Spate of Lawsuits Adds to Insurer’s Troubles
At first glance, giant disability insurer UnumProvident Corp. seems as solid as a rock.
The company traces its roots back more than a century, and promotes itself as a reputable safety net for more than 25 million American workers. Its board includes two former U.S. senators.
But the company is under attack in scores of lawsuits -- backed by statements from some former employees -- alleging that it has been canceling customers’ legitimate benefits to shore up the bottom line.
Several suits have been filed in California, and in one case, a $7.7-million jury award to a Novato woman was upheld last month by a federal judge who commanded UnumProvident to “obey the law.”
The allegations aside, this much is beyond dispute: UnumProvident’s revenue growth is sluggish, claims are up and profit has not been as strong as Wall Street has expected.
And the lawsuits only add to the troubles besetting the Chattanooga, Tenn.-based concern that insures about 2 million Californians and has a major regional office in Glendale with 300 employees.
Moody’s Investors Service this month downgraded UnumProvident’s debt ratings because, among other things, “earnings and capital growth going forward will be constrained.” The other major ratings service, Standard & Poor’s, also recently downgraded its outlook for the company’s performance, citing “flat growth trends.”
UnumProvident’s stock has plunged by two-thirds since nearing $60 a share in mid-1999, wiping out nearly $10 billion of investors’ wealth. The shares closed Tuesday at $17.52 on the New York Stock Exchange.
All of which keeps alive talk that the 3-year-old merger that created the company was a mistake -- or at least has been poorly executed under the watch of UnumProvident’s senior executives.
The $5-billion deal combined Provident Cos., the nation’s largest provider of disability insurance for individuals, with Unum Corp., the leader in group disability coverage. The transaction came two years after Provident bought rival Paul Revere Corp., another major disability carrier, and after both Unum and Provident had gone through a spree of buying and selling assets to focus more on disability coverage.
“We are disappointed that we’ve seen relatively flat earnings the last couple of years,” said Thomas Watjen, UnumProvident’s vice chairman and chief operating officer. But the company is set to rebound, he vowed, and he defended the merger as creating “a competitive advantage for us” by enabling UnumProvident to sell a wider array of policies to group and individual customers.
Without commenting on the specifics of the lawsuits, Watjen downplayed their impact on UnumProvident’s performance. He said the company has ample reserves to handle all types of claims and contended that “the volume of individual litigation” against the company is “actually in decline.”
But analysts aren’t as sanguine.
The lawsuits, which were covered last month in The Times and on TV’s “60 Minutes,” add “another level of uncertainty” both in terms of “how does it affect the bottom line and how does it affect the perception of potential clients” who might be weighing whether to buy a new policy from UnumProvident, said Moody’s analyst Ann Perry.
Lehman Bros. analyst Eric Berg, in a report to clients last month, said that “if UnumProvident is perceived in the marketplace as having an institutional bias against paying claims promptly -- and of cutting off the claims checks of individuals who are genuinely disabled -- it seems unavoidable that its new sales will suffer.”
The $7.7-million jury award went Joan Hangarter, 53, a mother of two who was felled by a painful joint condition. She alleged that after 18 months of making disability payments, UnumProvident abruptly halted them on the grounds that she was no longer disabled. Her case and others alleged that UnumProvident employs a widespread quota scheme to cancel a certain number of payouts each month.
In upholding the woman’s award, U.S. Magistrate James Larson of San Francisco ordered UnumProvident to stop engaging in corporate tactics alleged in the suits. Among them: using “biased medical examiners” and “destroying medical reports” to support its decision to stop paying claims.
UnumProvident denies those actions and any wrongdoing, and is appealing the judgment in the Hangarter case and others. “We do not set targets to close valid claims,” the company said in a statement, adding that “a minute percentage of our claims ever involve litigation.”
In all, UnumProvident will pay out some $3.6 billion in claims in 2002, a figure that has risen for 10 straight years.
Many of the policies being contested were sold by the Provident part of UnumProvident in the late 1980s and early ‘90s. These “own occupation” policies were aggressively peddled to doctors, lawyers and other self-employed professionals, especially in California and Florida. Hangarter, for example, was a chiropractor.
At first the policies were lucrative. But Watjen acknowledged that Provident miscalculated how many claims it eventually would face on that business, priced the coverage too low and wrote the noncancelable policies with ambiguous language. That, Watjen said, made them “more susceptible to differences of opinion” on whether claims should be paid.
Watjen challenged the plaintiffs’ contention that UnumProvident has canceled payments on many of the policies to boost profit, saying the company and its predecessors years ago added more than $1 billion to reserves to cover the escalating claims.
Nevertheless, “own occupation” agreements already have cost the company dearly, and now are more subject to litigation than are other types of policies.
What’s more, UnumProvident is grappling with problems beyond the “own occupation” market. The company, in fact, is dealing with lackluster results from its overall business, which includes life insurance and long-term care coverage.
In the nine months ended Sept. 30, UnumProvident’s net income tumbled 40% from a year earlier, to $273 million from $455 million, in large part because the company suffered $274 million in investment losses. It attributes those to the low interest rates it’s earning on its investment portfolio.
Yet even setting aside the investment losses, UnumProvident’s pretax earnings have been flat to declining for each of the past three years on its basic business, noted Kevin Maher, an analyst at Standard & Poor’s.
Merrill Lynch & Co. analyst Edward Spehar estimates that UnumProvident’s operating profit this year, excluding realized investment gains and losses, will be $613 million on revenue of $9.9 billion. That is down from three years ago, when by his calculations the company had operating profit of $638 million on revenue of $9.2 billion.
Several factors have been at work, observers said. The 1999 merger creating UnumProvident did not go smoothly, enabling competitors to exploit the company’s instability and seize new business. Then the weakening economy and rising number of layoffs hobbled UnumProvident’s premium income from group policies -- fewer workers means fewer premiums paid -- and simultaneously sparked a jump in disability claims.
Moody’s analyst Perry said workers figure “what’s the better option: to be laid off and be on unemployment, or go on disability and get 60% of your salary?”
At the same time, more employers have dropped disability coverage for their workers to pare costs. “If you cut a dental program, that’s something people complain about,” Maher said. “Disability income generally doesn’t get into that category.”
In response, UnumProvident is trying to peddle more individual policies to workers. “For the most part, employees still want the coverage,” Watjen said. “You have to pump very hard to get some earnings growth.”
Even if the economy improves and lifts UnumProvident’s core business, the highly publicized lawsuits still pose a threat, especially if more juries dole out awards against the company, according to analysts.
“At a minimum,” Lehman’s Berg said, “UnumProvident’s management will be spending lots of time shoring up the company’s reputation when they should be focused on building the business.”
In the end, Perry believes that UnumProvident may have one thing going for it: Corporate buyers are likely to have more pressing concerns than UnumProvident’s court battles when it comes to what disability coverage they purchase.
“They’re buying for service and for price,” she said, “and they may be less sensitive” to some of the legal machinations “than a television audience” is.
