普登 (UNM) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the UnumProvident Corporation first quarter 2006 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Head of Investor Relations, Mr. Tom White. Please go ahead, sir.

Thank you, Felicia, and good morning, everyone. Welcome to the first quarter analyst and investor conference call. Before we get started this morning, 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, and 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, 2005. The Company expressly disclaims any duty to update any forward-looking statements.

Our discussion will morning will include non-GAAP financial measures. Therefore reconciliations to the corresponding GAAP measures will be available on our website, which is www.unumprovident.com, under the investors and shareholders section. Representing the Company this morning on this morning's call are Tom Watjen, the President and Chief Executive Officer, Joe Zubretsky, Senior Executive Vice President of Finance, Investments and Corporate Development, and Bob Greving, our CFO. We also have representatives from our US Brokerage, Colonial and Unum Limited operations for the question-and-answer session. And now I would like to turn the call over to Tom Watjen.

Thank you, Tom, and good morning, everyone. As you know, yesterday we reported first quarter operating income of $0.41 per diluted common share, excluding 2 non-reoccurring items totaling $0.18 per diluted common share. This operating result was $0.02 per share below the consensus estimate for the quarter and slightly below our expectations. The larger of the 2 non-reoccurring items is an increase in our reserves for the claim reassessment process resulting from the multistate and California settlement agreements, which we will describe later in this discussion.

Our results this quarter I think can be summarized as follows: First, we generated strong operating results in most of our businesses and product lines, including sales, persistency, and profitability. The one exception was our US Brokerage group income protection line, which is still not meeting our profitability expectations, but made progress in the quarter. Second, our financial condition continues to strengthen, including our liquidity, capital position and financial flexibility. Over time, we expect this to gradually have a positive impact on our credit ratings, and Joe Zubretsky will have more on that in his comments. And finally, we continued this past quarter to take the steps needed to satisfy our previously discussed regulatory settlement agreements. This quarter we were in a better position to quantify the costs of our claims reassessment process, and adjusted upward our original estimate of that cost. We believe the steps we are taking illustrate our commitment to satisfactorily put these regulatory matters behind us, and is also obviously very manageable financially.

Now let me touch briefly on the performance of each of our 3 primary businesses, US Brokerage, Unum Limited, which as you know is our UK operation, and Colonial. As I have said before, we made a conscious decision to develop a more balanced -- excuse me, develop more balance in our business plan, and our subsidiary operations and nondisability lines are continuing to make a much more significant contribution to our overall results. Now, starting with our US Brokerage business, the size and the profitability of our group income protection business, we have strong performance in all of our other US Brokerage segments in first quarter. Our group life business posted solid results and our supplemental and voluntary lines had their strongest quarter in recent history with all 3 lines of business, the recently issued individual income protection, long-term care, and our voluntary workplace benefits businesses all performing well. In addition, we saw stable performance in the individual income protection closed block segment, which will never generate target rates of return on capital, but is generally performing on a basis consistent with the expectation we set when we restructured and segmented this closed block back in 2004.

I continue to also be very encouraged by our sales results. Our US Brokerage segment sales grew 3% in the first quarter. But we saw much greater growth in our core markets, where sales to employers with less than 2,000 employees, an area we have targeted for growth. In fact, our core market group sales increased 23% in group long-term income protection -- in our long-term income protection line, 22% in the group short-term income protection line, and more than 40% in our group life line of business. All achieved, I may add, while maintaining our pricing discipline. Sales to the larger employer markets were generally lower than last year, as we continue to see a fairly aggressive pricing environment, and we continue to be selective in this market. The result is that we continue to have a more balanced book of business between our core markets and our large case sales, which as you recall, has certainly been a very important area of focus for us.

Finally, our sales in our voluntary workplace benefits line, another area targeted for growth, increased 7.5% in the first quarter, and we continue to be very optimistic about our future in this particular area of the business. These sales results, along with strong persistency and renewal activity in the quarter, are very encouraging, not only because of the impact on future profitability, but these results are also indications of the strength of our position in the marketplace. The quality of our products and services, the strength of customer relationships, and the dedication of our people have positioned us well for the future.

As I mentioned earlier, we have one remaining operating challenge within our US Brokerage operation, and that is to restore our group long-term income protection line of business to an appropriate level of profitability. While the 2006 first quarter benefit ratio, excluding the reassessment reserve charge, increased slightly over the fourth quarter of 2005 result, we did see improvement in our group benefits operation performance, though not quite as much as we had expected. The trends in the quarter were encouraging though, and that gives us confidence that we are headed now in the right direction. We do not feel that our performance is being impacted by pricing or risk selection, and we also saw only a minor increase in incidence in the quarter. Joe will cover each of these topics in more detail later. As I said, we are pleased with the organizational changes we made in the benefits operation. While the financial effects will likely lag the operational improvement, we believe that the benefit ratio has stabilized in the mid-90% range, and will begin to improve in the second half of the year. And I'll have more to say on that in my closing comments.

Our subsidiary performance was again very strong this quarter. Unum Limited and Colonial, representing approximately 50% of our pretax operating income, excluding the reassessment reserve charge. Unum Limited had a very strong quarter, with operating earnings increasing 15% over the year ago quarter. The combination of outstanding risk management results, disciplined expense management, strong customer loyalty and persistency, and the impact of the acquisitions we have successfully undertaken over the past few years, continue to have a very favorable impact on our profitability.

The one area where we were below plan in last year's results, is in our sales. First quarter sales results were negatively impacted by lower quote activity in the UK market, driven primarily by the market's focus on recent pension legislation, which we believe has temporarily distracted benefits brokers and customers, as they focus their efforts on pension-related issues. While this lower level -- with this lower level of activity, the market is very competitive, and we are remaining disciplined and not chasing business. With all this said, we believe we have maintained our leading market share position in the UK market, and this lower level of activity and unusually aggressive pricing environment will actually only be temporary.

Now turning to Colonial. Colonial reported another solid quarter, with a 5.5% increase in operating income, and profit margins that are at some of the highest levels in this Company's history. I'm particularly encouraged by the sales trends this quarter. The 9.6% increase in sales was the highest rate of growth in almost 3 years. Like elsewhere around the Company, we have been more disciplined, though, in our growth. In this case, focusing on the market segments which have more attractive profitability and persistency characteristics. I'm therefore especially pleased with the 13% sales growth Colonial had this quarter in its small business practice. Looking ahead, I'm also encouraged with the recent level of agent recruiting, which speaks well for future sales growth. While the primary focus in recent quarters has been on restructuring our sales organization and restoring sales momentum, focus has also been on the risk management and expense areas of the business, and those actions are obviously contributing favorably to Colonial's results.

Now I close at this point, coming back to some of the things I started the conversation with here. This past quarter, we generated strong operating results in most of our businesses, and we have a clear focus on the one area that is not performing up to our expectations. Secondly, we have continued to strengthen our financial position, which ultimately will lead to, we think, a favorable impact on our ratings. And we're also making further progress toward satisfactorily putting our regulatory matters behind us. Now let me turn the call over to Tom White to review segment operating results. And then Joe Zubretsky will provide more detail on the quarterly trends, before I make a few closing comments. Tom?

Thank you, Tom. The Company reported net income of $73.4 million or $0.23 per diluted common share in the first quarter 2006, compared to $152.2 million or $0.49 per diluted common share in the first quarter 2005. Included in these results for the first quarter, is the charge that Tom referenced for the regulatory reserve strengthening of $86 million before tax, or $55.9 million after tax, which is $0.17 per diluted common share. In addition, there was a deferred debt cost write-off in the quarter of $5.3 million before tax or $3.4 million after tax, which is $0.01 per share related to the ACES securities which were repurchased and retired. Net realized after tax investment gains were $1.5 million in the first quarter 2006. Adjusting for these items produces operating results in the first quarter of $199.8 million pretax, which is an increase of 8.1% over the year ago quarter. It's also $131.2 million after tax, which is an increase of 7.3%, and this is $0.41 per share, which is a 2.5% increase over the year ago quarter.

Now I'll briefly review the segment operating results. First, the US Brokerage segment reported income of $28.5 million, compared to $100.5 million in the first quarter of 2005. $72.8 million of the $86 million regulatory reserve charge is allocated to this segment, therefore excluding the impact of the charge, the operating income in this segment totaled $101.3 million in the first quarter. Within this segment, the group income protection line of business reported a loss of $71.6 million in the first quarter '06, compared to operating income of $3.5 million in the first quarter of '05. Excluding the impact of the regulatory reserve charge of $72.8 million, which was allocated to this line, operating income totaled $1.2 million for the first quarter of '06. And Joe Zubretsky will cover the operating results of this line in more detail momentarily. The US Brokerage group life and AD&D line reported a decline in operating income, to $43.9 million in the first quarter of 2006, compared to $55.5 million in the year ago quarter. The year-over-year decline in earnings primarily reflects the lower premium levels and an increase in the benefit ratio to 76.6% from 74.4%, which is driven by slightly higher group life claim incidence and average claim size. Overall, the level of profitability of this line is generally in line with our expectations.

Also within the US Brokerage segment are the supplemental and voluntary lines of business, which reported first quarter 2006 operating income of $56.2 million, compared to $41 million in the year ago quarter, an increase of 35.4%. The improved earnings are driven by favorable earnings trends in all 3 lines of business. First, the individual income protection recently issued business experienced favorable claims incidence in the quarter, which offset somewhat lower recoveries. Second, long-term care results were strong due to revenue growth and favorable incidence trends, although the benefit ratio increased over the first quarter of last year due to the aging of this block of business. And third, the voluntary workplace benefits line had a strong quarter, driven by favorable claims experience in the income protection product line, along with continued positive growth in premium income due to strong recent sales trends.

As Tom mentioned, the Unum Limited segment reported an excellent quarter with income of $54.4 million in the first quarter of '06, compared to $47.3 million a year ago, an increase of 15%. The increased operating income reflects continued improvement in the benefit ratio due to favorable claims experience, and also a lower expense ratio. As mentioned, Colonial had a solid quarter, with operating income increasing 5.5% to $46.2 million in the first quarter, compared to $43.8 million in the first quarter of 2005. The benefit ratio improved to 52.1% in the first quarter of '06, compared to 53.8% in the year ago quarter, primarily due to hurricane-related lapses and improved risk results in the individual short-term income protection line. The expense ratio declined to 19.9% from 20.6% in the year ago quarter. Sales increased 9.6% in the first quarter, the strongest sales increase in 2.5 years, with particularly strong results in Colonial's core under-500 life marketplace, where sales growth exceeded 13%.

Premium growth this quarter slowed to 4.7% due to policy lapses related to the hurricanes in the Gulf Coast and Florida last year. And we estimate these lapses will reduce annualized in force premium income by approximately $7 million. We continue to be encouraged by the leading indicators of sales activity, with our district managers, and these are the people who are responsible for recruiting and developing agents at the local level, but our district managers were up 13.8% compared to the first quarter of '05. New rep recruiting was up 1.1% in the first quarter. It began the year slowly, but regained double-digit growth momentum in March and April. The individual income protection closed block segment reported income of $14.7 million. This compares to operating income of $23.1 million in the year ago quarter. And this quarter's results include the impact of the charge for the regulatory reserve strengthening, which was $13.2 million for this segment. So excluding the charge, operating income for the segment was $27.9 million for the first quarter of '06.

Finally, the other segment reported income of $8.2 million in the first quarter of '06, compared to $9.3 million in the year ago quarter. And the corporate segment reported a loss of $43.5 million in the first quarter, compared to a loss of $39.2 million in the year ago quarter. And keep in mind that this quarter's corporate segment results include additional interest expense of $5.3 million, which was related to the write-off of deferred debt cost, which we described earlier. Now I'll turn the call over to Joe Zubretsky to describe the performance trends and more detail on our results. Joe?

Thank you, Tom. My comments this morning will be on the following performance trends: First, the impact of claims management performance on our first quarter results, and other profitability trends for the group income protection line of business. Second, the details related to the nonrecurring charge of $0.17 per share, as a result of increasing our reserves and the claims reassessment processes related to the multistate and California settlement agreements. Third, an update on our capital planning initiatives. And last, our updated view on the interest rate environment, its impact on our portfolio yields, reserve discount rates and future profitability.

Our group income protection benefit ratio increased from 93.9% in the fourth quarter of 2005, to 95.5% in this quarter, excluding the impact of the claim reassessment charge. The reasons for the increase are the combined effects of slightly higher submitted incidence, which we attribute to random quarterly volatility, slightly higher average severity, and a slight increase in the liability acceptance rate associated with new claims. These were offset partially by the positive effects of 2 important aspects of benefit operations management -- An improved claim recovery rate, and improved level of Social Security and other liability offsets. The operating metrics in our benefit operation improved in many important areas, giving us confidence in the future, although the hard work continues. Some of the organizational changes and process improvements were just implemented in the first quarter, and others will be implemented in the second. The areas of focus for the benefit organization continue to be inventory management, process management, and quality control.

A few examples of specific initiatives implemented by the new benefit operations management for each of these areas of focus are as follows. First, with respect to inventory management, we have increased the number of disability benefit specialists by 60, or roughly 10%, thereby reducing the case loads for these individuals who work directly with claims. Second, with respect to process management, new procedures have been implemented to make claim decisions on a more timely basis. For instance, process change is focusing on consistent and accurate contract language interpretation, benefit calculations, and conditions precedent to Social Security offsets have been successfully implemented. Third, with respect to quality control, we have successfully implemented the right-sizing of our claim centers by expanding the number of our long-term disability benefit centers centers from 3 to 6, providing greater supervisory control and support to the disability benefit specialists to improve their decision making. In addition, leading indicators of claim handling quality are trending positively. Appeal rates, new claim litigation, and complaint rates continue to improve in the quarter.

Although I mentioned some first quarter volatility related to new claim incidence and average severity, we are not seeing any secular shifts in the underlying fundamentals of the business, or the macroeconomic trends which would affect our profitability outlook. Incidence rates in most occupation classes and customer segments are behaving well. Moreover, new account sales are robust, and policy renewals are strong and are being obtained at target pricing. We believe these factors are all supportive of a positive outlook for this business line once the benefit operation returns to consistent performance.

The second topic for commentary is the recorded increase to our claim reassessment reserves of $86 million on a pretax basis, $55.9 million after tax, or $0.17 per share. One of our highest corporate priorities is to satisfy the requirements of the multistate and California regulatory settlement agreements announced in late 2004 and October, 2005 respectively. We have established a claim resolution unit of some of our most experienced claim professionals to perform the reassessment process pursuant to those agreements, and we are devoted to making the right claim decisions. As we have reported in the last 2 quarterly conference calls, the reassessment process is a multistep process of mailing notifications to past claimants, mailing claim reassessment forms to those claimants who wish to have their claim reassessed, and finally, reassessing the claim once proper documentation has been received.

In 2005, we began to make claim decisions on reassessed claims. Based on recent assessment activity, meaning payments made and case reserves established, we have determined that it is probable we will incur more costs related to these reassessments than we originally estimated. The original estimates for the number of claimants opting into the process, reassessment forms received, and average claim costs, have generally held up. But the number of claims actually requiring payments or reopening is higher than we originally estimated. We are committed to complying with the spirit and intent of these agreements, and paying the claims that should be paid. And this additional reserve is the financial cost of that commitment. This additional reserve however, is not material to our capital ratios, holding company liquidity, or subsidiary dividend capacity, as it will in effect be absorbed by the over $1.1 billion of excess capital we expect to generate over the next year.

My third set of comments relate to capital planning initiatives. During the first quarter, in connection with the remarketing of the debt component of our ACES securities, issued in May, 2003, we effectively retired $400 million of short-term debt by using excess holding company liquidity. The $0.01 per share nonrecurring item was the write-off of the originally capitalized costs related to those securities. The equity forward contract related to these same securities, will mature later this month, providing $575 million of new cash to the holding company, and the issuance of approximately 43 million shares. We intend to apply a significant portion of these proceeds to retire outstanding debt, and reduce our leverage ratio to 25% by year end, which would reflect a reduction of 500 basis points over the past 5 quarters.

We continue to explore innovative ways to economically capitalize our various businesses, including the closed disability block. During the quarter, we worked on crystallizing the idea of an extended duration liability securitization. We are optimistic that the concept can work. But we are still a short time away from declaring it an executable plan, as we need to obtain all of the requisite approvals to successfully complete an inaugural transaction, which could be a precedent transaction for our closed block securitizations.

Lastly, let me comment on the interest rate environment, and its impact on our portfolio yields, reserve margins, new claim discount rates, and future profitability. When we last reported, the 10 year treasury was hovering in the 4.5% range, and we were very comfortable that we could maintain our reserve margins and new claim discount rates through 2006, and into 2007. If the 10 year treasury stays at its current 5% level, we are even more confident in that assertion. That being said, since we are very well durationally matched and hedge most of our future cash flows, a spike up in rates as has just occurred, will not cause an immediate increase to our new claim discount rate. In much the same way, a precipitous drop in interest rates would not cause us to lower it. Needless to say, for new business cash flows, the current interest rate environment portends well for future profitability. Our investment portfolio yields are holding, the portfolio credit quality is the highest in recent history, and as such, our investment returns are providing attractive risk adjusted yields. Now I would 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. As I mentioned to start the call, there was a great deal that worked well in the quarter. And we are making progress in those areas which did not meet our expectations. The Company also continues to be building operating and financial strength, and we are making progress towards satisfactorily putting the regulatory matters behind us. With so many things working well, and the slow but steady progress we are making in the areas that are not, I continue to be confident in the 2 to 3 year financial goals we established last October. A strong operating and financial foundation exists for us to achieve return on equity expansion from 8.9% in 2005, to the 10% to 12% range. However, given the shortfall this quarter and our expectation that the group income protection benefit ratio, although stabilizing at current levels, will not begin to improve until later this year, we are adjusting our 2006 earnings per share guidance to a range of $1.65 to $1.70 from our previous guidance of $1.75 to $1.80. While I'm obviously very disappointed that we are now forecasting a slower recovery in our US Brokerage group income protection business, nothing changes our long-term view, nor the potential for this franchise to generate significant shareholder value.

Now before I close, as you can imagine, a lot of the focus is on some of the operating areas we talked about, so that is obviously the first priority for this management team. But let me also make a few brief comments on some other activities we intend to undertake to help make sure that all of our key constituents have accurate, timely information regarding our Company. This is a complex business, and a very different Company than it was just even a few years ago. And it's not at all unusual to see misinformation circulating in the marketplace. When faced with these situations in the past, I felt that the best thing we could do, was to remain focused on the task at hand, and let our results ultimately speak for themselves. Now having accomplished a great deal of the things that we set out to do, and generally performing well, and probably even more importantly, having strong plans and management in place, I think it's more important that we take a stand externally and be more proactive and visible in communicating the facts surrounding this Company. To a large extent this means spending more time, both my team and me, visiting analysts, investors, and in certain instances, the media. I believe that one of the most important things I can do now is to help tell our story, and I know many of you believe the same, as well.

In closing, many of you already see this Company for what it is, a set of businesses with tremendous potential, and a Company which has come a long way in addressing a number of critically important issues over the past several years. While there is still more to do for us to reach our potential, based on what we accomplished, I continue to be very encouraged by our future prospects. Now, operator, this completes our prepared comments. And we would like to now go to the question-and-answer session. I would say to start, that we understand there's another call at 10:00, so we will try to end promptly at 10:00. But certainly, we're around after the call for follow-up questions. So, operator, I think we'll go to the Q&A session.

[OPERATOR INSTRUCTIONS] David Lewis, SunTrust Robinson Humphrey.

Tom or Joe, can you talk a little bit about what your benefit ratio or assumptions are for the balance of 2006 under your new guidance? And too, group disability claims incidence, if I recall correctly, was flat throughout 2005. You had some modest deterioration the first quarter. I guess I'm a little surprised that we haven't actually seen improvements under the stronger economic environment. Any thoughts there?

Well, let me, David, pass the benefit ratio question over to Joe Zubretsky. And then maybe I'll ask Kevin McCarthy to speak a little bit to just what we're seeing from an incidence point of view, and connect that just to some of the things happening with our book of business. But, Joe?

Sure, David, as we articulated, a tick up in the group income protection ratio for the quarter. As I said in my comments, a spike up in some incidence and average severity, offset by some positive trends in underlying benefit management performance, both rather small, but clearly accounting for the over 1.8 increase in the ratio. The reason for the guidance the rest of the way, is as we talked about before, one of the challenges here is not just improvement in benefit center operations, but improvement in the consistency from quarter to quarter. And while we saw some positive trends, as I said, in recovery rates and certain offset -- achievement of offset targets, we are at this point reluctant to consider that a sustainable trend throughout the balance of the year. So we are being cautious, and saying the benefit ratio from a benefit performance perspective, will stay where it is for a couple of quarters, before starting to improve. So again, I think the issue here is one of sustainability. We are certainly encouraged by the performance in the first quarter. There's tangible evidence that the programs, policies, and procedures are taking root. But at this point, I think we need to be cautious over the sustainability of that trend throughout the balance of the year.

Thanks, Joe. Kevin, maybe you could pick up on the -- on David's question with respect to incidence, and just the book of business, and the connection to the economy.

Good morning David. Maybe 4 quick points about incidence. First of all, you do tend to see some seasonality in the first quarter. Secondly, most of the uptick in incidence happened early in the quarter, and sort of flattened out as the quarter went on, toward the end of the quarter. Incidence does tend to lag economic change, and it also tends to lag actions that we take with respect to mix of business. We are seeing some improvement in STD incidence, which could be a leading indicator of improving incidence going forward. But we'll have to just wait and see if that plays out. So in general, I think the way to think about this, is that the incidence is fairly flat at the moment, and probably should have some positive improvement during the course of the year, if economic trends and mix of business trends and STD trends continue.

Thank you very much.

Colin Devine, Citigroup.

I've got 2 questions. First for Kevin, if he could expand a little bit on the progress he is making directly in terms of turning around the claims administration process, as well as perhaps comment on just general pricing trends in group disability, what he is seeing. And then secondly, with respect to the multistate charge, Tom, I'm still struggling with how in effect the Company could have got it so wrong to have to increase the charge over 100%. And if there's something you can give us, such as accident year reserve development, to really support your statement that your pricing is flowing through, you are getting better results year-over-year. It's pretty tough to really verify that just looking on an aggregate basis on the schedule H.

Be happy to do that. Kevin, again, let's start with you, with the changes that have been made.

As you know, I took over the operation in January. And at that time I thought there were some significant opportunities that we could improve that operating model. At this point, I would say that I'm more optimistic than ever about that, having been through the quarter. We did a couple things during the quarter. First, as you know in the past, we had some site volatility. All sites improved during the course of the quarter. And we had steady improvement in operating results, month over month, in the quarter. We implemented management changes at the top of the organization, we redesigned smaller sized operating units that were more aligned with customer relationships, so that we could use those customer relationships and develop them over time to get more effective return to work. We reduced the size of the units as well, to increase the direct relationship between managers and the disability benefits specialists on the floor. And we implemented a quality assurance process and file reviews.

As a result of those various actions, we identified a number of improvement areas that we feel quite positive about. First, a review of the way in which we were handling initial claim liability, indicated that we have some opportunity to improve the rigor with which we assess initial claim eligibility. We also identified that we could significantly improve the way in which we think about claim management on an ongoing basis, in terms of benefit accuracy with respect to occupations that have complicated income streams, earlier initiation of Social Security offsets, earlier intervention with respect to subrogation type review, when there is an accident claim or a workers comp-related claim, or an auto claim. And also an increase in the persistence and consistence of follow-ups during the claim management process, which we think we can accomplish through these smaller operating units, and because we also reduced the work loads associated with each claim disability specialist, so that they could be more comprehensive in their claim management. And finally, we identified that as claim durations lengthen, we have a real opportunity to assess the ongoing nature of the disability, with respect to the change in definition of disability in the contract. So we identified through all that, both increased management approach, reduced work load, and quality assurance assessment, a number of areas that we feel quite optimistic are going to take hold as the quarters unfold here.

Do you want to comment on pricing trends, as well, in general?

Yes, with respect to pricing in the marketplace, I'd say prices are fairly flat at the moment. As you know, we have been through a lot of price increase over the last several years. New business pricing, I think is fairly flat in the marketplace. Large case pricing continues to be volatile, and we continue to be quite selective there. And on our in force business, the renewal activity, although our renewal volumes are less than they had been in prior years, because of the actions we have already taken, nevertheless, we did place about average 8% price increases into the marketplace on our in force book of business in the first quarter.

Thanks.

And, Colin, if I could, I think you actually flipped a third question there, which is a little bit related to the one we just went through. Which is, how can you on the outside assess pricing. And frankly, let me say one thing, and ask Kevin to speak to another piece of it. But we recognize it's difficult on the outside to assess profitability year by year, and some of the pricing trends, and we're going to continue to look at things that we might be able to do to improve that. But Kevin, you just might want to speak to the fact that -- to some of the trends that we have seen this quarter in terms of just pricing of new business and so forth. I would say that we are, as you know, directing a lot more of our energy to the core markets, you see that with our sales results, which again, tend to be more price insensitive. Has better stick and better persistency. The other thing I would say too, is we are getting a very nice mix of business between target industries that we're going after. I think our target industry group was probably 67% of our sales this past quarter, which is up from a little over 50%. So those are the kind of indicators, Colin, we can talk about now, But Kevin, you may want to embellish on it a little bit more.

Yes, I think there is some evidence in terms of the resiliency of our overall marketing franchise here and distribution capabilities. Package sales were up year-over-year. 34% of our sales in the quarter involved 3 lines of business and 73% involved 2 lines of business. Which I think is a strong indicator of the relationship we have in that core marketplace with brokers and customers. Mix of business ran very close to plan, about 42% of our LTD business was small case, and another 16% was in the mid market. So, well over 50% -- close to 60% in terms of core market sales. Also, if you take a look at just activity levels were up in the quarter, closing ratios were up in the quarter, core sales of course, were substantially up across all lines, 27% up overall. And then in terms of premium per life, although we're looking sort of with a one quarter lag, our premium per life continued to move up year-over-year, and somewhat more strongly than the rest of the industry. In general, I think fairly solid results on the core market, both from the standpoint of growth activity, but also from the standpoint of consistent pricing.

Thanks, Kevin.

I think, Colin, to your last question about the estimate around the cost of the multistate, obviously we are disappointed as well, that original estimate didn't hold. Frankly as you know though, the priority was to be sure that we moved through this process successfully with the regulators, we're committed to fulfilling all the obligations we have under that agreement. In doing so, we continue to build and strengthen the relationships we have with the regulators. I would say this was a very difficult issue to forecast, because unlike our core business of writing new business and forecasting claims and claim trends, and things like that, this was basically giving opportunity for almost a half -- revisiting half a million decisions, and there really is no precedent out there for what number of those decisions, as Joe said, was going to lead to an additional payment.

As it turns out, it's still a very, very, very small percentage of those original decisions, both in terms of the number of decisions, and the dollar amounts are certainly very, very, very small in comparison to almost $7 billion of benefits that were paid over that particular period. But again, we're in an area that we just don't have real good historic information, because it's a very new concept. So the risk here was just one of estimating properly on a foundation where there's not a lot of good precedent. We did our best the first go around. We used things like turnover rates, and exception rates, and things like that. But again, you really didn't know until you got in the process. And again, as I said, we are absolutely committed to fulfilling those obligations that we have with the settlement. And that's the most important thing we wanted to do as we moved through this process. As Joe said from his comments, it alters in a very, very slight way the excess capital position we have as an organization. So it's not an issue of affordability. But did want to do the right thing here in this process, and that's, I think, what you see here.

Thanks very much.

[OPERATOR INSTRUCTIONS] Ed Spehar, Merrill Lynch.

I guess I want to understand a little bit more the benefit ratio in the quarter, because I think from the commentary, I think Joe, you said something to the effect of encouraged by the performance. Kevin more optimistic than ever. All sites improved during the quarter. Yet, and sort of the reference a couple times to normal volatility. So I guess putting all that together, I'm still confused by a benefit ratio in the quarter that I think was much higher than what you would have thought. And then also, if we're thinking about volatility, if it's normal volatility, why is it that you don't think it will improve over the next couple quarters?

It's a good question, Ed. Joe, want to pick up on that? We'll go around a couple others, as well. But why don't you get us started with that one?

Sure, Ed. There's lots of metrics, as Kevin alluded to, lots of different things that we watch. Some are more material to the benefit ratio than others, but they all contribute. Again, I think we are very clear with our comments. I think in the past, it was not only performance, but it was consistency of performance. And quarter-to-quarter, various of the underlying operating metrics bounced around way too much for our liking. And one of the reasons we made the organizational changes we did last year, although it was visibly apparent from a financial perspective that it was getting better, the underlying trend was not consistent. There was too much quarter-to-quarter volatility. So I think our projection of having the benefit ratio stay where it is for the next couple quarters, is more or less caution around is the performance that we executed in the first quarter sustainable before this thing gets back on track, and is consistent from quarter-to-quarter. So it's really one of sustainability and getting the consistency from quarter-to-quarter. But all the operating metrics are being followed. We have great business information systems that allow us to track these things on a daily, weekly basis. Kevin and Jack McGarry in our financial organization, US Brokerage, have very, very disciplined and focused mechanisms to watch these things. So we're on it, but again, the volatility is the issue, and an issue of sustainability.

And then if I could add just a little bit more to reinforce something that Joe said. As you recall again, some of the changes we made were very much around the basis that we were seeing some decent trends in the fall. But frankly, it was the consistency part that was a place where we just weren't making some of the progress we wanted to make. And Kevin, you may just want to take a few moments just to touch on a few things that you and your team are doing operationally to get at this consistency point. And again, I think since Kevin and the team have only been in place now for a little less -- about a quarter, at this point we don't want to start to assume that everything is in place to assure that quarter-to-quarter, month-to-month, week-to-week consistency. Obviously the right things are being done at the ground floor level, which Kevin will speak to. But I think, Joe, as you were saying, at this point that's not a place we want to make -- at this point, that will eventually be, though, a much more consistent performing part of the business. But again, Kevin maybe touch on a few things that we are working on to address the consistency issue.

Thanks, Tom. As you said, I think I'm pretty optimistic about the progress that we made in the quarter. But it is also only one quarter. And we have had improved quarters before. Last year, as you know, we had had a fairly volatile first quarter. We had improvements in the second and third quarter, then we had a volatile fourth quarter. So good solid improvement in performance in terms of benefit operational management in the first quarter, but it's, I think, prudent to let that evolve. We made a number of management changes. We put a quality assessment -- as I said, a quality control process in place. We have a number of initiatives on a number of very specific points around the way in which we assess eligibility, and ongoing claim management, and the use of medical and vocational resources, and the 24 month change in disability review, et cetera. We are increasing referrals in terms of Social Security offset opportunities. We are looking at the possibility of referrals in -- outsourcing in terms of some of our subrogation work. All that trends positively, but it's a lot of change to make in a quarter. I think we're only sort of part of the way through it. We have also been working on reducing the work loads of our disability benefit specialists. In order to do that, we have been ramping up some of our hiring and training. And all of that sort of takes time to settle in and be consistent.

I guess just one quick follow-up. If you're saying we have had improved quarters before and don't want to get too positive after one quarter. I guess am still -- I'm trying to figure out what the improvement was this quarter. I know we don't have all the data that you have, but am I missing something? Is there something else going on with the book of business itself? I mean, did the claims operation improve, but it was just the loss experience this quarter that is somehow different than what you had thought?

I think Joe can work through some of the components of that.

Again, I tried to be clear in my comments. We do attribute the incidence in average severity to past experience volatility. We have had volatility of that level before, in any one quarter, as Kevin said. It was really early in the quarter, and then it sort of evened out the rest of the way. But it still, on a quarter-to-quarter basis, was volatile. So again, we expect that to bounce back. On the claim trends, as I said, 2 very important metrics in processes that we follow, are claim recovery rates, and the level and penetration of Social Security offset identification. And those 2 particular measures, which are materially significant to benefit ratio performance, improved sequentially Q4 '05 to Q1 '06. But again I think we're very clear, we don't want to declare victory on a permanent, sustainable improvement there, although we're very confident that this was a major step in the right direction.

Thank you.

Vanessa Wilson, Deutsche Bank.

I guess I'm stuck on the benefits ratio, too. I mean I'm looking at the $1.2 million you earned in that segment, excluding the charge, and you're reiterating your target, your 2 to 3 year goals. And so something has to change there in a pretty big way. I mean there's a 95.5% loss ratio this quarter. Can we think about metrics, like what is the loss ratio that you still think you can get to to make the 2 to 3 year goals? And when we think of going from 95.5 down to that level, what are the levers to get it? Is it all the claims operation performing at appropriate levels? Is it incidence? Can you give us some of the pieces, because it doesn't make sense at this point.

We absolutely can. Joe?

Sure. Vanessa, as we outlined at our investor day, really the long-term story hasn't changed in the way we're thinking about it. Two-thirds of that improvement from the mid-90s down to 88%, which is I think the target we outlined at investor day, certainly is still our long-term target. Two-thirds of that performance improvement was related to benefit center operation improvement. And we have got all of that detailed and drilled down to what I call, the desk. Operating metrics, lead to benefit ratio, lead to financial outcome. And our financial team has done a great job making the translation of that operating improvement to the benefit ratio, and targeting that 88% by end of 2007, beginning of 2008. So two-thirds of that improvement is related to that.

And the other third is actually just continued improvement in risk selection, some modest pricing improvements over the -- single-digit pricing improvements over the next couple of years. And that translates into a benefit ratio in the high 80s. And again, because of this early volatility here in our benefit center performance, we're not suggesting that we're moving that long-term profitability outlook to 88%, but it's very well quantified, and it's really not any different than we outlined at our investor day in October.

Okay. So just to follow-up on that, Joe. That's one side of the see saw, is the benefits ratio coming down. But it sounds like you're adding people into the benefits department in a material way. And in the short term, expenses are going up. And your revenues are not growing right now. So in the short term, it sounds like we are going to suffer operating expense -- negative operating expense leverage. And how does that leverage look over the longer term, as you get to the 88? Do we have a permanently higher expense ratio?

That's a great question, Vanessa. The answer is no. And the reason is, because while we added people and resource to help Kevin get his hard work done, we have actually reallocated from other areas of the US Brokerage organization. We continue to be more efficient in our service operations and our field operations. And we reallocated the proper funds for him to add the 60 people, and all these different supervisory controls and processes. So again, no pick up in the overall US Brokerage expenses, although you may see a higher -- slightly higher allocation to group income protection. But for the segment as a business line, it's not going up at all. In fact, it's pretty flat year-over-year.

Okay. Thank you.

Tamara Kravec, Banc of America Securities.

So just to clarify Vanessa's question, the 60 caseworkers that you added, these are new hires, and not shifting in people from different places in the organization?

Kevin, why don't you maybe step back a little bit, and add a little more detail to what Joe had mentioned earlier about just your staffing plan. Where you are on your staffing plan. Where those resources are coming from, and maybe help fill that out. And then obviously in process, you can get to Tamara's question.

Thanks, good morning, Tamara. Yes, we added about 60 resources during the course of the quarter. We continue to requalify our entire management structure and process. We are carefully sort of redesigning the way in we allocate work load. As I said, we are moving from a formally sort of technically-oriented model, to a customer-based model. And that's taking us a little time during the course of the quarter to get all that lined up, because we don't want to have any disjointedness with respect to managing existing claims on existing customers. But I think over the course of the year, the hiring process should stabilize. Some of that hiring is new hiring and training, some of it is hiring of experienced people from other organizations, some of it is outsourcing to -- certain of disability assessment projects to firms that specialize in those areas, such as Social Security offsets, or some work on changing disability definition, or as I said earlier, third party subrogation. So, a lot of different resources. We also moved some people into a quality assurance function, and built that up. We think that will pay dividends over time, both in terms of effectiveness and productivity. And then, by -- as we enter the middle part of 2007, of course we should be winding down our reassessment process, as well. And those resources will be able to be redeployed against the growth associated with our business.

Okay. Thanks. And just switching topics to the UK, and I guess this is a question for Tom. What gives you confidence that what you saw in terms of the sales and the competitive environment, is only temporary? Because it was a pretty big drop in your sales -- .

It is. And I'll make just a comment, then ask Susan Ring actually, to maybe give you, Tamara, a little more detailed feel for the marketplace, and why our confidence is high. But I think just as everyone knows, we have by far the largest market share position in that marketplace. So we have a very commanding position. We have been fortunate that we have grown over the last several years through internal growth, but also selectively through acquisitions. And in doing so, we have actually frankly, strengthened our position in that marketplace. And so we are a target. But I think very much as we have looked at the level of activity in the market, it is clearly driven by some issues that are to a degree unrelated to the disability marketplace. And maybe Susan, you could just take a few minutes and talk about what's happening in the pension market, which has been to a large measure, a distraction to customers and brokers around disability products.

Thanks, Tom, and thanks, Tamara. First of all, it might be helpful for me to just say a little bit about what the actuals are turning out like for April, because we are, in fact, already seeing a bounce back of our sales. So the group sales results for April came in at 96%. So we are already starting to see us sort of turn the corner, and those sales are starting to come back through again, which is really good. But in terms of the distraction during the first quarter [inaudible] in the market, as Tom says, we believe that that's largely due to some pension legislation changes which took affect from the 6th of April. But obviously, in the run up to that change, brokers were very, very focused on making changes for their pension customers. And as a result, weren't paying the same attention they would normally do to the group risk side of things. And so I think that's the primary distraction that we've seen. So we don't actually feel that we have lost business, but that many of the decisions have been deferred. In working closely with brokers and customers, that's certainly what they are saying to us. I hope that answer your question, Tamara.

Yes, it does. Thank you.

And I think Susan, if I could add, too. Is what we have tried to do, is be I think in the UK market, like we have been elsewhere, very disciplined to not chase business that's too aggressively priced. And I think as everybody can imagine, when there's a lower supply of quotes in the marketplace, it does heat up the price competition. And I think, Susan, you and your team have been very disciplined about not chasing that.

Yes, absolutely. So as the competitive market has become more difficult, and other competitors certainly becoming more aggressive on price, and that's certainly not something that we have entered into. So we very much maintained our pricing discipline, and we haven't just bought business during that first quarter period, whereas others we believe, have done that. So with it being more difficult that first quarter, it certainly added a dynamic in terms of more competitive pricing decisions.

Okay, and then 1 final question on clarification on the guidance. Your earnings came in with a charge, about $0.20 lower, you lower your guidance range by about $0.10. So am I right in thinking that your guidance includes the charge, and that you are just expecting now there to be much better performance, than perhaps the Street is estimating for the second half of this year?

Tamara, our guidance assumes a first quarter operating result of $0.41 per share.

Okay. So it doesn't include the charge?

Right, $0.41 is what we're assuming in the guidance.

Okay. Thanks.

Doug Smith, Basswood.

Can you comment on the rating agency view of the charge?

Let me ask Tom White to update on that.

Yes, Doug, there was a release from A.M. Best this morning, that basically said that the ratings are unchanged as a result of the results in the quarter. Our practice is to get with all of the rating agencies prior to the public release of our results, and that's for -- that's true for any quarter. And A.M. Best did decide to make a public comment. And as I said, their release is out. And they basically say that the ratings are unchanged as a result.

Is it easy enough just to say what the benefit ratio would be, excluding the normal quarterly volatility? Are you saying it would have been down sequentially?

There would have been probably -- it would have been flat to maybe a very slight improvement, had the incidence held stable with the fourth quarter, and the severity held stable.

Okay, great, thank you very much.

Jason Zucker, Fox-Pitt.

I'll switch gears a little bit. Going back to the multistate, I guess as I understand you have about 25,000 claims to review, and you're through about 20%? If that number is correct, I was wondering how many claims do you guys anticipate on going through a month, and when do you at the end of the process?

I think your numbers are generally directionally correct. 25,000 decisions to be made, and we have made about 20% of the decisions. We have a budget that we have laid out for our regulators, for them to review the process. As we said before, this process will be done somewhere between the end of the second quarter in '07, and the end of '07. So be -- probably go on into the third and fourth quarter of '07. And I'm not going to sort of parse through how many decisions we will actually make in a quarter, because we don't know. But we have a budget and a projection that the regulators have certainly espoused and agreed to. It will be done, as I said, most of the decisions will have been made by the end of the second quarter, and some other decisions will dribble on into the third and fourth quarter of '07. And that was sort of our original expectation.

And then what's the process? Is it quarterly where you will go back and review your reserve estimates? Is it something that will happen at the end of the year? How does that get reported back to us over time.

Certainly, as an SEC registrant, we review our all our reserves every single quarter, and account for them, as we did this quarter. And so as new information unfolds that supports or refutes the estimates we have made, we will account for that on a quarterly basis.

Jason, this is Tom. Just to add, I think the key thing on this is that we have credible data now to deal with. And we have had a handful of months -- we do have a few thousand claims that we have looked at, and so we have got some very credible data with which to make the estimates around the reserves.

And then switching gears a little bit, obviously a lot of controversy around the reinsurance-related issues. And my question is, have you ever had something like an independent law firm, or some other credible independent body, other than your auditors, do a study of your reinsurance positions? And I mean, if not, why? And if not, maybe perhaps that's something you could think about, and then that's something you can deliver to us.

Let me ask Joe to speak to that. But I think as you know, there is a lot of controversy in the industry around reinsurance. And I think we're no different than probably most companies. We have reinsurance programs that are designed as incredibly good risk management tools. That's obviously the use we felt was appropriate for the closed block of business. But there's also in the history, there's been times when the Company has done things that are more on the surplus relief side. So I'd say there are those 2 general buckets of discussion. We continue to believe there's right reasons to use all those. Although again, as you know, we actually recently have unwound our most significant surplus relief transaction, which was the [Center REIT] transaction. So the history is I think, if anything, we're using reinsurance less. But Joe, maybe you’d speak to just kind of where our position is today with reinsurance. I do think it's been rubbed, scrubbed and looked at by a lot of different key constituents. We'll certainly take it under advisement, would it be a benefit to have somebody else look at it. But frankly, it's been looked at by an enormous number of constituents. But Joe, anything to add to that?

Not really, Tom. I think we understand them very well. There are 2 agreements that get the most notoriety out there, because they're the ones that get talked about in our public disclosures. And as Tom just said, 1 of them is now gone. We recaptured the [Center REIT] agreement last year, because it was no longer providing the intended benefits. We saved our shareholders $11 million a year in fees, and gave up 8 points on our risk based capital ratio as a result. But that was a great spend. So again, I think we understand them very well. A lot of work went into the establishment of certain of those contracts. We have expert actuaries and accounting folks here, that understand them well. And at this time, we were not considering an independent review. But as Tom said, we certainly would take that under advisement.

Then lastly, just back on the loss ratio, just with respect to, I guess, internal reporting systems. Because I guess as late as March, we were hearing the loss ratio in group was going to tick down, and then a big reversal after we saw the quarter. I'm hearing improvements in processes and things like that, but it seems to me that something internally failed along the way, for you guys to be confident only a couple of months ago. And I guess like everybody else, I'm struggling with that a little bit. Do you expect that their confidence level is very strong coming out of this period?

Let me just speak to the information side. Tom, then maybe you just speak to the specifics of Jason's question. We have I think, incredibly robust MIS systems to support business, some of which we didn't have in the past. So we have incredibly strong MIS systems, so that we can get right down to the desktop at any part of our business for our people to understand what's happening, in many cases, on a very realtime basis, in terms of some of the trends in our business. I think we, at the management team, look at that very, very carefully on a very frequent basis, as well, and are very close to the business. So I just wanted to make that general comment in terms of how we operate, and the closeness by which all of our team operates to the business, and having the data available to do that. Tom, you may want to speak to the comment that's sort of general about some of the sentiment that -- .

First of all, Jason, we have not made any update on guidance or comments around the benefit center operations, or the benefit ratio. Kevin McCarthy spoke at AIFA. He was asked the question. I think the way he responded was that we hope to see some improvement, but that there was a lot of work that needed to go on. And that's what we're seeing, there is a lot of work. We still need to have the consistency come through. That's the reason we have some caution around our guidance going forward. I think the impact of the incidence was a little more than we expected, and probably a little more than Kevin was looking for at the time he spoke at AIFA. But there's some volatility in this. The volatility tended to work against us a little bit. I think the bottom line is that we are making progress on the claim recovery side. We need to have a note of caution about how quickly that comes through, because the important thing is that it be consistent, and that we not have the quarter-to-quarter volatility.

Good. I think at this point, as I mentioned before, I know there was a call that started at 10, that many of you maybe have already left for, or needed to leave for. So I think at this point, we will close the conference call off. Thank you all for taking the time. And again, as you know, people are around to answer any of your follow-on questions. But, operator, this completes our first quarter call.

Thank you. That does conclude today's conference. We thank you for your participation. You may disconnect at this time.