A.M. Best Downgrades UnumProvident's Group Financial Strength Rating

Business Wire, August 17, 2001

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--Aug. 17, 2001

A.M. Best Co. has downgraded the financial strength rating of UnumProvident Corporation's, Chattanooga, Tennessee, (NYSE:UNM) life/health insurance companies to A (Excellent) from A (Superior).

A.M. Best had previously viewed the rating outlook on the group as negative.

The downgrade reflects the group's high concentration and reliance on group and individual disability income products for both premium income and profits. A.M. Best also notes that UnumProvident's overall GAAP ROEs are not projected to reach Superior levels for the next few years. In addition, while reduced in 2000, the organization's leveraged position is currently above the levels expected for organizations with the highest financial strength ratings.

Following the merger of Unum Corp. and Provident Companies, Inc. nearly two years ago, approximately three-fifths of the organization's premium income and pre-tax operating earnings are derived from individual and group disability income coverages. Both product lines are volatile in nature and have experienced considerable changes over the past decade. Evidence of this can be observed in the organization's fluctuating operating performance. In addition, UnumProvident's ancillary group life business, which has historically provided stability to its overall operating earnings, has begun to show weakness as evidenced by the organization's 2001 second quarter results. The group life market is currently very competitive, particularly in the larger case market.

Three of the primary insurance members in the group, Unum Life of America, Paul Revere Life and Provident Life and Accident, have large blocks of individual disability income business which were written prior to the mid-1990s. During that period, the products sold by all individual disability income writers were primarily non-cancelable, "own-occ" policies designed with very rich benefits. In the mid-1990s, the claims experience on all those products deteriorated noticeably. As a result, all individual disability income writers redesigned their product offerings to combat the adverse claim trends. While UnumProvident's current generation of products is meeting its profit expectations, the previously written individual disability income products continue to have lower profit margins. Therefore, due to the significant size of the inforce block, this older business will continue to hinder the group's overall operating earnings performance for many years to come.

For the first year following the merger, the organization experienced a dramatic decline in new business activity. While the level of competition has recently subsided somewhat in the group disability income market -- which has enabled the organization to expand its business again beginning in the third quarter of 2000 -- A.M. Best believes that there will continue to be some competitors which may be aggressive in their pricing strategy. The current ultra-competitive group life marketplace may also add pressure to UnumProvident's pricing discipline as it looks to meet its overall premium growth targets, while at the same time slowing premium growth in that product line.

In addition, the slowing U.S. economy could also negatively impact the claims experience on disability income business. While UnumProvident has not experienced an impact on its paid claims from the economic slowdown to date, A.M. Best believes that both the individual and group disability markets by themselves are not Superior today, and therefore any organization that is so highly dependent on those products -- like UnumProvident -- cannot attain a Superior rating under current market conditions.

In order to fund reserve strengthening and a number of substantial charges related to the merger, UnumProvident increased its leverage position. While the organization has made progress in reducing its debt-to-capital ratio at 29% at mid-year 2001, the ratio is still above the level UnumProvident has targeted for itself going forward. Concurrently, the organization's fixed charge coverage has declined in recent years. In early 2001, UnumProvident refinanced a portion of its short-term debt and replaced it with 10-year senior notes. While A.M. Best views UnumProvident's cash flows and its ability to generate earnings as sufficient at the current ratings, dividends from its subsidiaries will still be required to service its outstanding debt.

The group's rating assignment does acknowledge the company's leadership position in the individual and group disability income market, as well as its significant presence in the group life, payroll deduction and long-term care fields. UnumProvident has recently made numerous improvements, particularly with regards to strengthening the capitalization level in its primary insurance companies, realigning invested asset portfolios and implementing better checks and balances within the organization. In addition, A.M. Best notes the strength of the organization's management team, which has a proven track record.