A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) and the issuer credit ratings (ICR) "a-" of UnumProvident Corp.'s (UnumProvident) (Chattanooga, TN) [NYSE: UNM] insurance subsidiaries. A.M. Best has also affirmed the ICR of "bbb-" of UnumProvident. Concurrently, A.M. Best has affirmed all debt ratings of UnumProvident. All ratings continue to have a negative outlook. (See link below for a complete list of the ratings.)
The affirmation of UnumProvident's ratings acknowledges the insurance entities' improved overall risk-based capital position over the past few years, the reduced debt-to-capitalization level for the organization and the large amount of cash the parent holding company will be maintaining through the end of the ongoing claims reassessment process.
While UnumProvident's core business segment, U.S. Brokerage Group Income Protection, did show some improvement in its loss ratio in the most recent quarter, its results do fluctuate quarter to quarter. This segment continues to report higher than normal loss experience, which will take some time before it is projected to return to historical levels. A.M. Best also noted UnumProvident resolved some lingering litigation and regulatory issues on acceptable terms in the third quarter.
In its third quarter results, UnumProvident did report an additional $325 million pre-tax charge relating to its ongoing claim reassessment process. The timing and size of the latest charge were unanticipated by A.M. Best.
Since UnumProvident's first charge in the fall of 2004 relating to the claims reassessment process, UnumProvident has taken pre-tax charges of over $613 million"”multiple times above the original estimate. A.M. Best continues to be disappointed that UnumProvident has not been able to accurately predict the cost of the claims reassessment process. Consequently, A.M. Best believes there still could be more charges stemming from the settlement before it is finally concluded at the end of 2007. However, given the organization's strengthened capital and liquidity positions, it is in a better position to absorb any additional charges. UnumProvident projects that it will accumulate $950 million of excess holding company liquidity by the end of 2007. As a safeguard, the company plans to hold a cash reserve equal to six months interest expense, plus the after-tax cost of the upper end of its reasonably possible range, or $60 million, until the claims reassessment process is completed at year-end 2007. The organization's core subsidiary, Unum Life of America, the most impacted entity by the latest charge, is also receiving capital contributions in order to maintain an appropriate level of capitalization.
A.M. Best remains concerned about UnumProvident's ability to improve its loss ratio on its core U.S. Brokerage Group Income Protection segment to more appropriate levels. A.M. Best believes the company will be challenged to meet its goal of 90%-92% by early 2008 and 87%-88% over the next few years. The performance of this business has been impacted somewhat by the claims reassessment process.
A.M. Best believes it will take the organization additional time to work though its current challenges. Consequently, it is very unlikely, given the latest unexpected earnings charge, that A.M. Best will remove the current negative outlook on UnumProvident's ratings until the claims reassessment process is concluded at the end of 2007. During this time, A.M. Best will be looking for the organization to re-establish credibility in meeting its claims reassessment projections. If, in the meantime, significant additional unexpected negative events occur that endanger UnumProvident's capitalization or liquidity positions, or the performance of its core U.S. Brokerage Group Income Protection segment does not show an improving trend toward the organization's stated goals, A.M. Best would likely downgrade all ratings.
For a complete listing of UnumProvident Corp.'s FSRs, ICRs and debt ratings, please visit www.ambest.com/press/110703unum.pdf.
A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.
