flow through toward the lost ratio to the latter part of the year. Your right that It's not a half a point or quarter.

On a consistent basis, but you'd expect some bounce, quarter-to-quarter, but eng you'd see a fairly good impact on the second quarter. And then toward the end of the year for business affects and mix affects.

He goes just in terms of the expectation of the benefit ratio, Joe, Tom, I just -- Colin, our goal is to get that down to the 87 to 88% range in the next couple of years. And we feel that Kevin's repricing strategy as well the improvements in the claims management performance will get us there.

And you mentioned earlier, continued on the expense. That's a secondary part but a very important part of that margin expense as well. Colin as it relates to Colonial, earnings side, consistent market, coming out of the Colonial operation, I would say the last quarter was a little adversely affected by the life line of business which we do see some volatility from time to time.

So I would say at this point we feel pretty good that that group is very aggressively managing the margin side of the business expense ratio is actually down in the quarter so again I think there's some good things going there in terms of managing the underline sort of risk side of the beside. I think as you alluded to clearly the focus is on sales and I think as Tom mentioned in his comments, there's been a significant effort to make adjustment and stick to the sales management part of the organization.

And restore the culture of recruiting agents I think that was something that's been lost in the last two or three years. And so again, I think even though it doesn't show up yet in sales, I think some of us are encouraged when we look at the significant changes that have happened in the sales management group, a significant, Tom mentioned 16 or 17% increase that has occurred in that management tier, which, as you know, is very important to have the right people in those positions because those are the people that are going to be out creating new producers. The new producer piece is relatively flat but I think that's only because it's only been recently that we've been able to ramp up that management group.

So again while we're trying to rebuild the sales organization and get the focus back on the basis of recruiting, the good news is the group has been very good in managing the and the expense side of the business and as we said in our comments, we hope to start to see more tangible evidence as sales grow at the beginning of next year.

As I said we are cautionary because Colonial does have significant presence in the gulf coast region in Florida What were finding is you could imagine tha employers, because of the issue in that region of the company are deferring the enrollment process so we could see sales pushed out a little bit. But again I'm very encouraged with some of the things that have happened to restructure that sales management area.

One quick follow-up. With respect to UK, I'm impressed with the quarter earnings up. Are 20% of your earnings, but next year you're not necessarily going to have, I guess, the impact of the Swiss block, in terms of picking up. Should we expect to see the gross rate there moderate a little bit.

Colin, I think we've been trying to going down, their been an exaggerated rated of accelerated growth as a result of some of the acquisitions and block take offers I think from a bottom line profitability point of view, obviously people expect to see -- we ten to expect to see growth on the bottom lean. But the growth is going to be a little bit -- certainly a slower pace. I think in this question, are done. I think again, I'm in Brokerage by that because eng our group in the UK is following the same difficulties policemen that we're trying to follow in the U.S. which pricing isn't there, let the business go and focus on March general, so the theme of our K. management team.

Thanks a lot.

Thank you.

We will now go to David Lewis with Sun Trust Robinson.

Hi David.

Two questions, first, you talk about quote activity. Obviously, you lost a lot of business two or three years ago when you implemented your rate increase. Is that potentially coming back in some form, if you could get the pricing. And then two, can you talk about on the interest rate side what the prepayment were in the third quarter of '05 versus a year ago and is that likely to continue to diminish as rates rise? Finally on that, if your hedging program which protects you on the risk management -- the interest rate management side, is that going to preclude you from seeing much benefit as rates rise?

Okay. Three good questions. I'll ask Roger Edgren who runs our field sales organization just to comment on your question regarding quote activity. Roger?

Good morning, David. The answer is a definite ,yes, that we're seeing quote activity drilled every quarter and as we look at quarterly trends, we're seeing very good results there and that activity is also translating into good growth rates in a number of coverage written year-over-year and quarter-to-quarter.

So all the things that we are doing and certainly the reduced turn over we reported in sales staff over the last several months and as we reported in New York is also having an impact on that. So we're very pleased with that activity level.

As it relates, I think, to the interest rates and I'll just ask Tom White to pick that up.

Yes, David, on the prepaid, the third quarter was a lower quarter relative to the second quarter and relative to the third quarter of last year for really all forms of miscellaneous investment incomes, whether it's on calls or prepay, or what have you. So it did have a many times bit of a negative impact and we do feel that a by the more in our closed disability block. So I think you're right, as interest rates move up, we'll probably see a little bit less than that. But rising interest rate environment is a very, very healthy thing for us over all. And I think that feeds into -- into the question Joe was going to handle your third quarter.

David, let me comment on interest rate environment and how it plays into our hedging strategy. First of all we -- we hedge most of our cash flows, we leave a little bit out there mostly because as you know the accounting world are very fussy how you match that off and you can't be over hedge. There is a to put our hedge flow. But here's the hedging strategy and I will say this, we are very disciplined.

When interest rates spike and we hit our target returns, that's in our pricing metric, we will go out and put that cash flow to work. So as rates rise, could we have put cash flow to work now that we put to work two years ago. Sure, but every time we go out thereto hedge, we've put the cash to work at our target yield. And that's very important. Most of our unedged cash flow is in very, very out years and long-term care so this rising rate environment actually portend well for the future profitability of long-term care business and we're currently looking at that right now, trying to judge when rates are high enough to go out there and put a lot of that cash flow to work.

Thank you.

Thanks, David.

And we'll go now to Tamara Kravec with Bank of America Securities.

Hi.

Good morning.

Good morning. Just to touch a little bit more on the group life business. I know your focus area is really on profitability. But what can we expect in future quarters. Are you willing to sacrifice that much in terms of profitability to see the declines continue for -- through '06.

It's a good question. I'll take a little bit of that to start actually. I think when you look at group life, actually, actually two pieces to this. U.S. Brokerage actually , the group life sales in our core market are up for the quarter. So the theme that we've been talking about, repositioning our business so we have a more substantial emphasis around what we call core market, actually the group life sales on our core market are up for the quarter, which again are a strong consistent message with what I talked about earlier.

So in fact, the short fall is actually in our large case. So the question that you have, I think we very much what you want to stay the course there. Again, if we can opportunistically sell large case, whether it's disability or life, we obviously want to be very much in that market place and we still are -- we still remain a fairly large participant in the large case market, very, very disciplined. I guess, again, I'm encouraged by the core market sales growth in life and that, again, we feel like we've got stronger profitability, got potential, characteristics and as Roger said in his comment, the is up in all of that market. So I think that's very in encouraging but again we will stay disciplined. In the large case side of that market place.

Now, as it relates to the UK, again, they had a very -- they have some very difficult comparisons. So the life line grew very dramatically the last year so, again, that's in part what you're seeing as you look at some of the results in the group life line in the UK. But there, too, I think our focus in the UK is very much being sure that we stay focused and discipline around pricing.

I know our team led by Susan is looking for ways to continue to carve out segments where we can do it profitably but at the present time we're very comfortable staying with the discipline strategy and if we see some business that we can't write because we can't make meet the profit, profitability part, again we're prepared to trade that off again, continue to maintain good profit improvement

And as a follow-up, is the business mix shift enough to offset some of the short fall in the large case side and also, are you seeing more competition in any particular case sizes.

I say again when you aggregate it kind of neutralize, neutralize by the core market growth so it sort of presents a flattest from total sales, which again is -- is okay because we're very confident in the strategy that we have laid out that by focusing on getting that mix a little different is going to be in the best into of creating value down the road. Again, we're pretty comfortable with that. Now as it relates to competitive threats, I look to Roger and maybe Kevin to share some insights in terms of who we -- what's happening out there in the market place that would be -- to that point. Roger?

I think as we've been saying this morning and previously, really in the large case is probably the most competitive when we look at pricing being put in the market place and just our difficulties policemen as we've talked about for quite sometime. And more specifically, in the group life area, certainly in the group LTD area. But can Kevin maybe you may wants to expand on that a little bit.

Thanks, Roger. All the price competition group life that we've been, toward the larger case. We've had a pretty successful year to date and a successful quarter anchor market sales in general and group, large case life, though, especially the largest case, the cases over $1 million is highly competitive and. If you make a mistake on the pricing, so we've tended to shy away from that and also, we continue to do so.

Just add to the UK, I think it's the standard competitors we've seen in the past. It's legal and general, so I think all of those are -- have been certainly, it's a competitive in which meant over there but again, our team over there has been very difficulties and not walking into a situation that Kevin alluded to, is consistent across both market. It's hard to reprice after you've written the business as a loss.

Okay. Thank you.

Thank you.

We'll go next to Saul Martinez with Bear Stearns.

Good morning. I have one question on the work site market, in general. The work site market sales growth has been sluggish in recent years as you've highlighted in your investor day. In low penetration rates notwithstanding, here's my question. Why should we been confident that recruiting momentum aside that sales growth will pick up in the industry and at Colonial in particular.

I'll take that one. I think again when you think of our work site, again, we have two -- two access points into that market place. One is our voluntary benefit market and. Which again for the quarter was up 19%. So a strong result there. As you know, we come to market in that part of our business sort of more of an integrated solution, so we're working with existing group clients and others to sale voluntary. So a lot of that growth comes with building out and taking existing relations and shifting the relations to add voluntary products. So again, we have some very strong growth, coming to the Brokerage piece.

Obviously, the Colonial, coming to market and value property is a little it's a business that sold primarily, very smaller employers, it's a business that marketed differently told versus brokers. our confidence is knowing that we see opportunities out in the market place, that segment frankly does have, small employer is where the potential is. Again, we believe the growth is out there but we need to do some things, as I said in my comments, position organization to be more aggressively recruiting and the street and being out there and being exposed to those market opportunities.

We are confident it can be done because the Colonial got a did I have niche in the market place and it's around the small employer market place where the greater growth exists.

Why haven't we seen, a growth in your, is it sales disruption, like Colonial and AFLAC or is it something inherent in the market itself.

I think everybody has their own issues. If I can maybe speak to ours. I think we, as you may know, I think we shared the investor day, we made a leadership changes at the top, beginning the first quarter of 2004, and so we really got over the course of that time, Randy Horn who's the new CEO of Colonial , putting in place a new strategy there.

So I think some of our issues were specific to do new leadership, setting new tone and direction for the business, new business plan and obviously, this business is one that's heavily driven by, I use the word of street. You got to have people out there making calls on companies and we let our recruiting slack off. So we had to sort of build that back up again. You start at the top with did I have levels of sales management than an ones that group on his bothered, you change the incentive plan, has recruiting built into, and it takes time to build that back up again.

So I can really speak to our situation where I think it was -- our business plan frankly needed to be -- to be changed. And make some changes in the people, frankly, to build on that. And we've done that.

Great. Thank you.

Thank you.

We'll go now to Jeff Schuman with KBW

Good morning Tom, You directed us to the key for the update on the civil litigation. Is that the standard disclaim or will there been material updates this quarter.

Tom. Jeff, I don't think you'll see material updates in there. It's the standard disclosure. We did get some rulings that were generally favorable on some of the class action cases and that'll be included in there as well. But kind of a general update.

Okay. Thanks a lot.

Thanks, Jeff.

[OPERATOR INSTRUCTIONS] And we'll go now to Jason Zucker with Fox-Pitt Kelton

Good morning everybody.

Good morning, Jason.

A couple of questions, first, Joe, I wanted to go back to your statement with regard to the possibility of UK repatriation. I thought I heard you say that you might want to do something by year ends but I thought I also heard you say you wouldn't do something until the rating agency is moved to a positive stand. Can you clarify that for me.

I did say both and actually it's not wanting to, you have to do it before year even. It's a one year, sort of tax on repatriation those profits. If we do it, it has to be in '05 . And yes, obviously anything you do, given the ratings environment were in, we do it at the blessing of the rating agency. And Tom, do you want to comment on preliminary discussions we've had.

Jason, just to clarify, make sure everybody understands, we're not looking for a rating upgrade or a change in the rating before we would do this. We're just saying that we would want the rating agency to be okay and in agreement with our, you know, whatever our ultimate initiative is and how we carry it out. So we're not going to do anything that the rating agencies would come back and have a negative opinion on.

And generally speaking our preliminary conversation have been positive. They view it as a very positive management strategy. And obviously, that's weighing into our decision to move forward or not with this.

And Joe, can you quantify that amount that can be repatriate.

I really wouldn't wants to at this time. It's still a moving target in terms of what the capital markets are like. And how much we want to put back. But it'll be a sizeable amount and it'll be noteworthy. And stay tune. There's two windows, as you know, sort of borrow part -- part of the proceeds to do this. One is pre-Thanksgiving and one would be pre-Christmas and if we hit the pre Thanksgiving Wednesday, we'll obviously been making our announcement shortly. Stay tuned on that.

Thank you. And the other question is, is there any investment income in the quarterly results?

Excess investment income, Jason, I'd say no. In fact, it was probably a negative. When we break out bond calls and prepayment income it was -- this quarter was lower than what we saw in the second quarter of the year ago quarter.

We did have about $12 million as a result of the recapture, in the quarter that showed up investment income, if that's what you were looking right.

No, I was looking for something else that might not have been there like we saw, I guess a couple of quarters ago.

No, actually, this quarter was a little below trend line in terms of that type of income.

Okay. Great. Thank you.

You're welcome.

And we'll go next to Eric Berg with Lehman brothers.

That you and good morning. With respect to the UK, given that margins would probably be stable, you've emphasized that you're going to be focusing on profitability there and given the competitiveness of the environment why should we think of this as a growth business. If the top lean won't be all that great because of the competition and margins will be stable, how much can we expect this business to grow, what's the reasonable expectation and then I have a separate follow-up. Thank you.

Put your call on mute while I answer your call because you bring a little feedback actually. Let me answer the operating points and ask Joe to talk about the results. I think -- I think when you think about the UK, again, when we talk about even this quarter results, we saw decent, did he sentence -- relatively, flat ends LTD in terms of the sale. The real short fall was in the group life where again, we have -- we're prepared to be discipline and prepared to walk away from business that we can't -- we can't write profitably.

Having said that, again, I think group has one excellent job of continuing to manage margin, continue to manage expenses and so again, he goes that's why we are encouraged with the outlook for growth at the bottom line. It certainly isn't going to be in the kind of level that we seen in the years. We expect to see some growth. You're right, we can't expect, either top or bottom line growth we had the last couple of years but I think it's adequate and very attractive. Joe can speak to that.

If you remember on investor day, we guided you to growth rate of 8 to 10%. That market is under penetrated with respect to income protection and with our market share, leadership, we think that that growth rate is chief able. And in recognition of that, that growth does, never comes at a price. We actually guided people down. The returns on he can't have been higher than 20%. In fact, for the first half of '05 there were 22.3%. And we guided of 20%. Recognizing that the next of growth might come the a depressed margin. But we actually still belief, the 8 to10% growth rate and 20% return on equity is achievable in that market.

One quick follow-up. And that was very helpful, thank you. In respect to California in the conference call last week, Stand Corp. indicated, while in the challenges of total disability and other changes in contract language, that had occurred as a result of Unum 's agreement with the state, that it was by no means convinced that these changes would apply to it indeed to anyone but Unum .

In short, it let left me with the expression, the Company left me with the impression that Unum might be treated differently. What's your take on sort of how California will be dealing with the issue of contract language. In particular, what I'm asking is, will the changes -- are there certain changes in contract language that are going to apply unique current to Unum or is this an industry wide change. Thank you.

This is Tom. I believe it is an industry change. And again, I think that there is first off, a lot of commotion off in the California market as you can massage general, related to this whole issue of the direction that market is going, appear the role out of the insurance department is playing in setting that.

So it's not surprising that there'd be a lot of sort of noise out there and people sort of struggling with what this means to me type of thing. Unfortunately a couple of weeks time there's an important meeting with the California insurance department with all the carriers out there.

So I think there'll begin to be more clarity about this for th whole market place again, our firm belief is the things we agreed to, were ones that -- that are provisions that are going to be universal in the market place. And the actions that we've seen the California insurance, the department takes since that time have given us no reason to believe that's not going to be the case here.

Thanks very much.

Thank you.

And we'll go now to Joan Zief with Goldman Sachs.

Thank you. Good morning. I just had two quick questions. One is when you talk about this potential repatriation that you're contemplating, I know that we -- there's no disclosure about the amount. Is it more of an impact to your capital ratios or would there be an impact to earnings?

Joan, the idea is to basically shelter future dividends from the UK. If you think about what we just said strategically about UK, great cash flow, growing at a reasonable rate. Part of our capital, obviously is to rely on dividends to the parent company from the UK.

So, this tax act helps us sort of shelter some of those dividends through this AJCA. So going forward, the -- the benefit to us is clearly in the tax line, lower taxes on dividends we take from the UK. There's no impact on capital ratios. Any money we borrow as a result of this, we would absolutely engage in a repurchase of existing debt for dollar for dollar amount. So no impact on capital ratios. The earnings he impact is tax savings in the future as we harbor dividends off the UK business.

And would that be a GAAP tax.

Yes, GAAP and cash.

My second question is about the hurricanes. We've seen other companies put up some extra reserves for expectation of some losses from the hurricanes. I know you've mentioned that there could be some affect but you haven't set aside any particular amount of money. Is that because that -- that the affected areas relative to your total book of business is not meaningful? Could you just give us a feel for how important that area is to your books.

Sure. I wouldn't say it's not meaningful. We're well represented, both Colonial and and U.S. Brokerage, Joan. First thing, we have not seen any claim activity. So with respect to losses, both on disability income or group life. We haven't gotten any claim and again, we've been sort of in an outreach program to our clients making sure they're okay, concluding for claims and we can't finds any.

So obviously if thinks he emerge in the fourth quarter we'd record them. We think the exposer if any, but it will be on premium collection. As you know some of the states mandated premium holiday's. We didn't know if some of our clients survived the event. We've actually been out to most of them and lot of them did survive, So again, if we do have to sacrifice some of the premium collection we again think that would be diminish and very manageable and that's where we see the exposure.

Going forward, we will obviously have to rebuild our sales force and get them back in business, in those affected areas. And in the very near term we expect our sales activity to be a bit disruptive. Tom, I don't know if you want to comment on that.

I think that's where we see the exposure. The fee is quite manageable. With all the tragedy of this region, people are not looking at enrolling new plans and they defer those enrollment decision.

But as Joe mention we've had a very expensive out reach program to be certain we're connecting with our customers, that we're assessing any enrollment issues, any premium issues, any sales issues, any claims issues and so far we haven't, on the claims side seen anything that unusual happening in that part of the region. I would say our vast majority of the resources, in the gulf coast back up appear running. Even our New Orleans office his back up and operating on the Brokerage and in our Colonial staff is coming together.

So again, we haven't seen it on a claims front. And the only thing we have seen which is expected is deferral on enrollment decision. As Joe said, we'll get the outreach program outstanding so we'll see if there's something there but right now we don't see it.

Thank you very much.

Thank you, Joan. If I could operator, I think we've -- we'll do one more question and then we'll close up.

Okay. Our next question comes from Ed Spehar with Merrill Lynch.

Thank you. Good morning. I was wondering, is there any difference in the returns that you would expect to get in the UK income -- group income protection and life business versus the U.S. because of the capital that you're required to hold there.

It's a good question. Maybe ask Joe if you've got any thoughts on that.

No, it's -- if you converted the UK capital position, which as you know is not sort of regulated on RBC basis, but sort of converted it to RBC equivalent, it's actually is a bit lower than the 300% you would hold here on an RBC basis.

But -- so the returns might be a little higher because the capital base in relation to premium, the operating leverage is a little higher but it's not what's driving the return. Their return on premium is very, very attractive. It's in the mid teens. And so it's their return on premiums that's driving the result there. As you know, the regulate capital over there. They do it from a business perspective. They run all kinds of capital models and the capital position over there is very reasonable in connection with the risk we take. So a little bit perhaps in holding lower capital but it's really the return on premium and operating leverage that's driving the result.

Thank you.

Thanks, Ed. We want to thank you all for taking the time to Joan us on the call and that completes our third quarter call. Thank you.

And that does conclude today's conference. Thank you for your participation. You may disconnect your lines at this time.