| UNUMPROVIDENT CORP ITEM 1A RISK FACTORS Set forth below are certain factors that may adversely affect the Company’s business, financial condition, or results of operations |
| Any one or more of the following factors may cause the Company’s actual results for various financial reporting periods to differ materially from those expressed in any forward looking statements made by or on behalf of the Company |
| See “Cautionary Statement Regarding Forward-Looking Statements” contained herein on page 1 |
| Regulation The Company’s US insurance subsidiaries are subject to extensive supervision and regulation |
| The regulations may affect the cost or demand for the Company’s products and may hinder the Company from taking desired actions to increase its profitability |
| The Company’s insurance company subsidiaries may not be able to obtain or maintain necessary licenses, permits, authorizations, or accreditations, or may be able to do so only at great cost |
| In addition, the Company may not be able to comply fully with, or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to insurance companies and insurance holding companies |
| Failure to comply with or to obtain appropriate exemptions under any applicable laws could result in restrictions on the Company’s ability to do business in one or more of the jurisdictions in which it operates and could result in fines and other sanctions, which could have a material adverse effect on the Company’s business |
| Congress, as well as foreign, state, and local governments, could enact legislation related to changes in tax laws that could increase the Company’s tax costs or affect the desirability of the Company’s products by consumers |
| ERISA was passed by Congress in 1974 |
| One of the purposes of ERISA was to reserve for federal authority the sole power to regulate the field of employee benefits |
| ERISA eliminated the threat of conflicting or inconsistent state and local regulation of employee benefit plans |
| In doing so, ERISA pre-empted all state laws except those that specifically regulated the business of insurance |
| ERISA also provides an exclusive remedial scheme for any action brought by ERISA plan participants and beneficiaries |
| ERISA has allowed plan administrators and plan fiduciaries to efficiently manage employee benefit plans in the United States |
| Most group long-term and short-term income protection plans administered by the Company are governed by ERISA Changes to ERISA enacted by Congress or via judicial interpretations could adversely affect the risk of managing employee benefit plans, increase the premiums associated with such plans, and ultimately affect their affordability |
| Unum Limited is subject to regulation by the FSA in the UK These laws and regulations generally grant supervisory agencies and self-regulatory organizations broad administrative powers, including the power to limit or restrict Unum Limited from doing business in the event that it fails to comply with such laws and regulations |
| Many regulatory and governmental bodies have the authority to review the Company’s products and business practices and those of its agents and employees |
| These regulatory or governmental bodies may bring regulatory or other legal actions against the Company if, in their view, the Company’s practices are improper |
| These actions can result in substantial fines or restrictions on the Company’s business activities and could have a material adverse effect on the Company’s business or results of operations |
| During 2002 and 2003, the Company experienced increased market conduct examinations focused specifically on its disability claims handling policies and practices |
| These examinations by state insurance departments have generally involved a review of complaints from policyholders or insureds on a range of subjects and a review of disability claim files and associated materials from group long-term and individual income protection product lines |
| Because of the number of market conduct examinations initiated during 2002 and 2003, a coordinated multistate market conduct examination of the Company’s disability claims handling practices was organized during 2003 by Maine, Massachusetts, and Tennessee, the states of domicile for several of the Company’s insurance subsidiaries |
| In November 2004, certain of the Company’s insurance subsidiaries entered into settlement agreements with state insurance regulators upon conclusion of a multistate market conduct examination led by Maine, Massachusetts, and Tennessee relating to disability claims handling practices |
| A total of 48 states and the District of Columbia were parties to the settlement agreements |
| In addition, the US Department of Labor, which had been conducting an inquiry relating to certain ERISA plans, was a party to the settlement agreements, and the Office of the NYAG, which had engaged in its own investigation of the Company’s claims handling practices, notified the Company that it was in support of the settlement and was, therefore, closing its investigation on this issue |
| In October 2005, certain 18 ______________________________________________________________________ [44]Table of Contents of the Company’s insurance subsidiaries entered into a settlement agreement with the California DOI, concluding a market conduct examination and investigation of the subsidiaries’ disability claims handling practices |
| The California DOI had chosen not to join the 2004 multistate settlement agreements |
| See previous discussion under “Regulation – Examinations and Investigations” contained herein in Item 1, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained herein in Item 7, and Note 15 of the “Notes to Consolidated Financial Statements” contained herein in Items 8 for additional information concerning these settlement agreements and other regulatory examinations and investigations |
| The 2004 multistate regulatory settlement agreements and the 2005 California DOI settlement agreement resulted in changes in the Company’s claim handling practices and a process for reassessing certain claims to determine whether the earlier claim decision was properly decided |
| Failure to meet the requirements of these settlement agreements could result in a substantial fine |
| These and other regulatory examinations or investigations could result in, among other things, changes in business practices, including changes in broker compensation and related disclosure practices, changes in the use and oversight of finite reinsurance, changes in governance and other oversight procedures, fines, and other administrative action |
| Such results, singly or in combination, could injure the Company’s reputation, cause negative publicity, adversely affect the Company’s debt and financial strength ratings, place the Company at a competitive disadvantage in marketing or administering its products, or impair the Company’s ability to sell or retain insurance policies, thereby adversely affecting the Company’s business, and potentially materially adversely affecting the results of operations in a period, depending on the results of operations of the Company for the particular period |
| Determination by regulatory authorities that the Company or its insurance subsidiaries have engaged in improper conduct could also adversely affect the Company’s defense of various lawsuits |
| Reserves Reserves, whether calculated under GAAP or statutory accounting principles, do not represent an exact calculation of future benefit liabilities but are instead estimates made by the Company using actuarial and statistical procedures |
| There can be no assurance that any such reserves will be sufficient to fund future liabilities of the Company in all circumstances |
| Future loss development could require reserves to be increased, which would adversely affect earnings in current and future periods |
| Adjustments to reserve amounts may be required in the event of changes from the assumptions regarding future morbidity (the incidence of claims and the rate of recovery, including the effects thereon of inflation and other societal and economic factors), persistency, mortality, and interest rates used in calculating the reserve amounts |
| Debt and Financial Strength Ratings The Company competes based in part on the financial strength ratings provided by rating agencies |
| The downgrade of the financial strength ratings could adversely affect the Company by, among other things, adversely affecting relationships with distributors of its products and services and retention of its sales force, negatively impacting persistency and new sales, and generally adversely affecting its ability to compete |
| Changes in the Company’s debt ratings could have an effect on the Company’s ability to raise capital and its cost of capital |
| See “Ratings” contained herein in Item 1 and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained herein in Item 7 for further discussion of the Company’s ratings from these agencies |
| Litigation The Company and/or its subsidiaries’ directors and officers have been sued in over 20 purported class action and stockholder derivative lawsuits |
| These lawsuits are in a very preliminary stage, the outcome is uncertain, and the Company is unable to estimate a range of reasonably possible losses |
| Reserves have not been established for these matters |
| An adverse outcome in one or more of these actions could, depending on the nature, scope, and amount of the ruling, materially adversely affect the Company’s results of operations, encourage other litigation, and limit the Company’s ability to write new business, particularly if the adverse outcomes negatively impact certain of the Company’s ratings |
| 19 ______________________________________________________________________ [45]Table of Contents In addition to the claim related litigation described above, the Company and its insurance subsidiaries, as part of their normal operations in managing disability claims, are engaged in claim litigation where disputes arise as a result of a denial or termination of benefits |
| Typically those lawsuits are filed on behalf of a single claimant or policyholder, and in some of these individual actions punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims |
| For its general claim litigation, the Company and its insurance company subsidiaries maintain reserves based on experience to satisfy judgments and settlements in the normal course |
| Management expects that the ultimate liability, if any, with respect to general claim litigation, after consideration of the reserves maintained, will not be material to the consolidated financial condition of the Company |
| Nevertheless, given the inherent unpredictability of litigation, it is possible that an adverse outcome in certain claim litigation involving punitive damages could, from time to time, have a material adverse effect on the Company’s results of operations in a period, depending on the results of operations of the Company for the particular period |
| The Company is unable to estimate a range of reasonably possible punitive losses |
| Refer to Note 15 of the “Notes to Consolidated Financial Statements” contained herein in Item 8 for information on the above legal proceedings |
| Deferred Policy Acquisition Costs, Value of Business Acquired, and Goodwill The Company defers certain costs incurred in acquiring new business and expenses these costs over the life of the related policies |
| These costs include certain commissions, other agency compensation, selection and policy issue expenses, and field expenses |
| Value of business acquired (VOBA) represents the present value of future profits recorded in connection with the acquisition of a block of insurance policies |
| Deferred policy acquisition costs and VOBA are amortized based primarily upon expected future premium income of the related insurance policies |
| Recoverability testing for deferred policy acquisition costs and VOBA is performed when, in the judgment of management, adverse deviations from original assumptions have occurred and may be likely to continue such that recoverability of deferred policy acquisition costs and/or VOBA on a line of business is questionable |
| Insurance contracts are grouped on a basis consistent with the Company’s manner of acquiring, servicing, and measuring profitability of the contracts |
| If recoverability testing indicates that either deferred policy acquisition costs and/or VOBA are not recoverable, the deficiency is charged to expense |
| Goodwill is not amortized, but the Company reviews on an annual basis the carrying amount of goodwill for indications of impairment, with consideration given to financial performance and other relevant factors |
| In accordance with accounting guidance, the Company tests for impairment at either the operating segment level or one level below |
| In addition, certain events including, but not limited to, a significant adverse change in legal factors or the business environment, an adverse action by a regulator or rating agency, or unanticipated competition would cause the Company to review goodwill for impairment more frequently than annually |
| Industry Factors All of the Company’s businesses are highly regulated and competitive |
| The Company’s profitability is affected by a number of factors, including rate competition, frequency and severity of claims, lapse rates, government regulation, interest rates, and general business considerations |
| There are many insurance companies which actively compete with the Company in its lines of business, some of which are larger and have greater financial resources than the Company, and there is no assurance that the Company will be able to compete effectively against such companies in the future |
| Capital Adequacy The capacity for an insurance company’s growth in premiums is in part a function of its statutory surplus |
| Maintaining appropriate levels of statutory surplus, as measured by state insurance regulations, is considered important by state insurance regulatory authorities and the private agencies that rate insurers’ claims-paying abilities and financial strength |
| Failure to maintain certain levels of statutory surplus could result in increased regulatory scrutiny, action by state regulatory authorities, or a downgrade by the private rating agencies |
| 20 ______________________________________________________________________ [46]Table of Contents The individual RBC ratios for the Company’s US insurance subsidiaries at December 31, 2005, were above the range that would require state regulatory action |
| If the NAIC adopts revisions to the RBC formula, the Company’s insurance subsidiaries may require additional capital |
| The additional capital required may not be available on favorable terms, if at all |
| In addition, insurance companies in the UK are subject to regulation, including capital adequacy requirements and minimum solvency margins, by the FSA Need for additional capital could limit a subsidiary’s ability to distribute funds to the Company and adversely affect the Company’s ability to pay dividends on its common stock and meet its debt and other payment obligations |
| Income Protection Insurance Income protection insurance may be affected by a number of social, economic, governmental, competitive, and other factors |
| Changes in societal attitudes, work ethics, motivation, stability, and mores can significantly affect the demand for and underwriting results from income protection products |
| The climate and the nature of competition in income protection insurance have also been markedly affected by the growth of social security, worker’s compensation, and other governmental programs in the workplace |
| Both economic and societal factors can affect claim incidence for income protection insurance |
| The relationship between these factors and overall incidence is very complex and will vary due to contract design features and the degree of expertise within the insuring organization to price, underwrite, and adjudicate the claims |
| However, these actions take time to implement, and there is a risk that the market will not sustain increased prices |
| In addition, changes in economic and external conditions may not manifest themselves in claims experience for an extended period of time |
| The pricing actions available in the individual income protection market differ between product classes |
| The nature of that portion of the Company’s outstanding insurance business that consists of individual noncancelable income protection policies, whereby the policy is guaranteed to be renewable through the life of the policy at a fixed premium, does not permit the Company to adjust its premiums on in-force business due to changes resulting from such factors |
| Guaranteed renewable contracts can be re-priced to reflect external factors, but rate changes cannot be implemented as quickly as in the group income protection market |
| Income protection insurance products are important products for the Company |
| To the extent that income protection products are adversely affected in the future as to sales or claims, the business or results of operations of the Company could be materially adversely affected |
| Long-term Care Insurance Long-term care insurance can be affected by a number of demographic, medical, economic, governmental, competitive, and other factors |
| Because long-term care insurance is a relatively new insurance product, the degree of expertise within the insuring organization to properly price the products and use appropriate assumptions when establishing reserves potentially has greater risk than that of other product offerings for which greater experience exists regarding trends and appropriate assumptions |
| Mortality is a critical factor influencing the length of time a claimant receives long-term care benefits |
| Mortality continues to improve for the general population, and life expectancy trends have extended |
| Changes in actual mortality trends relative to assumptions may adversely affect the results of the Company |
| Long-term care insurance is guaranteed renewable and can be re-priced to reflect external factors |
| Group Life Insurance Group life insurance may be affected by many factors, including the characteristics of the employees insured, the amount of insurance employees may elect voluntarily, the Company’s risk selection process, the ability of the Company to retain employer groups with lower claim incidence rates, the geographical concentration of employees, and mortality rates |
| Claim incidence may also be influenced by unexpected catastrophic events such as terrorist attacks and natural disasters, which may also affect the availability of reinsurance coverage |
| Changes in any of these factors may adversely affect the results of the Company |
| 21 ______________________________________________________________________ [47]Table of Contents Investments The Company maintains an investment portfolio that consists primarily of fixed income securities |
| The quality and/or yield of the portfolio may be affected by a number of factors, including the general economic and business environment, changes in the credit quality of the issuer, changes in market conditions, changes in interest rates, changes in foreign exchange rates, or regulatory changes |
| These securities are issued by both domestic and foreign entities and are backed either by collateral or the credit of the underlying issuer |
| Factors such as an economic downturn or political change in the country of the issuer, a regulatory change pertaining to the issuer’s industry, a significant deterioration in the cash flows of the issuer, accounting irregularities or fraud committed by the issuer, or a change in the issuer’s marketplace may adversely affect the Company’s ability to collect principal and interest from the issuer |
| The investments held by the Company are predominantly invested to support the insurance liabilities of the Company |
| The timing and/or amount of the investment cash flows may not match those of the liabilities of the Company |
| The investments held by the Company’s insurance subsidiaries are highly regulated by specific legislation in each state that governs the type, amount, and credit quality of allowable investments |
| Legislative changes could force the Company to restructure the portfolio in an unfavorable interest rate or credit environment, with a resulting adverse effect on profitability and the level of statutory capital |
| The Company uses derivative instruments that are hedging in nature |
| The Company’s profitability may be adversely affected if a counterparty to the derivative defaults in its payment |
| This default risk is mitigated by cross-collateralization agreements |
| Dividend Restrictions As a holding company, the Company relies on dividends or extensions of credit from its insurance company subsidiaries, including its US insurance subsidiaries and Unum Limited, to make dividend payments on its common stock, meet debt payment obligations, and pay its other obligations |
| The Company’s insurance company subsidiaries are subject to regulatory limitations on the payment of dividends and on other transfers of funds to affiliates |
| The level of statutory earnings and capital in the Company’s insurance subsidiaries could impact their ability to pay dividends or to make other transfers of funds to the Company, which could impair the Company’s ability to pay its dividends or meet its debt and other payment obligations |
| See “Liquidity and Capital Resources” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained herein in Item 7 and Note 16 of the “Notes to Consolidated Financial Statements” contained herein in Item 8 for a discussion of the existing regulatory limitations on dividends |