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UNUMPROVIDENT CORPORATION REPORTS FIRST QUARTER 2006 RESULTS
CHATTANOOGA, Tenn., May 3, 2006 — UnumProvident Corporation
(NYSE: UNM) announced today its results for the first quarter of 2006 with net
income of $73.4 million ($0.23 per diluted common share), compared to $152.2
million ($0.49 per diluted common share) for the first quarter of 2005.
Included in the results for the first quarter of 2006 is a net realized after
tax investment gain of $1.5 million, compared to a net realized after tax
investment loss of $2.1 million in the first quarter of 2005.
In the first quarter of 2006, the Company completed an analysis of its
assumptions related to the reserves established for the claim reassessment
process implemented as a result of the settlement agreements entered into with
state insurance regulators in the fourth quarter of 2004 and the settlement
agreement entered into with the California Department of Insurance in the third
quarter of 2005. The analysis was based on preliminary data as of the end of
the first quarter of 2006, when actual results to date were considered credible
enough to enable the Company to update its initial expectations of costs
related to the reassessment process. The Company concluded that a change in its
initial assumptions, related primarily to the number of claimants for whom
payments will continue because the claimant remains eligible for disability
payments under the reassessment process, was warranted. Based on this analysis,
a charge of $86.0 million before tax, or $55.9 million after tax ($0.17 per
diluted common share), was recognized in the first quarter of 2006 to reflect
the Company's current estimate of future obligations for benefit costs for
claims reopened in the reassessment. The charge decreased before-tax operating
results for the U.S. Brokerage segment group income protection line of business
$72.8 million and the Individual Income Protection — Closed Block segment $13.2
million.
Also included in the first quarter of 2006 is interest expense related to the
write-off of deferred debt costs of $5.3 million before tax, or $3.4 million
after tax ($0.01 per diluted common share), resulting from the extinguishment
of $400.0 million of debt associated with the remarketing in February 2006 of
the senior note element of the adjustable conversion-rate equity security units
issued in May 2003. The Company participated in the remarketing of the units
and purchased $400.0 million of the senior notes which were subsequently
retired. The charge is included in the results for the Corporate segment.
Included in the first quarter of 2005 was the release of $32.0 million of
income tax liabilities that related primarily to interest on the timing of
expense deductions. The $32.0 million ($0.10 per diluted common share) increase
to net income was reported as a reduction to income tax expense in the first
quarter of 2005.
Income, on an after tax basis, excluding net realized investment gains and
losses, the first quarter of 2006 regulatory reassessment charge and write-off
of deferred debt costs, and the first quarter of 2005 release of income tax
liabilities was $131.2 million ($0.41 per diluted common share) in the first
quarter of 2006, compared to $122.3 million ($0.40 per diluted common share) in
the first quarter of 2005. (See discussion of non-GAAP financial measures and
the related reconciliation below.)
Thomas R. Watjen, president and chief executive officer, said, "We continued to
generate strong operating results in most of our business and product lines in
the first quarter. Although our U.S. Brokerage group income protection line
performance remains below our expectations, I am encouraged by indications that
the steps we took earlier this year within our benefits area are beginning to
have a positive impact."
"Separately, we are fulfilling the requirements of our regulatory settlement
agreements, including making the appropriate payments required under the
reassessment process. We are today in a much better position to quantify the
cost to us of the reassessment process and based on our experience thus far we
have determined that we will likely incur higher costs than initially
projected, which have been incorporated in our first quarter results. We
believe we are taking the appropriate actions to satisfactorily put this matter
behind us."
In the following discussions of the Company's segment operating results,
"operating revenue" excludes net realized investment gains and losses.
"Operating income" or "operating loss" excludes income tax and net realized
investment gains and losses.
U.S. Brokerage Segment
The U.S. Brokerage segment reported operating income of $28.5 million in the
first quarter of 2006, compared to $100.5 million in the first quarter of 2005.
The results for the first quarter of 2006 include the before-tax claim
reassessment charge of $72.8 million. Excluding the charge, operating income
for this segment for the first quarter of 2006 was $101.3 million.
Within this segment, the U.S. Brokerage group income protection line of
business reported a loss of $71.6 million in the first quarter of 2006 compared
to income of $3.5 million in the first quarter of 2005. Excluding the
before-tax claim reassessment charge of $72.8 million in the first quarter of
2006, operating income in this line was $1.2 million, and the benefit ratio was
95.5 percent in the first quarter of 2006, compared to 95.3 percent in the
first quarter of 2005. This slight increase reflects an increase in paid claim
costs on existing claims due to lower claim recovery rates during the past
several quarters. Partially offsetting this increase was a decline in both
submitted and paid claim incidence in the first quarter of 2006 compared to the
prior year first quarter. Premium income in group income protection declined
2.5 percent to $619.8 million in the first quarter of 2006, compared to $635.4
million in the first quarter of 2005, reflecting lower sales in recent quarters
as the Company has focused on improving the profitability of the business.
Sales of fully insured group long-term income protection products in the first
quarter of 2006 increased 16.5 percent to $43.1 million, compared to $37.0
million in the year ago quarter. First quarter of 2006 sales in the small and
mid-employer core market segment were 22.5 percent higher than the first
quarter of 2005, while sales in the large case market were also higher than the
prior year quarter but grew less than sales in the core market. Sales of fully
insured group short-term income protection products in the first quarter of
2006 decreased 25.0 percent to $12.0 million, compared to $16.0 million in the
year ago quarter, reflecting decreased sales in the large case market which
offset increased sales in the core small and mid-sized markets. Premium
persistency in the group long-term income protection line of business improved
to 86.6 percent for the first quarter of 2006 compared to 82.6 percent in the
year ago quarter.
The U.S. Brokerage segment's group life and accidental death and dismemberment
lines of business reported a 20.9 percent decline in operating income to $43.9
million in the first quarter of 2006, compared to $55.5 million in the first
quarter of 2005. The decline in earnings primarily reflects a decline in
premium, lower net investment income, and a higher benefit ratio relative to
the year ago quarter. Premium income for these lines of business declined 2.9
percent to $358.8 million in the first quarter of 2006, compared to $369.7
million in the first quarter of 2005, reflecting lower sales and persistency in
recent quarters as the Company has focused on improving the profitability of
the business in a competitive market environment. Sales of group life products
in the first quarter of 2006 increased 4.7 percent to $33.2 million, compared
to $31.7 million in the year ago quarter, with increased sales in the core
small and mid-sized markets offsetting a decline in sales in the large case
market. Premium persistency in the group life line of business improved to 79.1
percent for the first quarter of 2006, compared to 72.5 percent for the first
quarter of 2005.
Also within this segment, the U.S. Brokerage supplemental and voluntary lines
of business reported a 35.4 percent increase in operating income to $56.2
million in the first quarter of 2006, compared to $41.5 million in the first
quarter of 2005. The improvement in earnings is primarily driven by improved
results in all three lines of business; the individual income protection —
recently issued, long-term care, and voluntary workplace benefits. Premium
income increased 6.9 percent to $325.2 million in the first quarter of 2006,
compared to $304.1 million in the first quarter of 2005. New annualized sales
in the voluntary workplace benefits line of business increased 7.5 percent in
the first quarter of 2006 compared to the first quarter of 2005, while sales in
the individual income protection — recently issued line decreased 7.5 percent
and long-term care sales declined 18.5 percent compared with the year ago
quarter.
Unum Limited Segment
The Unum Limited segment reported a 15.0 percent increase in operating income
to $54.4 million in the first quarter of 2006, compared to $47.3 million in the
first quarter of 2005. Operating income in this segment benefited from a
slightly lower benefit ratio resulting from favorable risk experience and
claims management and a lower expense ratio relative to the year ago quarter.
Premium income for this segment was flat, increasing 0.7 percent to $191.4
million in the first quarter of 2006, compared to $190.0 million in the first
quarter of 2005. New annualized sales in this segment declined 68.1 percent to
$11.7 million in the first quarter of 2006 from $36.7 million in the first
quarter of 2005 due primarily to decreased activity in the U.K. market during
the first quarter, the competitive environment in the U.K. for group life
products, and the Company's decision to maintain its pricing discipline.
Colonial Segment
The Colonial segment reported a 5.5 percent increase in operating income to
$46.2 million in the first quarter of 2006, compared to $43.8 million in the
first quarter of 2005. Results in this segment in the first quarter of 2006
benefited from a lower benefit ratio resulting from favorable risk experience
in the individual short-term income protection line of business and also due to
the release of reserves related to the policies which lapsed due to the impact
of the third quarter of 2005 hurricanes in the United States gulf coast region.
Premium income for this segment increased 4.7 percent to $202.6 million in the
first quarter of 2006, compared to $193.5 million in the first quarter of 2005,
reflecting current and prior period sales growth and stable persistency,
partially offset by the policies which lapsed as a result of the 2005
hurricanes. New annualized sales in this segment increased 9.6 percent to $67.2
million in the first quarter of 2006 from $61.3 million in the first quarter of
2005.
Individual Income Protection — Closed Block Segment
The Individual Income Protection — Closed Block segment reported operating
income of $14.7 million in the first quarter of 2006, compared to $23.1 million
in the first quarter of 2005. Results for the first quarter of 2006 include the
before-tax claim reassessment charge of $13.2 million. Excluding this charge,
operating income in this segment was $27.9 million in the first quarter of
2006.
Other Segment
The Other segment reported operating income of $8.2 million in the first
quarter of 2006, compared to $9.3 million in the first quarter of 2005.
Corporate Segment
The Corporate segment, which includes investment earnings on corporate assets
not specifically allocated to a line of business, corporate interest expense,
and certain other corporate expenses, reported a loss of $43.5 million in the
first quarter of 2006, compared to a loss of $39.2 million in the first quarter
of 2005. Included in the first quarter of 2006 interest expense is the
write-off of deferred debt costs of $5.3 million.
The Company's average number of shares (000s) outstanding, assuming dilution,
was 319,636.8 for the first quarter of 2006, compared to 307,610.9 for the
first quarter of 2005.
Book value per common share at March 31, 2006 was $21.94, compared to $23.68 at
March 31, 2005. Excluding the net unrealized gain on securities and the net
gain on cash flow hedges, book value per common share at March 31, 2006 was
$20.40 compared to $19.49 at March 31, 2005.
Commenting on the Company's first quarter results, President and Chief Executive
Officer Thomas R. Watjen stated, "There is a great deal that worked well in the
first quarter, and we are making progress in those areas which did not meet our
expectations. The Company continues to build operating and financial strength,
and we are making progress toward 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 two
to three year financial goals we established last October at our analyst and
investor meeting. A strong operational and financial foundation exists for us
to achieve ROE expansion from 8.9% in 2005 to the 10 to 12% range. However,
given the short-fall this quarter and our expectation that the U.S. Brokerage
group income protection benefit ratio will stabilize at the current level and
not begin to improve until later this year, we believe it is prudent to adjust
our 2006 operational earnings per diluted common share guidance to a range of
$1.65 to $1.70 from our previous guidance of $1.75 to $1.80. While I am very
disappointed that we are now forecasting a slower recovery in our U.S.
Brokerage group income protection business, nothing changes our long-term view
or the potential for this franchise to generate significant shareholder value."
The Company analyzes its performance using non-GAAP financial measures which
exclude certain items and the related tax thereon from net income. The Company
believes operating income or loss excluding realized investment gains and
losses, which are recurring, is a better performance measure and a better
indicator of the profitability and underlying trends in the business. Realized
investment gains and losses are dependent on market conditions and general
economic events and are not necessarily related to decisions regarding the
Company's underlying business. The Company believes book value per common share
excluding unrealized gains and losses on securities and the net gain on cash
flow hedges, which also tend to fluctuate dependent on market conditions and
general economic trends, is an important measure.
The Company believes that exclusion of certain other items specified in the
non-GAAP reconciliation enhances the understanding and comparability of the
Company's performance and the underlying fundamentals in its operations, but
this exclusion is not an indication that similar items may not recur. For a
reconciliation to the most directly comparable GAAP measures, refer to the
attached digest of earnings.
UnumProvident Corporation senior management will host a conference call on
Thursday, May 4 at 9:00 a.m. (eastern) to discuss the results of operations for
the first quarter and will include forward-looking information, such as
guidance on future results and trends in operations, as well as other material
information. The dial-in number is (877) 502-9276 for U.S. and
Canada. For International, the dial-in number is (913) 981-5591.
Alternatively, a live webcast of the call will be available at
www.unumprovident.com in a listen-only mode. About fifteen minutes prior to the
start of the call, you should access the "Investor and Shareholder Information"
section of our website. A replay of the call will be available by telephone and
on our website through Thursday, May 11. In addition, the Company's Statistical
Supplement for the first quarter of 2006 is available on the Company's website.
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