普登 (UNM) 2006 Q3 法說會逐字稿

Good day and welcome to the UnumProvident Corporation third quarter 2006 earnings results conference call. This call is being recorded.

At this time for opening remarks, introductions I'd like to turn the call over Mr. Tom White with Investor Relations. Please go ahead, sir.

Thank you, Stacy, 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. A Safe Harbor is provided for forward looking statements under the Private Securities Litigation Reform Act of 1995. Statements in this conference call regarding the business of UnumProvident Corporation, which are not historical facts are forward looking statements that involve risks and uncertainties, that could cause actual results to differ materially from those contained in the forward looking statements.

These forward looking statements are made based upon Management's current expectations and beliefs as of the date of this conference call, but there could be 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 10K for the fiscal year ended December 31, 2005 and our subsequently filed 10Qs.

The Company expressly disclaims any duty to update any forward looking statements. Our discussion this morning will include nonGAAP financial measures, therefore reconciliations to the corresponding GAAP measures are now available on our website, which is www.unumprovident.com and you'll find those under the investor and shareholder section.

As you know yesterday afternoon, UnumProvident reported a net loss for the third quarter 2006 of $63.7 million or $0.19 per diluted common share compared to net income of $52.6 million or $0.17 per diluted common share in the third quarter of 2005. The loss in the third quarter 2006 included before tax costs of $325.4 million, which is $211.5 million after tax, to reflect our revised estimate of future obligations for benefit costs, for claims reopened in the regulatory claim reassessment process, and for additional direct operating expenses to conduct this reassessment process.

Also included in the third quarter of 2006, are costs of $18.5 million before tax or $12.7 million after tax related to our settlement of broker compensation issues. Excluding these costs and also excluding net realized after tax investment gains of $3.1 million, the Company's operating earnings in the third quarter of 2006 totalled $157.4 million or $0.46 per diluted common share.

We have several members of Management assembled on the call this morning, including Joe Zubretsky, Senior Executive Vice President for Finance, Investments, and Corporate Development, and Kevin McCarthy Executive Vice President- Risk Operations. And now I'd like to turn the conference all over to the, UnumProvident President and Chief Executive Officer, Tom Watjen.

Thank you, Tom, and good morning. As Tom noted including special charges we reported a net loss for the third quarter of $63.7 million. Excluding special charges, we reported strong operating results, with a 17% increase in third quarter before tax operating income over the same period last year, and a 12.9% increase over the second quarter of this year. The adjusted earnings per share of 60-- $0.46 exceeded both our plans and the consensus estimates reflecting the improvements across many areas of our Company. I recognize, though, that the majority of your questions may surround the additional 325 million that we recorded related to additional costs for the reassessment process. I want to first take that issue head on.

I'm obviously very disappointed that we have to further increase our estimate of the cost of the reassessment process. However I want to be clear also that I'm not disappointed that we entered into these agreements, nor am I unhappy with the way we are adhering to both the letter and spirit of the agreement. Remember that our goal was to satisfactorily put this matter behind us with the regulatory community. I believe that we're definitely achieving this goal, yes at a higher cost, but most definitely achieving this goal. Failure to do so, I might add, would adversely impact our future. A future which is quite bright evidenced by the Company operating performance we've had this past quarter.

It's important to note that this increase in cost does not alter our overall financial strain,nor does it have any implication for our ongoing operation. As I have said from the start, the reassessment is an unprecedented process and as a result the cost is very difficult to estimate. While this reestimate certainly comes with some sticker shock, the capital cushion we have built allows us to have maintained our strong financial position despite this added cost. I'm obviously very pleased that Fitch and Standard & Poors have affirmed our ratings. While neither Moodys or Amvest has announced any reaction, we believe they will do so soon. Given the reaction from Fitch and Standard & Poors as well as our performance against the financial benchmarks the other agencies have outlined for us, and the minimal impact the additional costs have on our financial position, we will be surprised if their reaction was much different.

So while no one is more disappointed than I am that these agreements are more costly than originally estimated, I would ask that you not overlook the tremendous progress our people have made in improving the performance of our operating businesses. This is after all, the driver of shareholder value here at UnumProvident. I'm very appreciative of the efforts of our people and the impact those efforts are having on producing strong results for our customers and shareholders.

Since assuming my role in 2003, we have focussed on four areas. Improving the performance of our ongoing operations, maximizing the value of our Closed Block of Individual Income Protection Business, reaching satisfactory closure of the outstanding legal and regulatory matters surrounding the Company, and continuing to build financial strength. I'd like to take a few moments to give you my overview of our progress in each of these key area,.

First our ongoing operation-- operating businesses, including our U.S. Brokage, Colonial and UnumLimited segments produced very strong results in the quarter. With before tax operating income of 235.8 million an 18.7% increase over the third quarter of 2005 and a 12% increase over the second quarter of 2006. Our return on equity while still below our goals was 11.9%, a respectable level. In our U.S. Brokerage business the organizational and operational changes we have been implementing in our group income protection claims management operations are beginning to produce improved performance levels and importantly a consistency we have lacked in the past. Improving the performance in this area has been a number one issue in my discussions with investors, analysts, and the rating agencies.

The benefit ratio for the Group Income Protection segment excluding the reassessment reserve charge improved to 94.5% in the third quarter of 2006 from 95.1% in the second quarter, driven primarily by improved claim recovery performance in the Group long term Income Protection product line. With this, we remain on track to meet the benefit ratio guidance we established last quarter. Joe-- Joseph Zubretsky will provide more detail in his comments and Kevin McCarthy is available in the question and answer session to provide more perspective on the progress what we're seeing.

Also within the U.S. Brokerage business, we reported another excellent quarter in the supplemental and voluntary line of business with record quarterly profits. The Group like and AS&D line continued its steady performance, as well. Overall, though, it was a softer sales quarter in the U.S. Brokerage business, than I would like to have seen, although industry sales and group income protection have been very mixed. We are increasing our focus in the small, mid-sized market and are cautiously optimistic on the fourth quarter sales outlook. Persistency for each of our major business lines in this particular segment continue to improve with the Group Income Protection line at the highest level it's been since 2001, a testimony to our outstanding customer service performance.

It was another record quarter for Unum Limited as operating earnings increased 48.5% in the third quarter over the prior year. The pretax operating margin reached nearly 30% another record for this business. We continue to be prepared for margins to tighten although this has not yet been the case. I'm encouraged by the recovery in sales activity this quarter following a market-related slow down in the first half of 2006, and we expect sales momentum to continue into the fourth quarter.

Colonial had another record quarter as operating earnings grew 24% in the third quarter and premium income grew 7.8% over the prior year. The efforts of our Colonial team these past two years to reposition the sales organization and increase sales rep recruiting is paying off, as sales in the third quarter grew 17.8%. I'm not only pleased with the progress our Colonial team has made to position the organization to deliver sustainable consistent sales growth, but also their ability to very successfully manage the risks and expenses aspects of the business.

It was also a very important strategic action that we took that reinforces our commitment to actively manage the capital supporting our ongoing business operations. We completed what we believe to be the first ever disability securitization, which Joe Zubretsky will talk about in more detail. This not only frees up capital in our ongoing business, but also sets the stage to explore the same concept for our Closed Individual Protection Block.

Now the second area of focus for us and our investors is our Closed Block of Individual Income Protection business. Excluding the charge, earnings in this segment were $28.7 million down about 3% from last year, largely due to lower than expected claim performance. Since there are still only limited actions we can take to improve operating performance, our real focus has been managing the capital supporting this Block. Our Closed Block is supported by approximately $2.6 billion in capital, and our third quarter return of equity for this Block was approximately 2.2%, compared to about $6.4 billion in capital and a return of about 11.9% for our ongoing operations.

With the successful launch of our Group long term Income Protection securitization, we remain cautiously optimistic that we can complete a similar securitization for this Closed Block of individual business. Any such transaction would free up additional capital beyond what we have provided guidance on in the past.

Another area of focus has been the legacy legal and regulatory matters that arose during our restructuring period. I take personal responsibility for assuring that we prudently address these overhang issues and we made a great deal of progress this past quarter on a number of fronts. Joseph Zubretsky will provide more detail, but I want to make a few general comments on the multi-state claims settlement agreements and our claims reassessment process.

First the reassessment process is unprecedented and thus the cost has been difficult to estimate. While we have been accurate in forecasting many aspects of the costs we significantly underestimated the number of overturned decisions. The primary reason we found for overturning a decision is that information has been now provided, which we did not have at the time of the original claim decision. Because we are basing our revised estimates, though on approximately half of the ultimate number of decisions, we're certainly much more confident today in our estimate.

Second, I believe that the regulators are pleased with our management of the process as we are meeting all of the operational objectives and metrics and are paying what we should on reassessed claims in compliance with the regulatory settlement agreements.

And lastly, this process is completely separate from our ongoing claim operation where as I said earlier, we saw continued progress in the third quarter. Its cost has no impact on our outlook for income protection insurance profitability, and most importantly, this process will by agreement be concluded in 2007, so there's no long-term uncertainty about the eventual outcome.

Moving beyond the claim reassessment process, we made very good progress in a number of other areas described in our form 10Q litigation footnote, and I'l touch on two. First we reached a settlement with the New York Attorney General regarding his investigation on broker compensation issues and we have resolved a lawsuit with the California Insurance Commissioner regarding many of the same issues. This begins to put these issues behind us in a way that is beneficial to our customers, our brokers and the Company, and I might add actually for our industry. The dollar amount of settlement is small in relation to others, the New York Attorney General has reached regarding broker compensation. And a settlement with California involves no monetary payment except for the cost of an investigation component.

Secondly, as you may know, there are four consolidated class action lawsuits from that period. We have made progress on three of those and we have an agreement in principle to settle the fourth, the 401K case.

Now the last area of focus for me as I became a CEO was to build financial strength and flexibility. While the additional costs of the reassessment process certainly impacted our results, it has not had a material impact on our key financial metrics. We remain very pleased with the strength of our capital position today as well as the levels projected for year end 2006. We expect to maintain a 300% consolidated risk based capital ratio. We expect our debt leverage ratio to decline to just over 25% at year end 2006 with further reduction planned in 2007. And our holding company liquidity is projected to close the year at approximately $400 million, and grow significantly higher in 2007 to $950 million, only slightly below our previous estimate.

In closing, I'm very pleased with the performance of our ongoing operations and want to again thank all of our people for the contributions they have made to this quarters' results. I'm encouraged by the progress in U.S. Brokerage and obviously very pleased with a record profitability again turned in by Colonial in the U.K.

I'm also encouraged by our revenue trends. The strong persistency in our U.S. Brokerage business, significant sales growth in Colonial and the improving sales environment in the U.K, all bode well for our future. But we still have some regulatory and legal matters hanging over the Company. I'm determined to get those behind us so that the entire focus of investors can return to the operating performance of our well positioned businesses. Now I'd like to turn the call over to Joe Zubretsky for a more detailed review of the quarter before I make my closing comments. Joe?

Thank you, Tom, and good morning. My comments this morning will be on the following issues in the third quarter announcement. First the increased costs for the claimed reassessment process and the progress we're making to put this issue as well as several other regulatory and legal issues behind us. Second, the impact of claims management performance and other profitability trends for the U.S. Brokerage Group Income Protection line of business. Third, a review of our capital management initiative and a positive impact these are having on our financial profile. And fourth, a review of recent discussions with rating agencies and their reaction to our third quarter results.

Each quarter we evaluate all of our reserve positions including the reserves for the cost of the reassessment process. As described earlier, we are increasing our estimate for the total cost of this reassessment process by 325.4 million on a pretax basis, and 211.5 million after tax. Moreover, we believe it is prudent to also say that there is a reasonable possibility that the additional cost for the reassessment process could be more or less than the provision we have just recorded by $90 million on a pretax basis. The cost could be $90 million higher if the assumptions on which the reserves were based track more closely with the most recent performance rather than the performance from inception to date. And the entire cost could be $90 million lower if the future experience tracks more closely with the earlier experience.

In summary, it is the rate at which we are now overturning claim decisions that is driving the increased cost estimates. The following points should help you understand this dynamic and how it is influencing the increase.

When we revise the claim reassessment reserve in the first quarter of 2006, which was to record $86 million before tax and $55.9 million after tax, we based that estimate on the information that existed at that time, which was the actual cost related to approximately 5,500 claims we had actually reassessed or 20% of the projected ultimate total of 25,000. The characteristics, profile, and cost of these 5,500 claims were certainly more statistically credible than the information on which we based our original cost estimates.

In this third quarter, we began to experience increasingly higher monthly benefit costs related to the claim reassessment process, and mid-way through the third quarter this monthly cost began to exceed that which we had assumed in our reserves. As I stated previously, only one of the major assumptions used to calculate the reserves had materially exceeded its expected range. That assumption being the number of decisions being overturned by the reassessment process. To give you an idea of the dramatic shift in this particular metric, consider the following.

From the inception of this process in January of 2005 through March of 2006, we overturned approximately 23% of the claims reassessed. From April through September of this year, that rate averaged 50% with the highest level experienced in the third quarter. This recent change drove the 23% overturn rate experienced through March 2006 to 36% cumulatively through September 2006. The other major assumptions, the number of claims projected to be reassessed is holding to its original assumed level, while the average cost of individual benefits upon reassessment are increasing ever so slightly.

We therefore believe it is necessary to increase our provision for the cost of this process, which is now based on the nearly 11,000 claims reassessed and also 3,000 pending claims or 55% of the estimated ultimate of 25,000. Suffice it to say that our point estimate of 325.4 million or 310.4 million for claim payments, and $15 million for expenses, assumes that the profile of the remaining 45% of claims to be reviewed in the future is similar to the profile of the 55% already reviewed and pending.

If, however, the remaining 11,000 claims have a profile more reflective of the most recent monthly experience, our costs could be higher, which is why we are now quoting and disclosing a reasonably possible estimate of $400 million for claim payments. We will continue to monitor our claim reassessment experience and consider future experience in our quarterly evaluation of reserve adequacy. Unfavorable experience relative to our revised assumptions could certainly result in additional claim reassessment costs.

Since we have developed our new capital model, and have conservatively managed our capital, we were able to fund this cost with an allocation of our excess capital position without materially changing any of our capital ratios. We expect to report 2006 year end risk-based capital of approximately 300%, holding Company liquidity at over $400 million, and Corporate leverage of just over 25%. At the end of 2007, we expect our holding company liquidity position to be $950 million.

Next, I'd like to provide an update on the two regulatory legal matters that Tom referenced with which we had recent success. First, we have recently reached a settlement agreement with the New York Attorney General regarding his investigation concerning broker compensation matters. The settlement includes the approval of new compensation plans and disclosure, which we will be introducing as part of our Broker Compensation Program beginning in 2007.

We made significant changes in our discloser practice surrounding compensation 18 months ago, and this agreement further advances our objective of open and complete disclosure of all forms of broker compensation. The settlement also involves the payment of $15.5 million in restitution and a penalty of $1.9 million, which has been recorded in our third quarter results. I think we would all agree that it is more desirable to put this matter behind us than engage in a protracted legal battle.

We have also resolved litigation filed by the California Commissioner of Insurance against UnumProvident and other insurers. This settlement is based on new practices regarding disclosure of broker compensation, but does not involve any monetary restitution or penalties. Second, we have reached the settlement agreement in principal with the plaintiffs on the planned beneficiary class action with the 401K case, which is one of the multi-district litigation matters outlined in our litigation footnote and our past 10Qs and 10Ks. The settlement subject to court approval, had an immaterial net cost. As always we update our disclosures on these and other regulatory matters in our Form 10Q filing, and encourage you to read that for a more detailed update when it is filed no later than November 8th.

The second major topic I would like to discuss this morning is the improvement we saw in our U.S. Brokerage Group Income Protection performance. The benefit ratio for this line declined to 94.5% in the third quarter of 2006 from 95.1% in the second quarter and 95.5% in the first quarter, excluding the claim reassessment charges. Relative to the second quarter results, we saw improved performance in our Group long term Income Protection line of business, that was partially offset by a slight increase in the benefit ratio for the Group short term Income Protection business.

At a more detailed level, this quarter's results were positively impacted by a higher level of claim recovery performance, resulting from the improvements we have made in the claims management organization, as well as stronger premium and slightly lower incidents. The actions we have outlined in our previous calls which focus on better inventory management, increased resources and management controls, quality assurance, and others are being used to drive improved claim recovery results with a higher degree of consistency as evidenced by many of the improved metrics we are using to monitor performance.

Also we saw a slight increase in the benefit ratio for our Group short term Income Protection business, relative to the second quarter, driven by our higher weekly average [inaudible] and some one-time costs related to a large case, which will soon be terminating. Our short term Income Protection business is solidly profitable and continues to perform well, but did cause a drag of approximately 1 percentage point on the Group Income Protection benefit ratio in the third quarter. To reiterate our guidance, we expect and are more confident that the benefit ratio for Group Income Protection will decline to the 90 to 92% range by late 2007, early 2008, though we caution you that the pace of quarterly improvement in this benefit ratio may be subject to some volatility.

Third, we continue to execute our capital plan in the third quarter and I'm very pleased to highlight an announcement that we made with our earnings release. We just recently received approval from the South Carolina Department of Insurance, which allowed us to complete our inaugural transaction to securitize $1.5 billion of Group long term Income Protection claim reserves, the first ever in the industry. This $1.5 billion securitization transaction supports our thesis that the economic capital required to support these reserves is considerably lower than the levels we were holding.

We will provide more detail at our investor day, but in summary, we created a financial technology much like that of a XXX securitizations that had been completed recently. We reinsured these claim reserves into a special purpose captive capitalized mostly with third party nonrecourse debt on which we received an investment grade rating. To reduce the borrowing cost, we had the bonds insured by MBIA, and thus the bonds distributed to the market were rated AAA. We freed up approximately $130 million of capital with this transaction, which will be used to bolster the capital base of our Unum America subsidiary. Periodically, we will return to the capital markets to securitize additional long term disability claim reserves as they age. Moreover, we are now exploring the possibility of a Closed Block securitization as we now better understand the market'sappetite for insurance risk and in particular disability insurance risk.

Lastly, I will comment upon the reaction of the rating agencies to our third quarter earnings announcement. Certainly the increase to our reserves for the cost of the reassessment process was a point of discussion with the agency. As we have said many times, and we have been consistent on this, this reassessment process has no impact on the strength of our franchise, or operations, and is not a reflection on Management's ability to estimate the cost of its product. But rather is an unprecedented endeavor that carries with it a heavy burden to estimate its cost properly.

The only issue in our view therefore, is whether the capital base of the Company can fund the cost without changing the credit quality of the Company. The fact that we can still boast a year end respaced capital ratio of 300%, holding Company liquidity of an excess of $400 million and Corporate leverage of just over 25%, is testimony to the hard work of the past 18 months. The reaction we receive from the various agencies largely reflects that view.

To recap, both Standard& Poors and Fitch have affirmed the ratings and outlook without any change. Moodys and Amvest have not yet registered their reaction and tell us they will do so in due course. Since we have met all of the operating and capital metrics and financial targets they have outlined for us, again given the strong operating performance of the Company and our strong capital ratios, we would look for a reaction similar to that of the other agencies. It has been a busy, but highly productive quarter for us and I'll be happy to address any questions you have during the Q&A, but now I'd like to turn the call back to Tom Watjen who will make some brief closing comments. Tom.

Thank you Joe. Given our operating performance in the third quarter, I feel it's appropriate to raise our operating earnings per share guidance for 2006 to $1.73 to $1.76 from our previous guidance of $1.65 to $1.70. We'll have more to say about our outlook for 2007 at our investor day meeting next week. But right now given this recent strong operating performance, we would say that our 2007 guidance will be in the range of $1.83 to $1.87 per share, resulting from an approximately a 12% pretax operating earning growth for the year which will be offset by EPS dilution from the May 2007 [asis] conversion. So again, a strong [BTOE] growth expectation for next year.

Now, let me cap what Joe said what was a very complex quarter in the four ways I think about our results. Again I'm very pleased with the performance of our operating business and most areas are meeting our expectations. We look forward to sharing more with you next week about all-- each of our businesses and the outlook for each of those businesses. Our Closed Block results were generally in line with past results, with the successful completion of our securitization of a portion of our U.S. Group long term Income Protection reserves, we are turning our attention to potentially securitizing all or a portion of this Close Block of individual business.

Thirdly while I'm disappointed in the additional cost of the claim reassessment progress, we are making great progress towards putting this and other regulatory and legal matters behind us. And lastly, despite the increased costs incurred this quarter, our financial position remains extremely strong. Now I know there's been a lot to digest this quarter, but I'm confident that the-- through the actions that we've taken, and the results that we have delivered, we are continuing to increase the value of the UnumProvident franchise. Stacy, this completes our prepared comments. And we'd like to now go to the question and answer session.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from David Lewis, Suntrust Robinson Humphrey.

Good morning. This is actually [Eric Sucsan] calling in for David. I have a few quick questions. Can you talk about any new assumptions? Are the drivers behind your confidence that you can further improve your group disability benefit ratio now to the low 90s by the end of 2007?

Sure, be happy to, Eric. I think hopefully you sense that all of our comments that as we've gone through the last two or three quarters our confidence continues to grow because frankly we have a business plan in place that we feel is not just going to produce results one month or one quarter, but is actually going to produce consistent results. And I ask Kevin McCarthy maybe just to spend a few minutes just talking about the specifics. Because again it's those underlying business plans and some of those early results I think that give us our renewed confidence. Kevin?

Thanks, Tom. Good morning, Eric. As you recall during the first and second quarters of this year, we put a completely new claim management organization in place. We reduced the case loads for our claim specialist, we reduced the oversized work load for the directors in our units, we put specific protocols in place for the management of our claim processes around inventory management and quality assurance, and we put specific actions in place in particular regarding continuing disability reviews and social security offsets.

During the second and third quarters we've seen continuing improvement in all of our measurement metrics. Our quality assurance metrics are improving, our recovery rates are improving, our social security offset rates are improving, and the consistency of performance across all of our sites is improving. So we, we're quite confident that the actions we put in place are working and they're working consistently and we expect that to continue.

Okay. Now with the securitization announced yesterday, how does this affect the timing and dollar amount level of doing a similar transaction on yours Closed Block?

Well, I think, Eric, this is Joe Zubretsky. I think the reason we did-- we first started with long term disability and seasoned claim reserves, is that the risks of that investors needed to analyze were very confined and constrained to mortality risk and asset risk. But we wanted to test the market's appetite for investing in disability risk. And we found the appetite quite high. I think as testimony MBIA a very high profile and high casha bond insurer guaranteed the bonds.

So with that as sort of a precedent, we think we have a very good read on how the rating agencies are thinking about this, how the regulatory authorities think about this, and certainly how the capital markets think about this, to embark upon a securitization for the Closed disability Block, which as Tom said earlier has $2.6 billion of capital behind it. It's a more complex transaction, it involves real policy holders who are paying premium and the risks, not only are mortality risks and asset risks, but there's morbidity risks et cetera. So it's a more complex transaction, but we really feel we understand it a lot better now to at least put together a team to explore this possibility and, will report you quarterly on our progress.

Okay, all right, Thank you and that's all I have for now.

Thank you, Eric.

Thank you, we'll go next to Jeff Schuman with KBW.

Good morning. You kind of implied the answer to this, but I wonder if we can get sort of a direct answer. What is the cost, the actual cost of settling the 11,000 claims that have actually been settled at this point?

This is Joe Zubretsky. I think the way to look at it, if you look at our website, we put out some information yesterday that walks you through the total cost-to-date and you can see that if you have that in front of you, you can see the $325 million reserve [cash] we're taking for a total ultimate projected cost of $477.7 million for the benefit cost--

Right, I can see the change in the projection of the ultimate cost. But I was just wondering what is the cost for the 11,000?

Well, we -- it involves, tabulating all kinds of reserve estimates et cetera and I just don't have that for you right now.

Okay. So, but in general terms you're saying that you would assume that the second half looks like the first half, so I guess the assumption is that the remaining 14,000 proportionally sort of look like the 11,000? Is that --?

That's the underlying assumption. And now that we've looked at roughly 50% of the activity, we feel that that's statistically credible enough to actually project no improvement or no deterioration in the average claim costs, the number of overturned decisions, the rate of social security penetration in those particular metrics that are going to drive the costs. So we think the most prudent move was to face our best estimate on everything we knew to date, which as I said was 11,000 settled claims, but also over 3,000 pending claims. We wanted to base it on every piece of information that we could possibly look at.

And as we said, the reason we put a range around this, Jeff, is if the future experience is more like the most recent run rate, that estimate will be higher, but if it reverts back to some of the earlier experience we had, it could be lower.

Well what's the overturn rate in October?

We're not going to report on a monthly results on our overturn rate.

Okay. Are you going to consider publishing similar data on the reassessment process each quarter? It seems it might be-- if you're trying to build confidence and credibility here, that would be helpful.

Absolutely, and one of the reasons we put this information on our web last night, was it can be a fairly complicated issue to follow the tabulation of all of this, and we wanted you to be able to see something that we could talk from. But yes we're now thinking about what we're going to do every quarter to enhance the markets understanding of how much progress we're making.

That would be great. And then just lastly, and I apologize if Tom mentioned this, but the U.K,, obviously has seen a lot of volatility kind of in the sales and growth rates, what should we expect going forward in terms of growth in the U,K.?

Yes, Jeff, this is Tom White. The U.K. business sales have come back very nicely looking at the first half of the year, the sales were down pretty significantly, that was due to a lot of dislocation in the market around brokers and customers dealing with pension reform legislation. That has worked its way through, and so we had a nice improvement, I think sales were up a couple of percent. And looking to the fourth quarter, we feel very very optimistic that sales will get back to some nice growth levels. And then going into 2007, kind of get to a more market rate of growth in the kind of high single-digits to maybe 10%.

Great thanks a lot.

Good, thanks, Jeff.

Thank you, we'll go next to Joan Zief with Goldman Sachs.

Thank you, good morning.

Good morning, Joan.

My first question is can you explain if there's any give ups that you have to deal with in securitizing these reserves? Either less long term user earnings that you're providing to the bondholders, less investment income? What is--is there any -- is there a cost to you that we should be thinking about as you securitize your group OPC reserves?

Yes, Joan. There is a small cost. The way to think about it is once you reinsure the business out of your operating companies, whatever capital was deemed to have set behind those reserves is now free to provide dividend capacity to the holding company. Meanwhile, those reserves are in a special purpose captive. And that captive is capitalized with nonrecourse third party debt that will have a fully wrapped cost at a A level. But that capital will be invested at a slightly higher risk profile. So there's a small negative carry on the capitalization of the securitized vehicle. It's not material at all to the financial results of the Company.

So what you're saying is there's a small earnings hit, but not material and you get the cash to free up.

Exactly.

Okay. That's my first question. All right and my second question, is could you just talk particularly as you talk about your optimism about the improving loss ratios? What sort of assumptions are you assuming for the discount rate? What sort of assumptions are you assuming going into next year for the economy, for your incidence levels and those types of things?

Joan, this is Tom White. Since I was an economics major 25 years ago, I can handle that one. But Joan, we really don't make a bet on the economy. From an interest rate point of view, you're familiar with the hedging program. And-- well, that's something that we'll talk about quite a bit next Wednesday, kind of what our position is there. But in general terms, as long as the 10 year treasury's kind in the 4.25 and 5.25 range, here for the next several quarters, we really don't see any need to make any change to the discount rate on new claim [incurals].

We have -- we targeted at 50 to 60 basis point margin for our LTD line of business, we're actually pretty nicely above that. So there's some cushion there. And so with the hedges that we have in place, there's a nice buffer in there. So the 10 year treasury can move around and it's not going to have a big impact. But next Wednesday we'll walk through what the hedged position is. And but again, the message is that we're well protected there and really looking out for the next several quarters, we don't see any need to make any changes to any of the discount rate assumptions.

Thank you, my last question is. You've been doing -- you've been freeing up a lot of capital with your strategic initiatives here. But so far most of it has gone basically to fund your policy holders. When do you think your capital initiative can start generating the excess cash to be able to be returned to your shareholders?

Joan, as we said the liquidity position at the end of the third quarter is about $460 million and will be over $400 million at year end, that grows pretty steadily throughout 2007. And our estimate for the end of 2007 is a holding company liquidity position of $950 million, part of which arrives in early May at the conversion of our second tranch of [aces] securities. So we've already paid for that through earnings per share dilution, so that just arrives in early May. So we're pretty confident in that estimate.

By any measure of liquidity conservatism, holding six months of fixed charges, holding a liquidity reserve for potential excess-- additional costs to the claim reassessment process, we have excess capital to deploy to take leverage down further and to begin discussing a share repurchase program late in '07. And obviously as part of our deliberations with the rating agencies with respect to potential upgrade, we'll have that as part of that program. So we have not waivered from that same statement we made last year. Obviously our liquidity position is going to be down a little bit, from what we originally estimated of over $1 billion, but not materially. And we will still have that discussion late in 2007 about giving some back to the shareholders.

Great. Thank you.

Thanks, Joan.

Thank you, we'll go next to Eric Berg with Lehman Brothers.

Thanks very much. I have a couple questions, I guess directed at Joe regarding the reserve charge and what the future will -- I guess my thinking is that since there was such a significant increase as you pointed out in the overturn rate in the April to September time frame verses the -- verses the period before. 50% overturn rate verses 23%. There must be some profit going on here or something different about the claims that you have been reviewing and reassessing more recently.

Question is, why was it reasonable to presume that the overturn rate will stop at 50%? Why couldn't you have just as easily said, things are getting worse than when we started. They're going to get worse from here? I'm trying to understand your thinking about why you think that the future will be basically the same as the recent past? Thank you.

Eric, this is Tom, let me start and I'll ask Kevin to add some color just from an operational point of view. But I think what you just described is part of the reason we actually put a range out there. Unlike many other parts of our business, where we can have very firm estimates, those estimates are very easy to track and manage to, I think as we've said this process is very unprecedented. And really it's one of those situations where each time you open up a claim file, you're going to find a different set of circumstances because you're really basing your decision on new information that you didn't have at the time you made that initial claim determination. So it's a much more difficult to predict process. I think we do feel, I think as Joe said, very comfortable with the assumptions that we've made.

On the other hand, you never know whether the claim you open up tomorrow is different than the one you opened up today, which is why we put a degree of a range out there. So I think there's various degree of randomness to them. We have to admit this is the one part of our business I'd say that has that element to it, but maybe Kevin just a little more color just on the kinds of things the people in the reassessment unit are seeing, where I think as a result we're pretty confident in taking the position we have taken. But also need to be clear that there's some differences here verses other parts of our business.

Before Kevin comments too though I'd also say, Eric, we need also put this in context with the bigger picture. This is still a relatively small percentage of our claims that are actually being overturned, it's a relatively small part of the total benefits that were paid over this period of time. In fact I think if you go back over the entire reassessment period, we probably paid or accrued benefits of close to 23 billion. So it's small, it's obviously big in this period, but it's also difficult to predict give the nature of the way the-- this flows. But Kevin?

Thanks, Tom, good morning, Eric. Two things I want to reiterate. One, this is mostly about just the emerging credibility of the information that we have. And as Joe said, we are now through 11,000 decisions, another 3,000 pending on an estimated total of somewhere around 25,000 ultimate decisions. So we're well through the process now in terms of the credibility I think of information. So you wouldn't expect the same kind of volatility on the run out as you had from on the start up.

The second thing I'd say is that we've done a fair amount of sampling work to understand pending decisions and understand what the implications are within those claim files. When majority of the overturned decisions are based on a single element, which is the availability of social security approval for the claim that happened after we had denied the claim originally. And so we can see that emerging in the data. We know how often that's happening. And I think that gives us confidence about the remaining estimates.

My second and final question is, you said-- I think you said repeatedly that your estimate for these claim costs, this reassessment process now assumes that the second half of claims will have the profile of the first half. That's your assumption. So if it turns out to be the case, if the remaining whatever it is, 14,000, however many cases turn out to be similar in profile to the first 11,000, then I just wanted to clarify, will there be no further increase in the reserve or will there be the $90 million increase that Joe referenced?

No, Eric this is Joe. That is correct, the estimate that we've recorded is based on the 11,000 decisions. And as we said, if future experience is more reflective of the most recent run rate, than that's the $90 million range we put around it. So the 325 million point estimate is based on the entire portfolio of claims. Both adjudicated the 11,000 and pended, so we looked at every piece of information that is available to us at this time.

Okay, thank you.

Thanks, Eric.

Thank you, we'll go next to Colin Devine with CitiGroup.

Good morning gentlemen.

Good morning Colin.

[inaudible] I'll get two things. First, I was wondering if Kevin could talk about just general trends in the market now as we're going into the renewal season, what are you seeing? And perhaps to be specific in the large sort of medium-small case market on the LTD as well as Group Life.

And then second, with respect to the claims reassessment, I guess the part that strikes me here, Tom is the number of people who were able to get social security benefits. And is it fair to say that the regulators were right when we're looking at 40% of them based on your sides today, organic social security, you clearly made the wrong call. What assurance do we have that this isn't going to repeat? What has changed-- That's a great-- That's causing you so a 50% overturn rate? I mean social security benefits are hard to get.

Right.

Something went very wrong.

Well we'll come back to that. Let's start with the first question about the trends, Kevin. And then we'll come back to the second piece of it. Because I think we had a slightly different view, Colin, we can share some insight there I think that you're maybe a little more comforting than that. But Kevin, why don't you just speak to the environment first?

Good morning, Colin.

Hey, Kevin.

I think the marketplace has gone through a fair amount of change over the last couple of years, I think right now pricing is probably a little bit more stable in the marketplace, particularly in small and mid-sized marketplace than it has been. We've had to increase new business prices less this year than we've had to in prior years. I think sales results reflect that across the industry. It's been kind of a bouncy year for the industry, the first half of the year I think sales for the industry were actually down year-over-year although our sales were up.

And I think in the large case marketplace that the environment has remained largely the same. It's a highly competitive market place, as you know we've been very disciplined pretty much about staying out of that marketplace unless we can get the disciplined price that we're looking for. As a result our large case sales have consistently declined, as a percentage of our total book of business over the last several years. We're sticking to that because we don't see any change in the volatility of pricing in the large case marketplace.

Okay Kevin, if you were, I think, number two in first half sales, I haven't seen the nine month numbers, that's of course based on premium. With your pulling away from the large case market, do you still feel confident that Unum's number one in terms of total LTD cases being sold today?

Yes, I would definitely be confident about the total number of clients that are selecting UnumProvident.

And Colin, you're right to point out, that has been an important focal point of ours is to get a different balance of the business. Because we're just not going to be undiscipline in growth and try to focus more on the profits and the margins and things like that. So that very much is skewing some of the industry statistics.

Now on your second point, lete me make a few comments, then I ask Kevin to supplement those. Again first off, I want to put again what we've been through in context. When we talk about significant overturns, frankly it's in relationship to the decisions that we're making around the claims that have been submitted, but in the context of all of our terminations as Kevin said earlier, this is a very, very, very small percentage of overturns. So again just context wise, this is a small percentage both in terms of the number of claims as well as the amount we're paying in relationship to the benefits we've paid over this particular period.

The other thing I'd say is, when you think about what we've-- what we're doing at this particular point, we're really trying to almost -- we're trying to look back in history, back as far as 1997, for example and look at a claim determination based on information today that we have, that actually we didn't have back in 1997, nor did we have back in 1997 the ability to use some tools that we'd otherwise use. For example, return to work protocols with a customer. So we're very limited as we make that file review today back, I'm using 1997 as an example, on that 1997 decision because now, for example, our process and procedures, which Kevin will talk about, for example have much more thorough medical reviews on the front end. In fact we actually get independent medical examines in many if not all cases around the specific claim determination.

If we find that old file, for example, didn't have a second medical opinion, we have to rely very heavily on social security. And we actually have reduced, therefore, some of the things we would use today on a new claim and actually making that judgment call on a reassessed claim. So Colin I think those are the operational things that you're confronted with, as many of the things that is we use today on a new claim, we simply don't have available in the reassessment process.

That's correct Tom. And again as you put it in perspective, we're talking about around 2% of all the claims that we resolved over this time period, so pretty small number of claims, Colin, it's pretty bias sample with respect to social security. The majority of the claims that we are overturning are as a result of a subsequent social security approval and a medical determination was in that approval, which constitutes in effect, the de facto second opinion that we didn't have when we were reviewing those claims and denying them at that time, and we can't go back and reconstruct that now.

When we look at that today. When we look at claims management today on a new claim, we go through a thorough medical review, we have doctor-to-doctor discussions with the attending physician for the claimant, we seek an independent medical assessment before we make a claim denial determination, we evaluate the possibility of chronic condition deterioration, much of which is what's driving these later social security approvals, we evaluate [inaudible] morbidity, we estimate the likelihood of subsequent social security approval, and we pursue every possible return to work angle.

So if you think back on that 1997 claim, when we made the medical determination based on our own assessment that the person wasn't disabled, we didn't go through any of that stuff that I just discussed. And so now when we find out that a person had received social security, that in effect drives us to having to make the overturn decision. That wouldn't be the case on new claims today.

Kevin, of the remaining 14,000 claims, since the biggest driver here seems to be the social security determination, are you prepared to share with us today how many of those claims approximately are receiving social security benefits?

Of the remain -- no.

Of the remaining 14,000 is it 40%, 50, 60, 30 --?

Kevin-- Colin, we wouldn't actually have that information actually, because there's a stage process of processing these reassessed claims. And so we wouldn't even have files, I don't think Kevin at this point on those claimants. Is a very orderly process for how people respond to the request and send the file information in.

That's correct.

Okay I had thought that part of the process was complete--

Really the process-- just very briefly, the process starts with the mailing, the mailing then leads to people who indicate they want to have their claims reassessed, then there's an orderly process. Actually by bringing, I think those that have requested to have their file reassessed there's an orderly process, then send the package out to them to complete, they then bring it in, send that material in. So it stays, Colin, actually just so operationally we don't find ourselves with a huge volume of claims that we actually can't process in an orderly fashion.

Okay thanks.

Thanks Colin.

[OPERATOR INSTRUCTIONS] We'll go next to Tamara Kravec with Banc of America.

Hi, thanks, good morning.

Morning, Tamara.

I just want to ask this question a different way. So bear with me, but the -- just assuming that the 14,000 claims are left and you've got an assumption that 50% of them are going to be overturned. And so you've got this range with up 90 million or down 90 million. But if the remaining claims come in at say 70% overturn rate, the maximum obviously is that they all get overturned, and so you're ending up with a potential, and I just kind of backed into this on the back of envelope, that if 100% of them come in and are overturned, you're going to have to book another 385 million, the 70% assumption gets you to about 156,000.

So is it reasonable to take that kind of math as say you've paid, you've had 11,000 claims overturned, you put up 613 million so an average claim size would be about 55,000, but I'm not sure if that's really the correct way to look at it to try to back into that. But the 100-- even if it gets a little bit worse and goes from say 50 to 70 and you're at 156,000-- 156 million more, sorry, that's a little bit over the 90. So first is that an okay way of doing this with information we have?

And second, if you go over the 90 million, is there a sense that the rating agencies are okay with that or given that you've given this range those are my first two questions. And then I have one follow up.

Okay, Tamara, it's Tom White. Obviously you can put any percent you want and get to pretty much any number that you want. I'd say right at this point we've got information on roughly 14,000 claims and in total we're seeing a 36% overturn rate. So to suggest that we're going to have 100% overturn rate on the next 11,000 claims I think is a bit of a stretch. Now yes, you can do your math and you can get to a number on that, but I think in reality we're not going to see a 100% overturn rate on the rest of these claims.

Right.

Now, on the range what-- we did present that to the rating agencies. We actually committed that we would hold some excess, some of our excess capital kind of as a buffer, so that if we do get to the point next year where we do need to increase the reserve, we have those resources. Again, we're projecting to have $950 million of liquidity. And if the number is a little higher, we have the money available. And we'll just watch this very very closely. We'll update you guys, we'll update the rating agencies every quarter, as to the trends that we're seeing. And if there is a need to make the adjustment, we'll make the adjustment. But again I think to suggest that we'll have a 100% overturn rate is out of line.

Right. That's what I would think. 'Cause then that's just kind of the worst case scenario, which I think is probably not a reasonable scenario. But at the most, that got me to, not even 400 million. So I think that's probably not realistic, but I was just asking if that math was okay?

I didn't work through your math, but I think the assumption is a huge stretch.

Yes. Okay. The next question then just given the range that you've given and in terms of the ROE, the previous guidance you've given has been the 9 to 11%. And that was with your previous disabilities benefits ratio of I think 87 to 88, now it's 90 to 92. You're using some of your excess capital for the charge here and -- does your ROE guidance get stretched if, you're moving to 90 to 92, and now you can't really use the buy back. So I guess my question is, is your ROE guidance assuming any buy back through 2008?

No. Tamara when we-- we'll go into a little more detail with this with you next week, but when we talk about our guidance range for next year of what $1.83 to $1.87, that has embedded in it getting to that 90 to 92% Group Income Protection benefit ratio and that gets us to a return on equity in the 9 to 10% range. Now that assumes that, we build up capital, that also assumes that we're not putting that capital to work. So there's no -- there actually is-- there's some deleveraging that we'll-- embedded in that, but there are no share repurchases that are embedded in that assumption. But we'll go into the guidance in a lot more detail next week with you.

And Tom if I could add too, those numbers are the consolidated results there's not the continuing operation numbers that we referred to earlier. We're actually--is where the greater leverage in ROE is actually going to come. Second thing is I think you alluded to it, but that does not include any Closed Block disability securitization transaction, which is-- could be potentially significant in terms of the overall excess capital positions.

Exactly.

Okay and then my last question is on the disability sales in your Group Income Protection business, they were down year-over-year and sequentially a fair amount. And I'm just wondering if you can comment on whether you're seeing anything different in this quarter or is just seasonal?

Yes, Tamara, again this is Tom White, we're not really seeing anything different. I guess the one trend that we're seeing is that the average case size has been a little smaller. The coverage, which is the number of sales-- units of sales, if you will, that we're making we watch closely. And that's been trending better. We're seeing good signs there, but in general the average case size was a little bit lower. And again, this is-- we'll have some statistics on this. Kevin will be talking about that next week.

Okay.

But we really haven't seen any change in the overall marketplace. Operator, it's about four minutes, three minutes till. So I think we'll have time for one more question.

Thank you, our last question will come from Bob Glasspiegel with Langen McAlenney.

Good morning.

Good morning, Bob.

I was wondering if you could go through this hypothetical scenario of someone that, let's say had a bad back, that was part of your reopen claim process and you look at it again and over that period of time in the last couple of years, the back has gotten progressively worse. So now that it's, it's over the line clearly today and it may have been ambiguously over the line with your new reexamination process. How do you decide whether that goes into the below the line bucket or the current bucket?

Well, I think as-- and I'll start with this one, see if it helps a little bit Bob, and then just ask it again if I don't answer the question. But I think if the claimant had submitted-- we have separated the ongoing new business operations from the reassessment process. So there's actually a reassessment unit that I believe has about 100 professionals in that right now. And that unit is just simply responding to those -- the response of those mailers I talked about earlier. So to use your example, if that individual had not had a pending claim with us in the ongoing operations of our claims operation, we would be alerted to that through the reassessment process. And I think Kevin, then it would go through the traditional reassessment process. And we'd look at it just like we would look at any other reassessed claim.

That's right.

I actually was trying to frame it a little bit tighter in the sense of he didn't refile, but there was some progressive back elements to the situation. So I mean-- I guess, the hidden question is are we sure that there wasn't some stuff that would have been normal claims incidents in the current Block that sort of is bubbling up in the old Block? The degree of confidence you have that 94.5 is sort of a good number?

Yes. I don't think there's any merging between those two. I think it's very separable, Bob. So I think, now I understand your question. I think that we're very confident in the 94.5 being the 94.5 and there's not some bleeding of activity between ongoing claim activities and the reassessment process.

Okay. Because I mean I'm not an expert on the disability process, but I imagine there's some people that sort of continue to reapply claims. And in fact, their situation does worsen to a point where ultimately it becomes a legitimate claim where before it would have been more borderline. But you don't think there's an element to that--

No, I think we've got these very compartmentalized between reinvestments and ongoing claims. And you're right there could be a claim situation where someone has given us an alert on a new claim, may not have yet manifest itself to a claim determination or a payment, that would still be staying in the new operations side of our business. So again, I'm pretty confident that we've got these two sort of dynamics walled off.

Okay the last question is just on your settlement with Spitzer, Attorney General Spitzer, are you comfortable this doesn't put you in a short term uncompetitive situation where some of your competitors are still paying contingents?

No, I don't think it does. I think again, as you know we've taken two steps towards this process. One was in the first quarter of 2005 made a number of changes to disclosure and other practices which actually many have adopted. We think the things we've now done with this plan, are ones that certainly others will adopt at some point.

I would say, though that the good news is as you can imagine we have the Good Housekeeping Seal of Approval, so to speak, on how we set up compensation agreements and that should go a long way I think in helping the market get to that particular point. And in fact, actually some brokers and producers will even come to us now, I believe because our plan has gotten the Good Housekeeping Seal of Approval. And I think if you even look at the Attorney General's press release, frankly the department endorsed it as hopefully what becomes industry practices.

Thank you very much. Appreciate it.

Operator, let's do one more quick question here.

Okay. We will go next to Patrick Meegan, Hotchkis Wiley.

I'll keep it quick. What determines the order in which the claims are reassessed? Thanks.

Thanks, Patrick. Kevin?

They're assessed in chronological order. We have to do them in the order of the year of claim [incural]. So we started with the 2000 claims, worked our way through the 2000, 2001, 2002 claims and we'll do that all the way through 2004, and then go back and do the '97 to '99 editions.

Well you lost me on the '97 to '99 editions.

When we settled with California, we had to go back and do an additional mailing to select Block of claimants between 1997 and 1999. So they come in at the tail end.

Okay just so summarize to make sure I got it right. You're doing it in order of -- ?

Claim year.

Claim year. So the earliest claims are processed first?

Right.

And then how many claims are there in this California reopen?

I want to say it's about 14,000, but don't hold me to it. I think that's the ballpark.

That's the mailings.

That's the number of mailings.

Okay and are all of those that have the-- has the time to expire, or has the time to respond to those mailings in California lapsed or no?

No,-- All the mailings have not been -- the mailings will be completed over the next two quarters, fourth quarter and first quarter of '07, the mailings will be completed.

Okay. All right. Thanks, guys.

Thanks, Patrick. And again if I could close, thank you all again for taking the time and that completes our third quarter call. Again we hope to see as many of you as possible at next week's investor meeting. So thank you very much.

And once again, ladies and gentlemen, that does conclude today's conference.