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REPORT OF EXAMINATION
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This report has been reviewed.
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Dated this _____ day of _________, 2004
TABLE OF CONTENTS
INTRODUCTION
SCOPE OF EXAMINATION
DESCRIPTION OF THE COMPANY
HISTORY
MANAGEMENT
CONFLICT OF INTEREST
CORPORATE RECORDS
AFFILIATED COMPANIES
TRANSACTIONS WITH AFFILIATES
TERRITORY
PLAN OF OPERATION
FIDELITY BOND AND OTHER INSURANCE
REINSURANCE
INFORMATION SYSTEMS REVIEW
LITIGATION
SUBSEQUENT EVENTS
FINANCIAL STATEMENTS
NOTES TO STATUTORY FINANCIAL STATEMENTS
COMMENTS AND RECOMMENDATIONS
CONCLUSION
ACTUARIAL OPINION
September 13, 2004
Susan F. Cogswell, Chair
|
Kevin McCarty, Chair |
Tim Wagner, Chair |
Mike Kreidler, Chair Western Zone Commissioner State of Washington Washington State Office of Insurance Insurance 5000 Building 5000 Capitol Way Tumwater, Washington 98501 |
Alessandro A. Iuppa,
Superintendent
State of Maine
Bureau of Insurance
34 State House Station
Augusta, Maine 04333
Dear Commissioners and Superintendent:
Pursuant to the provisions of Title 24-A, M.R.S.A., Section 221 and in conformity with your instructions, a financial examination has been made of the
UNUM Life Insurance Company of America
at its home office in Portland, Maine. The following report is respectfully submitted.
The Financial Examination of the Company began during the third quarter of 2003 and was finalized September 13, 2004. A concurrent MultiState Market Conduct Examination of UnumProvident which included the Unum Life Insurance Company of America, a Maine company, began principally at the same time and was still ongoing as of September 13, 2004 (see Subsequent Event, MultiState Market Conduct Examination, page 13, for a more complete description and summarization). The MultiState Market Conduct Examination noted certain areas of concern in the claims handling practices of UnumProvident. It was prudently determined that the Financial Examination would not be issued until the MultiState Market Conduct Examination was completed with full findings and implications. This was estimated to occur during the third quarter of 2004 (ultimately it concluded on November 18, 2004). The Lead State Commissioners/Superintendents including the Maine Superintendent of Insurance fully apprised their peer Commissioners/Superintendents as well as the NAIC Leadership of the status of the MultiState Market Conduct Examination and the status of the Financial Examination of the Company at the June Meeting of the NAIC in San Francisco, California. Additional updates occurred thereafter including at the NAIC Meeting in Anchorage, Alaska and subsequent. The MultiState Market Conduct Examination report was issued once concluded. The Financial Examination Report of the Company was then issued with a date of September 13, 2004 except for the full update of the Subsequent Event included within the Report as to which the date is November 19, 2004.
UNUM Life Insurance Company of America (hereinafter referred to as “the Company”) was last examined as of December 31, 1999 by the Bureau of Insurance of the State of Maine. This examination covers the period from January 1, 2000 to the close of business on December 31, 2002.
This examination consisted of a review of the Company’s operations and administrative practices, a valuation of assets, and a determination of liabilities at December 31, 2002 in conformity with statutory accounting practices, National Association of Insurance Commissioners (“NAIC”) guidelines, and the laws, rules, and regulations prescribed or permitted by the Maine Bureau of Insurance. To the extent deemed appropriate, we utilized the work papers of the Company’s independent accountants for the year ending December 31, 2002.
Areas reviewed in this examination included: aggregate reserve of life policies, aggregate reserve of accident and health policies, policy and contract claims, corporate reinsurance, investments, risk based capital requirements and cash flow testing. To the extent deemed necessary, we also reviewed transactions occurring subsequent to the examination date.
The results of this examination present the financial condition of the
Company as of December 31, 2002. For purposes of this report, comments
on various balance sheet items may be limited to matters involving a departure
from laws, regulations or rules; a significant change in the amount of
the item; or where an explanation, comment and/or recommendation are warranted.
The Company was incorporated on August 24, 1966 in the State of Maine and commenced business on September 3, 1966 as Union Mutual Stock Life Insurance Company of America. Effective November 18, 1986 as part of the Demutualization Plan by the UNUM Group, the Company became a wholly owned subsidiary of UNUM Corporation and changed its name to UNUM Life Insurance Company of America.
Effective December 31, 1991, UNUM Corporation (the “Parent”) merged two affiliated companies, UNUM Life Insurance Company (“ULIC”) and UNUM Pension and Insurance Company (“UPIC”) into UNUM Life Insurance Company of America. As a result of the merger, the Company became jointly owned by UNUM Corporation and UNUM Holding Company, a wholly owned subsidiary of UNUM Corporation. As a condition of the merger, ULIC paid UNUM Corporation $60 million plus accrued interest to retire surplus debentures. In addition, $50 million of surplus debentures between ULIC and the Company were forgiven, along with accrued interest. The Company was also required to increase its paid-in capital stock to an amount of $5 million.
In connection with the merger of ULIC and UPIC into the Company, ULIC ceased to be licensed in the State of New York effective December 31, 1991, and all future New York business is transacted by First UNUM Life Insurance Company (“First UNUM”). As a condition to regulatory approval by the New York Insurance Department, the Company agreed to maintain a security deposit in the State of New York equal to 102% of the outstanding statutory liabilities to New York policyholders, insureds and claimants of ULIC.
In 1996, Commercial Life Insurance Company, an affiliated company, writing group universal life and travel accident coverages was merged with and into the Company.
On November 22, 1998, Provident Companies, Inc. (“Provident”) and UNUM Corporation signed an agreement that merged UNUM Corporation into Provident with Provident being the surviving corporation. The merger closed on June 30, 1999 at which time Provident changed its name to UNUMProvident Corporation. As part of the approval to merge, the Bureau issued a Decision and Order dated June 18, 1999 which outlined certain criteria the Company must meet. As of the date of this report, the Company remained in compliance with the conditions of the Decision and Order.
Board of Directors
As of December 31, 2002, the Board of Directors consisted of the following members:
Name |
Relationship/Affiliation |
|---|---|
| James Harold Chandler | Chairman, President and Chief Executive Officer of UNUMProvident Corporation |
| Thomas Ros Watjen | Vice Chairman and Chief Operating Officer of UNUMProvident Corporation |
| William Lester Armstrong | Director of UNUMProvident Corporation |
| Floyd Dean Copeland | Senior Executive Vice President and General Counsel of UNUMProvident Corporation |
| Cynthia Ann Montgomery | Director of UNUMProvident Corporation |
Officers
As of December 31, 2002, officers of the Company consisted of the following:
| Title | Name |
|---|---|
| Chairman, President and Chief Executive Officer |
James Harold Chandler |
| Vice President & Treasurer | John Joseph Iwanicki |
| Vice President, Corporate Secretary And Assistant General Counsel |
Susan Nance Roth |
| Vice President & Chief Actuary | Richard Joseph Pollard |
| Senior Vice President, Customer Loyalty Services and Chief Information Officer |
Robert O’Hara Best |
| Senior Vice President and Deputy Risk Manager |
Donald Eugene Boggs |
| Senior Vice President, Claim Litigation and Deputy General Counsel |
Joseph Christopher Collins |
| Senior Executive Vice President, Legal and Administrative Affairs & General Counsel |
Floyd Dean Copeland |
| Vice President and Controller | Vicki Wright Corbett |
| Senior Vice President, Human Resources |
Eileen Couvrette Farrar |
| Senior Vice President, Product And Marketing Development |
Joseph Richard Foley |
| Senior Vice President, Pricing Portfolio Strategy |
Todd Harold Fuhs |
| Senior Vice President, Investments | David G Fussell |
| Senior Vice President and Chief Financial Officer |
Robert Carl Greving |
| Vice President, Business Practices | Richard D Lang |
| Vice President, Chief Compliance Officer and Privacy Officer |
Joan Sarles Lee |
| Senior Vice President, Underwriting | Kevin Paul McCarthy |
| Senior Vice President, Return to Work Services |
Ralph Wilson Mohney |
| Senior Vice President, Government Relations |
Donna Thibodeau Mundy |
| Vice President, Corporate Tax | Regina Y Rose |
| Vice Chairman and Chief Operating Officer |
Thomas Ros Watjen |
| Senior Vice President Field Sales | Richard Alan Wolf |
| Vice President, Product Strategy Planning and Integration |
John Young |
Each director and officer of the Company is required to complete a conflict of interest statement annually to disclose any material interest or affiliation which is likely to be in conflict with his/her official duties and responsibilities to the Company. Review of the statements on file disclosed substantial compliance with the conflict of interest policy.
The Company’s Articles of Incorporation, by-laws and minutes of the Board of Directors’ meetings held during the period under examination were reviewed. Based upon our review, the Company is conducting its affairs in accordance with the statutes of the State of Maine and in accordance with its own charter and by-laws.
The Company is 82.72% owned by UNUM Holding Company and 17.28% by UNUMProvident Corporation. UNUM Holding Company is a wholly owned subsidiary of UNUMProvident Corporation. The following is an organizational chart of the UNUMProvident Corporation:
ORGANIZATION CHART
| Company | Incorporation |
| UNUMProvident Corporation | Delaware |
| UNUM Holding Company | Delaware |
| UNUM Life Insurance Company of America | Maine |
| SP Administrator, LLC | California |
| First UNUM Life Insurance Company | New York |
| Claims Service International, Inc. | Delaware |
| UNUM Development Corporation | Maine |
| UNUM International Underwriters Inc. | Delaware |
| UNUM European Holding Company Limited | United Kingdom |
| UNUM Limited | United Kingdom |
| Claims Service International Limited | United Kingdom |
| Duncanson & Holt, Inc. | New York |
| Duncanson & Holt Underwriters Ltd. | United Kingdom |
| Duncanson & Holt Syndicate Management Ltd. | United Kingdom |
| LRG Services Limited | United Kingdom |
| Trafalgar Underwriting Agencies Ltd. | United Kingdom |
| Duncanson & Holt Europe Ltd. | United Kingdom |
| Duncanson & Holt Agencies, Ltd. | United Kingdom |
| Duncanson & Holt Services Inc. | Maine |
| Duncanson & Holt Canada Ltd. | Canada |
| TRI-CAN Reinsurance, Inc. | Canada |
| Duncanson & Holt Asia PTE Ltd. | Singapore |
| Colonial Companies, Inc. | Delaware |
| Colonial Life & Accident Insurance Company | South Carolina |
| Benefit America Inc. | South Carolina |
| UNUM Japan Accident Insurance Company Limited | Japan |
| UNUMProvident International Ltd. | Bermuda |
| Boston Compania Argentina de Seguros S.A. | Argentina |
| Boston Sequros de Vida S.A. | Argentina |
| Fibos S.A. | Argentina |
| Options and Choices, Inc. | Wyoming |
| The Paul Revere Corporation | Massachusetts |
| The Paul Revere Life Insurance Company | Massachusetts |
| The Paul Revere Variable Annuity Insurance Co. | Massachusetts |
| GENEX Services, Inc. | Pennsylvania |
| GENEX Services of Canada, Inc. | Ontario |
| Primecor, Inc. | Pennsylvania |
| GENEX Services, Inc. of Ohio | Ohio |
| GENEX Consultants, Inc. | New York |
| Provident Life and Accident Insurance Company | Tennessee |
| Provident Life and Casualty Insurance Company | Tennessee |
| Provident Investment Management, LLC | Tennessee |
| Benefits Technologies, Inc. | Delaware |
| Provident Insurance Agency, LLC | Delaware |
The Company provides certain administrative, technical and managerial support to certain affiliate companies and is reimbursed pursuant to the terms of service agreements. During the period of this examination, there were intercompany loans between the Company and affiliate companies. As of December 31, 2002 the following affiliates had loans with the Company:
| Affiliate | Loan Receivable | Date Loan Repaid |
| UNUMProvident Corporation | $253,001,430 | January 2, 2003 |
The Company is licensed to transact business as a life and health insurer in all states including the District of Columbia, with the exception of New York. The Company also is licensed in Guam and Puerto Rico.
Certificates of Authority and/or other evidence of permission to do business in the respective jurisdictions were viewed and found to be in proper order and in effect.
The Company primarily writes group disability insurance, life insurance and long-term care coverage. Products are marketed using the brand name “UNUMProvident”. Distribution is primarily through a network of Company sales representatives and independent brokers.
Long-Term Disability (“LTD”)
UNUMProvident is one of the leading providers of LTD benefits offering choices in benefit percentage, maximum duration, elimination period and disability definition.
Short-Term Disability (“STD”)
UNUMProvident’s group STD plan provides income replacement for shorter-term disability leaves, and is designed to integrate well with LTD benefits.
Long-Term Care (“LTC”)
UNUMProvident offers both individual and group LTC plans on a voluntary or employer-paid basis.
In mid-2003, UNUMProvident de-emphasized marketing of the Company’s individual long term care product and started marketing a newly designed individual long term care product through another insurance company subsidiary.
Group Life
UNUMProvident offers a range of life insurance options, including group term life insurance as well as individual term, universal and interest-sensitive whole life plans. The group term plan is available under a variety of funding options, including employer-paid, employee-paid, and flexible base/supplemental. Individual plans are available only as employee-paid programs.
FIDELITY BOND AND OTHER INSURANCE
The Company is protected as a named insured under a blanket fidelity bond issued to UNUMProvident Corporation. The bond amount was reviewed and was determined to be adequate. The Company is also covered under various other insurance coverages including property and equipment, automobiles, general liability, and directors and officers' liability.
Reinsurance Business Segment
In 1999, UNUMProvident Corporation began a comprehensive strategic review of its reinsurance operations to determine the appropriateness of this segment of the business within the context of the UNUM/Provident group. These operations include the reinsurance management operations of Duncanson & Holt, Inc. (“D&H”); risk assumption arrangements, which includes reinsurance pool participation; direct reinsurance which include accident and health, long-term care and long-term disability coverages; and Lloyds of London syndicate participation. As a result of its review, UNUMProvident Corporation concluded that these operations were not solidly aligned with UNUMProvident Corporation’s strength in the disability market. UNUMProvident Corporation decided to exit these operations through a combination of a sale, reinsurance, and/or placing certain components in runoff.
In October 1999, UNUMProvident Corporation entered into an agreement with the American United Life Insurance Company (AUL) to sell its reinsurance management operations of its accident and health and long-term care reinsurance facilities, and to reinsure the Company’s risk participation in these facilities. The terms of the transaction require the Company to continue to participate in certain reinsurance facilities during the year 2000. The transactions closed effective January 1, 2000.
UNUMProvident Corporation has decided to cease participation in Lloyds underwriting after the year 2000.
Reinsurance Program
The following describes some of the Company’s significant reinsurance programs in effect at December 31, 2002.
Individual Disability Income (IDI)
Reinsurance Ceded
The Company established a 100% quota share arrangement with Centre Reinsurance Ltd (“Centre Re”) on all losses incurred on its individual disability non-cancelable policies occurring on or after January 1, 1996 and paid on or after the inception date of December 31, 1996. The Company remains responsible for claims incurred prior to January 1, 1996. Centre Re’s risk is limited to an amount equal to the sum of the initial reinsurance premium, plus 75% of the premium received, and investment credits at 6.5% per annum less 100% of the losses paid. On any December 31st beginning with December 31, 2000, the Company can recapture the reinsured risk in full. This agreement originally resulted in a deferred after tax gain of approximately $114,500,000 which is being recognized into income as the results of the block develop. Through December 31, 2002, approximately $28,800,000 of the gain has been recognized.
The Company also has several excess-of-loss reinsurance contracts with Cologne Re, Lincoln National, Munich Re, and Swiss Re (formerly Mercantile and General). Personal IDI business is ceded in excess of $8,000 monthly benefit. The retention limit for business expense contracts is $15,000 for Lincoln National and $20,000 monthly indemnity benefits for the other agreements. The retention limit for business buy/sell contracts is typically $500,000 total benefits.
Reinsurance Assumed
The Company assumes non-cancelable IDI risk on both a coinsurance and modified coinsurance basis from National Life Insurance Company, Indianapolis Life Insurance Company, Protective Life Insurance Company and Penn Mutual Life Insurance Company.
Collectively, this business comprises the Private Label segment. These treaties are closed to new business.
Long Term Disability (LTD)
Reinsurance Ceded
Effective April 1, 2003, the Company reinsured on a 100 percent indemnity coinsurance basis a block (Association Block) of individual disability policies. This block was ceded to Employers Reinsurance Corporation, Employers Reassurance Corporation and Unimerica Insurance Company.
Effective January 1, 2001, the Company retroceded 100% of a block of long-term disability reinsurance business to ACE Tempest Reinsurance Company LTD. and ACE Capital Reinsurance LTD. Ceded reserves at December 31, 2002 amounted to $371,531,549.
A treaty with UNUM International Limited in Bermuda, an affiliate of the Company, represents the majority of the ceded LTD business. The Company cedes 100% of losses paid on Group LTD claims that are more than 60 months from the incurred date; including assumed business from affiliates effective 2002 noted in the assumed section. The treaty allows the Company to move a sizable liability to an offshore affiliate, and as a result, benefit from a more favorable tax treatment of the reserves. During 2002, the Company executed an amendment to the existing reinsurance agreement revising the reinsurance from a coinsurance agreement to a funds withheld agreement. The reserve credit taken and loss recoverable for this treaty was $1,176 million.
Reinsurance Assumed
Effective October 1, 2002, a portion of the group long-term disability business of Provident and The Paul Revere Insurance Company (Revere) was ceded to the Company. Both Provident and Revere are affiliates of the Company and are indirect wholly owned subsidiaries of UNUMProvident. The reinsurance was executed on an arms-length basis. As of December 31, 2002 the ceded reserves totaled $745.1 million. A deferred gain of $94.9 million was recorded for the transaction. At December 31, 2002 the balance of the related deferred gain was $72.3 million.
The Company participates in many treaties in which it assumes LTD risk from other carriers. The treaties are part of the reinsurance segment managed by Integrated Disability Resources (IDR) (formerly managed by D&H), which represent a substantial amount of the assumed business. Material LTD assumed treaties are as follows:
Life Insurance
Reinsurance Ceded
Effective October 1, 1996, the Company entered into a 100% indemnity coinsurance agreement with Lincoln National Life Insurance Company ceding its tax sheltered annuity business. Ceded reserves at December 31, 2002 amounted to $200,772,333.
The Company entered into a 100% indemnity coinsurance contract with Reassure America Life Insurance Company (formerly Life Reassurance Corporation of America) on July 1, 1997, ceding its individual annuity block of business. At December 31, 2002 ceded reserves for this block of business totaled $83,882,915.
Long Term Care
Reinsurance Ceded
During the first quarter of 2003, the Company ceded its group and individual long-term care business to its affiliate, UNUMProvident International Limited (UPIL), through a funds withheld reinsurance arrangement.
The Company participates in many treaties that cede LTC risk to other carriers. The Company has a reinsurance agreement with AUL whereby risk participants of the Company in certain reinsurance facilities associated with D&H is ceded. Ceded reserves pertaining to this agreement totaled $121,542,988 as of December 31, 2002.
In 1994, the Company acquired, on an assumption reinsurance basis, a block of long term care business from the insolvent insurer, American Integrity Insurance Company. 100% (formerly 80% prior to 2001) of the risk was then ceded on a coinsurance basis to the American Long-Term Care Reinsurance Group (“ALTCRG”), a reinsurance pool administered by AUL (formerly administered by D&H). Ceded reserves on this block are $19.6 million at December 31, 2002.
Approximately 100 group long-term care contracts issued to members of Continuing Care Retirement Communities as well as the State of Connecticut employees are 100% ceded to ALTCRG. The State of Connecticut was amended to cede 100% rather than 80% in 2000. Gross reserves on this block are approximately $31.8 million as of December 31, 2002.
As part of the Information Systems Review, reliance was placed on review of the Company’s Exhibit C IS Questionnaire as well as testing of certain information system controls in coordination with the Massachusetts Department of Insurance contracted review of the Paul Revere Life Insurance Company. A review and an evaluation of the control environment of the Company’s information systems were performed. The Information Systems Questionnaire completed by the Company was reviewed and interviews with Company staff were conducted to gather supplemental information and corroborate the Company’s responses to the questionnaire. A review was also made of the documentation supporting Management and Organization Controls, Application Systems Development and Maintenance Controls, Operating and Processing Controls, Logical and Physical Security Controls, Contingency Planning Controls and Personal Computer, Local Area Network, Wide Area Network and Internet Controls.
In the normal course of its business operations, the Company is involved in litigation from time to time with its claimants, beneficiaries and others. The Company believes that it has valid defenses in all material suits and is in the process of defending its position. The Company’s representations in this regard were confirmed, on a scope basis, through direct correspondence with the Company’s outside legal counsel. In the opinion of management, the ultimate liability, if any, arising from this litigation is not expected to have a material effect on the financial position of the Company.
In March 2003, Harold Chandler, CEO & President, was replaced by Thomas Watjen who remains as the current CEO & President of UNUMProvident Corporation.
On a GAAP basis, the UNUMProvident Corporation strengthened reserves by $450 million in March 2003 and by $440 million in February 2004.
In May 2004, the UNUMProvident Corporation took a $967 million pre-tax charge which included a write-off of intangible assets and reserve strengthening associated with its closed block of individual disability income. To offset a portion of the financial impact, in conjunction with the individual disability income segment, UNUMProvident Corporation raised $300 million of additional capital through a private offering. Also in 2003, UNUMProvident Corporation strengthened its capital position by issuing 45,980,000 shares of common stock an received approximately $476.3 million as well as issuing 20,000,000 8.25% adjustable conversion rate equity security units and received approximately $485 million.
In May 2004, Standard & Poor’s downgraded UNUMProvident Corporation from an A- to BBB+ and Moody’s downgraded UNUMProvident Corporation from Baa3 to Ba1.
The Company, along with its parent UnumProvident and other affiliates are defendants in a number of law suits brought against the Company in recent years, some of which have resulted in adverse rulings and verdicts against the Company. A number of these cases are in various stages of appeal. Additionally, a number of suits brought against the Company are alleged to have “class action” status, although in most instances the trial courts have not ruled on whether classes will be certified. In May of 2003, UnumProvident on behalf of the Company and other subsidiaries filed a motion to transfer a number of these alleged class action suits, pending against the Company in various federal district courts to a single district for coordination or consolidated pretrial proceedings. In September of 2003, the Judicial Panel on Multidistrict Litigation entered an order transferring these cases to the U.S. District Court for the Eastern District of Tennessee for coordinated or consolidated pretrial proceedings. The Company has disclosed this information and other details of each particular case in its “Notes” to the 2003 Annual Financial Statement, and monitors each case closely and defends itself accordingly. Given the inherent unpredictability of litigation, it is possible that an adverse outcome in certain litigation involving punitive damages could from time to time, have a material adverse effect on the Company’s results of operations in a particular reporting period.
MultiState Market Conduct Examination
The UnumProvident Corporation announced on November 18, 2004 settlement agreements between Unum Life Insurance Company of America, The Paul Revere Life Insurance Company, Provident Life and Accident Insurance Company and Provident Life and Casualty Insurance Company with the chief insurance regulators of Maine, Massachusetts and Tennessee with respect to issues arising from the Multistate Market Conduct Examination and relating to their long-term disability insurance claims handling practices as well as with the U.S. Department of Labor regarding its parallel investigation concerning employee benefit plans covered by the Employee Retirement Income Security Act. Those agreements become effective upon approval by two-thirds of the other jurisdictions (forty-nine) participating in the Multistate Examination. (Please see such Announcement and the full Market Conduct Examination Report and Regulatory Settlement Agreements which can be found at www.unumprovident.com). In addition, the full Market Conduct Examination Report and the Regulatory Settlement Agreements and the Regulator Press Release can be found on the Maine Bureau of Insurance website at www.maine.gov/insurance under “Recent News”. A similar settlement agreement was reached between First Unum Life Insurance Company, a New York domiciled company, and the New York Superintendent of Insurance, the chief insurance regulators of Maine, Massachusetts and Tennessee and the U.S. Department of Labor.
Beginning on September 2, 2003, a multistate targeted market conduct examination was commenced by the Maine Bureau of Insurance, the Massachusetts Division of Insurance and the Tennessee Department of Commerce and Insurance (“Lead States”) concerning Unum Life Insurance Company of America, The Paul Revere Life Insurance Company and Provident Life and Accident Insurance Company (“Companies”). This examination addressed claims handling practices for both individual and group long-term disability insurance. The other forty-seven states, the District of Columbia and American Samoa were participants in this examination (“Participating States”).
The examination team identified no material differences in claim handling among the individual companies included in the multistate examination or among claim offices. The examination report made no findings as to violations of law or market conduct regulations; however, a number of areas of concern were identified, with the examiners and the Lead States concluding that the level of claim handling errors was sufficient to merit further regulatory action. After consultation with the Companies’ senior management and the Board of Directors of the Parent Company, an agreement in principle was reached on a Plan of Corrective Action. There followed a period of several months of extensive negotiation and discussions that resulted in four substantially identical Regulatory Settlement Agreements that incorporated the Plan of Corrective Action and covered the five insurance subsidiaries writing disability insurance referenced above (collectively, the “Agreement”). This Agreement was executed by the respective parties on November 18, 2004. In addition to the respective insurance companies and the Lead States, the U.S. Department of Labor is a party to each Agreement. The Office of the New York Attorney General, which had an investigation of claims handling practices in process, is not a signatory to the Agreement but announced its support of the settlement and closed its investigation of this issue.
The Agreement becomes effective upon the approval of two-thirds of the Participating States. It provides for a penalty of $15,000,000 and substantial additional contingent fines or significant regulatory action should the Companies fail to comply with the terms of the Agreement. There are three key components of the Plan of Corrective Action: a Claim Reassessment Process, Changes in Claim Organization and Procedures and Changes in Corporate Governance.
The Claim Reassessment Process provides for review of certain previously denied or terminated claims pursuant to procedures included in the Agreement. Claimants having approximately 215,000 claims will receive written notice that they may elect to participate in the reassessment process. The claimants receiving notice cover categories of closures for claims decided on or after January 1, 2000. There is an additional block of claims covering the same closure categories between January 1, 1997 and December 31, 1999 that will be eligible for reassessment on request of the claimant. This reassessment process is designed to be completed within approximately twenty-four months. The Changes in Claim Organization and Procedures provide for, among other things, increased engagement of experienced claim personnel at the initial stage of claim reviews, creation of a separate compliance/accountability function at the claim denial and termination level, assurance that co-morbid conditions are evaluated at every level of claim review, increased utilization of independent medical evaluations and additional claim staff compliance training. Changes in Corporate Governance involve an expansion of the Parent Company’s Board of Directors to three additional directors over a period of time with insurance industry and/or regulatory experience, one of whom will be added to the Audit Committee, establishment of a Board Regulatory Compliance Committee (“Committee”) and the creation of a corporate Regulatory Compliance Unit to report to the Committee and to monitor compliance with the Agreement and claim handling practices and also to provide information to assist the Committee with its oversight. The Committee and Lead State regulators will meet quarterly to review matters relating to compliance with the Agreement.
As noted in the UnumProvident Corporation’s Announcement, they have estimated the financial impact of the Plan of Corrective Action to be a loss of $127 million, before tax, or, $88 million, after tax, using a GAAP effective tax rate of 35% (exclusive of a tax benefit on the $15 million fine), and anticipate recording such loss within their financial statements upon obtaining consent of two-thirds of the participating jurisdictions (forty-nine), or such lesser number of consents as the Companies may agree. The Companies expect to receive the required number of consents during the fourth quarter of 2004. Total combined statutory surplus of the insurance companies within the UnumProvident Group approximates $4.4 billion as of September 30, 2004.
The following financial statements, presented on the basis of accounting practices prescribed by the Maine Bureau of Insurance and by the National Association of Insurance Commissioners, show the results of the Company’s operations for the year ended December 31, 2002 as determined by this examination.
Statement of Admitted Assets, Liabilities, and Surplus as of December 31, 2002
Statement of Operations for the year ended December 31, 2002
Statement of Changes in Capital and Surplus Account for the year ended December 31, 2002
STATEMENT OF ADMITTED ASSETS, LIABILITIES AND
SURPLUS
AS OF DECEMBER 31, 2002
| ADMITTED ASSETS | |
| Bonds (Note 1) | $ 9,232,601,470 |
| Preferred stocks | 4,167,083 |
| Common Stocks | 38,628,023 |
| Mortgage loans on real estate (Note 2) | 532,270,467 |
| Real Estate (Note 3) | 119,400,043 |
| Policy loans | 88,126,765 |
| Cash on hand and on deposit | (57,286,357) |
| Short-term investment | 85,363,772 |
| Other invested assets | 6,214,905 |
| Receivable for securities | 14,991,347 |
| Reinsurance ceded | 32,782,815 |
| Amounts receivable under reinsurance contracts | 6,743,732 |
| Electronic data processing equipment | 36,115 |
| Federal and foregin income tax receivable | 58,263,440 |
| Guaranty funds receivable or on deposit | 7,928,597 |
| Life insurance premiums and annuity consid. deferred and unpaid | 81,308,967 |
| Accident and health premiums due and unpaid (Note 4) | 155,173,427 |
| Investment income due and accrued (Note 5) | 140,534,384 |
| Receivable from parent, subsidiaries and affiliates (Note 6) | 205,280,463 |
| Amounts receivable relating to uninsured accident and health plans | 5,111,151 |
| Aggregate write-ins for other than invested assets | 209,329,474 |
| Total assets excluding separate accounts business | 10,966,970,083 |
| From separate accounts statements | 15,381,360 |
| Total admitted assets | $ 10,982,351,443 |
STATEMENT OF ADMITTED ASSETS, LIABILITIES AND
SURPLUS
AS OF DECEMBER 31, 2002 (Continued)
| LIABILITIES | |
| Aggregate reserve for life policies and contracts (Note 7) | $ 795,962,750 |
| Aggregate reserve for accidents and health policies (Note 8) | 6,074,926,048 |
| Liability for deposit-type contracts | 578,408,806 |
| Policy and contract claims, life & A&H (Note 9) | 963,674,285 |
| Provision for policyholders' dividends & coupon payable | 16,170,000 |
| Premiums and annuity consideration received in advance | 30,777,837 |
| Liability for premium and other deposit funds (Note 10) | 119,114,649 |
| Commissions to agents due or accrued | 54,910,494 |
| General expenses due or accrued (Note 11) | 6,386,070 |
| Taxes, licenses and fees due or accrued (excl. fed.inc.tax) | 30,173,346 |
| Unearned investment income | 1,694,898 |
| Amounts withheld by company as agent or trustee | 1,160,109 |
| Amount held for agents' account | 22,603,234 |
| Remittances and items not allocated (Note 12) | 67,557,651 |
| Miscellaneous liabilities | 1,331,837,213 |
| Aggregate write-ins for liabilities (Note 13) | 41,158,172 |
| Total liabilities excluding separate account business | 10,136,515,562 |
| From separate account business | 15,381,360 |
| Total liabilities | $10,151,896,922 |
| SURPLUS | |
| Common stock, par value $10, issued and outstanding - 500,000 | $ 5,000,000 |
| Gross paid in and contributed surplus | 967,280,336 |
| Aggregate write-ins for other than special surplus funds (Note 14) | 165,813,707 |
| Aggregate write-ins for special surplus funds (Note 15) | 5,000,000 |
| Unassigned funds | (312,639,522) |
| Total surplus | 830,454,521 |
| Total liabilities and surplus | $10,982,351,443 |
UNUM LIFE INSURANCE COMPANY OF AMERICA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
| REVENUES | |
| Premiums and annuity considerations | $ 2,758,461,918 |
| Deposit-type funds | - |
| Consid. for supp. contracts with life contingencies | 140,193 |
| Consid. for supp. contracts w/o life contin. div. accum. | - |
| Net investment income |
614,988,275 |
| Amortization of interest maintenance reserve | 4,643,005 |
| Commissions and expense allow. on reins. ceded | 162,328,477 |
| Fees from investment mangement, adminstration and contract guarantees | 239,624 |
| Aggregate write-ins for miscellaneous income | 21,671,541 |
| Total revenues | 3,562,473,033 |
| BENEFITS | |
| Death benefits | 465,354,514 |
| Matured endowments | 605,357 |
| Annuity benefits | 29,791,207 |
| Disability benefits & benefits under A&H policies | 1,599,407,320 |
| Surrender benefits and other fund withdrawals | 15,241,230 |
| Group conversions | (1,737,351) |
| Interest on policy or contracts fund | 19,019,772 |
| Payments on supplemental contracts with life contingencies | - |
| Payment of supp. contracts w/o life cont. & div. accum. | 397,266 |
| Incr. in aggr. reserves for life & A&H policies and contracts | 374,740,055 |
| Increase in liability for premium and other deposit funds | - |
| Increase in reserves for supp. contracts w/o life cont. & div. accum | - |
| Total benefits | 2,502,819,370 |
| EXPENSES | |
| Commissions on premiums and annuity considerations | 370,183,178 |
| Commissions & expense allow. on reinsurance assumed | (35,334,891) |
| General insurance expenses | 629,368,872 |
| Insurance taxes, licenses and fees, (excl fed.inc.tax) | 103,359,716 |
| Increase in loading & cost of collection in excess of loading on deferred and uncollected premiums | 272,590 |
| Net transfers to or (from) separate accounts | (1,911,177) |
| Aggregate write-ins for deductions | 34,329,654 |
| Total expenses | 1,100,267,942 |
| Net loss from operations before dividends to policyholders and fed. income tax credit | (40,614,279) |
| Less dividends to policyholders | 18,520,247 |
| Net loss from operations after dividend to policyholders and before federal income tax credit | (59,134,526) |
| Federal income tax credit (excluding tax on capital gain) | (11,138,243) |
| Net loss from operations after federal income tax credit | (47,996,283) |
| Net realized capital losses | (144,582,877) |
| Net loss | $ (192,579,160) |
UMUM LIFE INSURANCE COMPANY OF AMERICA
STATEMENT OF CHANGES IN CAPITAL AND SURPLUS ACCOUNT
FOR THE YEAR ENDED DECEMBER 31, 2002
| Capital and surplus, January 1, 2002 | $ 1,218,045,369 |
| Net loss | (192,579,160) |
| Change in net unrealized capital gains | (25,456,992) |
| Change in non-admitted assets and related items | (11,520,105) |
| Change in reserve on account of change in valuation basis | 2,776,372 |
| Change in liability for reinsurance in unauthorized companies | 3,343,003 |
| Change in net deferred income tax | 49,045,000 |
| Change in asset valuation reserve | 50,439,658 |
| Surplus adjustments - paid in and contributed capital | - |
| Surplus adjustments - Change in surplus as a result of reinsurance | 58,371,003 |
| Surplus adjustments - Change in surplus as a result of reserve adj | (300,000,000) |
| Dividends to stockholders | (40,000,000) |
| Aggregate write-ins for gains and (losses) in surplus | 17,990,373 |
| Net change in capital and surplus for the year | (387,590,848) |
| Capital and surplus, December 31, 2002 | $ 830,454,521 |
NOTES TO STATUTORY FINANCIAL STATEMENTS
| 1-Bonds | $9,232,601,470 |
The Company’s bond portfolio is carried at amounts prescribed by the NAIC. Bonds eligible for such are carried at amortized cost. Certain bonds for which there is evidence of the issuer’s inability to meet its obligation in full at maturity are carried at NAIC market value.
No material adjustments have been proposed or made to the carrying values of the Company’s investment portfolio as a result of examination procedures performed. However, during review of the Company’s investment custodial accounts, Examiner noted that several of the Company’s custodial account agreements were missing suggested language contained in the NAIC Examiners Handbook. (See Comments and Recommendations)
| Description | Cost | Par Value | Market Value |
Amortized or Statement Value |
|---|---|---|---|---|
| Governments | $ 672,602,215 | $ 3,619,993,655 | $ 696,918,193 | $ 680,761,333 |
| States, Territories | 4,812,405 | 5,000,000 | 5,037,000 | 4,996,387 |
| Political Subdivisions | - | - | - | - |
| Special Revenue | 1,529,316,558 | 1,615,769,203 | 1,530,108,806 | 1,529,797,881 |
| Public Utilities | 715,497,026 | 746,453,324 | 677,156,574 | 702,126,654 |
| Industrial and Misc. | 6,355,550,419 | 6,795,749,552 | 6,529,498,548 | 6,314,919,215 |
| $9,277,778,623 | $12,782,965,734 | $9,438,719,121 | $9,232,601,470 |
As required by Title 24-A, M.R.S.A. Section 412, the Company has maintained the required security deposit with the Treasurer of Maine. The following schedule reflects security deposits maintained in other jurisdictions:
SPECIAL DEPOSITS
| Jurisdiction | PAR VALUE | STATEMENT VALUE |
MARKET VALUE |
|---|---|---|---|
| California | $ 54,259,000 | $ 51,764,261 | $59,013,261 |
| Georgia | 30,000 | 30,123 | 35,222 |
| Guam | 57,346 | 57,346 | 57,346 |
| Massachusetts | 475,000 | 476,952 | 557,679 |
| New Mexico | 105,000 | 105,431 | 123,276 |
| New York | 210,108,000 | 207,616,306 | 213,419,026 |
| North Carolina | 415,000 | 414,194 | 457,280 |
| Puerto Rico | 500,000 | 510,682 | 572,485 |
| Virginia | 225,000 | 223,852 | 225,943 |
| Other | 16,072,000 | 16,099,651 | 16,782,427 |
| Total Deposits - Not all policyholders | 282,246,346 | 277,298,798 | 291,243,945 |
| 2-Mortgage Loans | $532,270,467 |
The Company’s investments in mortgage loans are principally loans collateralized by commercial real estate. The mortgage loan portfolio is generally carried in the amount of the unpaid principal balance adjusted for amortization of premium or accretion of discount. No material adjustments have been proposed or made to this account as a result of examination procedures performed.
| 3-Real Estate | $119,400,043 |
The Company’s real estate portfolio consists of property occupied by the Company, property acquired in satisfaction of debt and investment real estate. The portfolio is carried at cost plus capitalized improvements, net of any encumbrances, depreciation and other adjustments. For property acquired in satisfaction of debt and investment real estate, the statement value is the lower of depreciated cost or fair market value less encumbrances.
| 4-Accident and Health Premiums Due and Unpaid | $155,173,427 |
As a result of testing the integrity of the Company’s inforce records which included the review of policy files, no material issues were noted.
| 5-Investment Income Due and Accrued | $140,534,384 |
The balance for Investment Income Due and Accrued is unchanged from that reported by the Company.
| 6-Receivable From Parent, Subsidiaries and Affiliates | $205,280,463 |
The majority of the balance included in the receivable account relates to a receivable balance from UNUMProvident Corporation in the amount of $253,001,430. This amount represents outstanding short-term lending activity between the Company and the parent Company. During review of this account, it was noted that the Company does not seem to be following the offsetting guidelines in SSAP #64 and is including balances from multiple affiliates in one balance without regard to proper set-off. (See Comments and Recommendations) It was noted that the receivable balance was subsequently settled in the first quarter of 2003.
Actuarial Review of Reserves
The Bureau engaged Hoyer Actuarial Litigation, LLC, and its Principal, Robert L. Hoyer, FSA, MAAA, to assist in this financial examination and to provide an actuarial analysis of the Company’s reported reserves. His work is documented in the Statement of Actuarial Opinion – UNUM Life Insurance Company of America – For the year 2002, as dated September 13, 2004 (the Statement of Actuarial Opinion) and the Actuarial Analysis of Reserves – UNUM Life Insurance Company of America – For the year 2002, as dated September 10, 2004 (the Actuarial Analysis of Reserves).
| 7-Aggregate Reserve for Life Policies | $795,962,750 |
The balance for Aggregate Reserves for Life Policies as reported by the Company at December 31, 2002, net of reinsurance, consisted of the following:
| Group | Individuals | Totals | |
|---|---|---|---|
| Annuities | $ 217,378,789 | $ 317,838 | $ 217,696,627 |
| Disability- disabled lives | 280,604,471 | 1,269,726 | 281,874,197 |
| Individual disability-active lives | - | 304,195 | 304,195 |
| Life | 29,661,732 | 264,387,919 | 294,049,651 |
| Supplementary contracts with life contingencies |
104,629 | 1,537,770 | 1,642,399 |
| Accidental death benefits | - | 147,245 | 147,245 |
| Miscellaneous reserves | - | 248,436 | 248,436 |
| Totals | $527,749,621 | $268,213,129 | $795,962,750 |
The balance as stated above is considered reasonably stated and is unchanged in this Report.
The Actuarial Analysis of Reserves provides detail as to the actuarial related testing which led to this conclusion.
| 8-Aggregate Reserve for Accident and Health Policies | $6,074,926,048 |
The balance for Aggregate Reserves for A & H Policies as reported by the Company at December 31, 2002, net of reinsurance, consisted of the following:
| Group A&H |
Collectively Renewable |
Individual A&H |
Totals | |
|---|---|---|---|---|
| Active Life Reserve: | ||||
| Unearned premium reserve | $ 13,503,703 | $ 3,520,011 | $ 122,125,302 | $ 139,149,016 |
| Additional contract reserve | 208,445,292 | - | 1,093,768,256 | 1,302,213,548 |
| Less reinsurance ceded | (24,158,751) | - | (672,035,373) | (696,194,124) |
| Net Active Life Reserve | 197,790,244 | 3,520,011 | 543,858,185 | 745,168,440 |
| Claim Reserve: | ||||
| Present value of amounts Not yet due on claims |
5,564,274,442 | 102,620,967 | 1,753,841,698 | 7,420,737,107 |
| Unpaid loss adj. exp. | 129,351,084 | 2,702,398 | 37,448,726 | 169,502,208 |
| Less reinsurance ceded | (1,576,221,405) | - | (954,260,302) | (2,530,481,707) |
| Net Claim Reserve | 4,117,404,121 | 105,323,365 | 837,030,122 | 5,059,757,608 |
| Totals | $4,315,194,365 | $108,843,376 | $1,380,888,307 | $5,804,926,048 |
The balance as stated above is considered less than a reasonably stated amount and is increased by $270,000,000 in this Report.
During the later portion of 2002, and continuing throughout 2003 and into part of 2004, the Company experienced adverse morbidity associated with disability income policies. This adverse experience took the form of higher than anticipated disability incidence, and lower than anticipated recovery from disability. As a result, policy reserves, calculated using actuarial assumptions based in part on prior Company experience, are not adequately stated.
The Actuarial Opinion and the Actuarial Analysis of Reserves provide detail as to the actuarial related testing which led to the above conclusion.
See Comments and Recommendations section in this Report for further comments on this reserve.
| 9-Policy and Contract Claims | Life $292,486,060 A&H $671,188,225 |
Claim reserves represent incurred but not reported claims and claims in the course of settlement. As a result of the examiners reviewing life claim files and noting the disposition of the pending claim subsequent to year-end 2002 and an actuarial analysis, the Company’s reported life claim reserve was considered reasonably stated. The Company’s claim reserve for A&H claims is calculated based on a factor of 10% of the Company’s total actuarially determined statutory A&H case reserve and incurred but not reported claim reserve. An actuarial analysis of the A&H claim reserve by Deloitte & Touche LLP indicated that the reserve amount reported by the Company was reasonable.
However, as stated above in the section Aggregate Reserve for A&H Policies, the balance is considered less than a reasonably stated amount and is increased by $30,000,000 in this Report.
See Comments and Recommendations section in this Report for further comments on this reserve.
| 10-Other Amounts Payable on Reinsurance | $29,291,807 |
The examiners determined this liability amount to be reasonable based upon its review of reinsurance statements and the review of payments made by the Company subsequent to December 31, 2002.
| 11-General Expenses Due and Accrued | $6,386,070 |
The examiners conducted a search for unrecorded liabilities, which was designed to detect significant amounts not properly accrued for as of December 31, 2002. No material exceptions were found.
| 12-Remittances and Items Not Allocated | $67,557,651 |
This account consists primarily of premiums received by the Company, for which the Company is unable to apply to a specific policy at time of receipt. A review of the subsequent disposition of items included in this liability as of December 31, 2002, indicated that the Company is clearing suspense items on a timely basis.
| 13-Aggregate Write-ins for Liabilities | $41,158,172 |
A summary of this liability is as follows:
| Account | Amount |
|---|---|
| Policy claims-other lines | $ 11,838,217 |
| Accounts payable for operating expenses | 10,122,070 |
| Amounts payable to group administrator | 9,575,914 |
| Missing claimants liability | 7,504,732 |
| Group suvivor income benefit reserve | 2,084,981 |
| Unearned premium reserve - other liabilities | 32,258 |
| Total | $ 41,158,172 |
Significant balances were reviewed by examiners and found to be reasonable.
| 14-Aggregate Write-Ins for Other Than Special Surplus Funds | $165,813,707 |
This amount represents the deferred gain net of taxes resulting from the 100% quota share arrangement with Centre Reinsurance Ltd. (“Centre Re”) in which all non-cancelable individual disability income policies written and in-force as of January 1, 1996 and those policies issued subsequently were reinsured.
| 15-Aggregate Write-ins for Special Surplus Funds | $5,000,000 |
This fund balance was comprised of the following:
Reserve for aviation reinsurance $ 5,000,000
Examiners noted this reserve has been on the books for some time. Discussion with the Company indicated that this balance supports a potential liability from a block of policies sold years ago and will discuss with the Maine Bureau of Insurance the possibility of releasing this amount.
16-Contingent Liabilities
As a condition of New York Insurance Department approval relating to a December 31, 1991, corporate realignment which merged UNUM Life Insurance Company and UNUM Pension and Insurance Company into UNUM Life Insurance Company of America, the Company has agreed to maintain a security deposit in the State of New York equal to 102% of outstanding liabilities to New York policyholders, insureds and claimants of UNUM Life Insurance Company in the event that funds are needed to satisfy such obligations and cannot otherwise be supplied by the successor UNUM Life Insurance Company of America. At December 31, 2002 securities having a statement value of $207,616,306 is on deposit with the State of New York.
The Company has committed $5,000,000 of surplus funds to reserves to cover contingent liabilities under aviation reinsurance as noted above.
The following comments and recommendations are the result of this examination:
During review of the Company’s custodial agreements with Chase Manhattan Bank and Royal Trust Corporation of Canada, Examiners noted that the agreements did not contain all the suggested guidelines from the NAIC Examiners Handbook. The following exceptions were noted:
1a. The Chase Manhattan Bank agreement does provide that custodian bank shall not be liable for any failure to take any action required to be taken in the event that the taking of such action is prevented or delayed by wars, insurrection, acts of God, government actions, etc., and other causes beyond its reasonable control. The Royal Trust agreement does not specify these exceptions.
1b. Neither agreement stated that “in the event that the custodian gains entry in a clearing corporation through an agent, there should be a written agreement between the custodian and the agent that the agent shall be subjected to the same liability for loss of securities as the custodian.”
1c. Neither agreement stated that “if the custodian agreement has been terminated or if 100% of the account assets in any one custody account have been withdrawn, the custodian shall provide written notification, within three business days of termination or withdrawal, to the insurer’s domiciliary commissioner.”
1d. Royal Trust agreement does not provide that reports received from a clearing corporation, Federal Reserve, or outside auditor regarding systems of internal control, must be provided to the Company upon request.
1e. The Royal Trust agreement does not state that “the custodian shall secure and maintain insurance protection in an adequate amount.”
It is recommended that the Company have these custodian statements amended to incorporate the above findings.
During review of the amounts reported as Receivable from Parent, Subsidiary and Affiliates, Examiners noted that the Company was incorrectly netting receivable payable balances where no right of offset exists. In accordance with SSAP #64 – Offsetting and Netting of Assets and Liabilities, “assets and liabilities shall be offset and reported net only when a valid right of set-off exists”. It was noted that the majority of the receivable balance was a receivable from the Holding Company, but that this was netted against various smaller receivable and payables from other affiliates to arrive at the net balance. It is recommended that the Company comply with SSAP #64 and properly report any inter-company activity in accordance with the NAIC Accounting Manual.
As previously noted, the Company settled intercompany balances in 2003 and no longer utilizes intercompany loans as a normal business practice routine and intercompany balances are reconciled on a monthly basis.
During review of denied claims, Examiners noted that the Company was unable to locate 2 of the claim files requested. During review of Life Claims, Examiners noted that the Company was unable to locate 2 of the sample of 25 claim files requested. M.R.S.A. Title 24-A, Section 3408 requires the Company to maintain adequate records to support the operations of the Company. Failure to provide requested document is a violation of this statute. It is recommended that the Company review their record retention policies in light of these findings.
The actuarial review of the Company’s disability income loss reserves indicates a deficiency of approximately $300 million as of 12/31/02. The Company used acceptable and reasonable reserving assumptions/methodologies to arrive at an incurred but not reported (IBNR) and a known claimant reserve amount as of 12/31/02. There was no apparent indication of manipulation by the Company to understate loss reserves with the intent of presenting a more favorable financial condition than actually existed at 12/31/02. The aforementioned deficiency was due to less favorable than expected loss development in 2003 and thereafter. As a consequence the Company strengthened reserves in 2003. As the deficiency was a result of subsequent events, considered a change in accounting estimate and due to the relative timing of the financial examination, a further review of loss reserves as of 6/30/04 was necessary to determine the pending financial impact of the 12/31/02 reserve deficiency. The 6/30/04 review indicates the remaining deficiency is approximately $30 million and as a result is below any material financial impact, therefore no financial adjustment is warranted to current financial statements.
It is recommended, in order to decrease future reserve deficiencies, the Company should incorporate a margin element to the determination of IBNR disability reserves. At present, such reserves are determined as a function of historical values without margin for potential adverse morbidity experience. A reasonable margin would result in reserves which would be adequate to provide for corresponding claims in a majority of instances.
SSAP #10 also requires that in computing the gross DTA existing temporary differences that reverse by the end of the subsequent calendar year shall be determined in accordance with paragraphs 228 and 229 of FAS 109. Also, the phrases "reverse by the end of the subsequent calendar year" and "realized within one year of the balance sheet date" are intended to accommodate interim reporting dates and reporting entities that file on an other than calendar year basis for federal income tax purposes. Subsequent review of several of the Company's DTA components indicated that they were not actually reversed by the end of the subsequent calendar year or realized within one year of the balance sheet date.
It is recommended that the Company comply with the requirements of SSAP #10 when preparing the deferred tax asset/liability calculation.
The Company’s financial condition, as disclosed by this examination, is reflected in statements and supporting exhibits contained in this report. The basis of preparation of such statements conforms to laws, rules and regulations prescribed and/or permitted by the Maine Bureau of Insurance.
Acknowledgment of cooperation and assistance extended to the examiners by all Company personnel is hereby expressed.
STATE OF MAINE
COUNTY OF KENNEBEC, SS
James C. Williams, CPA, CFE, being duly sworn according to law deposes and says that, in accordance with authority vested in him by Alessandro A. Iuppa, Superintendent of Insurance, pursuant to the Insurance Laws of the State of Maine, he has made an examination of the condition and affairs of the
UNUM Life Insurance Company of America
of Portland, Maine as of December 31, 2002, and that the foregoing report of examination subscribed to by him is true to the best of his knowledge and belief.
_____________________
James C. Williams, CPA, CFE
Director of Financial Affairs and Solvency
Subscribed and sworn to before me
This _____day of _________, 2004
_______________________
Notary Public
My Commission Expires:
I, Robert L. Hoyer, Principal of Hoyer Actuarial Litigation, LLC, am a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. I was engaged by the Bureau of Insurance of the State of Maine to render this actuarial opinion. I meet the American Academy of Actuaries qualification standards for rendering this opinion and am familiar with the valuation requirements applicable to life and health insurance companies.
This document is not a Statement of Actuarial Opinion to accompany a statutory filing of financial statements for the Company as of year-end 2002. Rather, it is a Statement of Actuarial Opinion performed as part of a financial examination of the Company as of year-end 2002 undertaken by the Bureau of Insurance of the State of Maine. It is being written, to the extent possible, in a form comparable to the Company’s Statement of Actuarial Opinion for the year 2002 as rendered by Richard Joseph Pollard, FSA, MAAA, and dated February 13, 2003.
I have examined the actuarial assumptions and actuarial methods used in determining the reserves and related actuarial items listed below and as shown in the Annual Statement of the Company, as prepared for filing with the state regulatory officials, as of December 31, 2002:
| Exhibit 5 | $ 795,962,749 |
| Exhibit 6 | $ 5,804,926,048 |
| Exhibit 7 | $ 578,408,805 |
| Exhibit 8, Part 1 | $ 933,674.286 |
| Total Reserves | $8,112,971,888 |
In forming my opinion, I relied on information, data, policy forms, reinsurance agreements, and reserve documentation and calculations as provided by the Company and the Bureau of Insurance. In other respects my examination included such review of the actuarial assumptions and actuarial methods and such tests of actuarial calculations as I considered necessary and I am satisfied as to their reasonableness and consistency.
In my opinion, the reserves and related actuarial values concerning the Annual Statement items identified above:
However, in my opinion, the reserves and related items, when considered in light of the assets held by the Company with respect to such reserves and related items, including, but not limited to, the investment earnings on such assets and the considerations anticipated to be received and retained under such policies and contracts, do not make adequate provision, according to presently accepted actuarial standards of practice, for the anticipated cash flows required by the contractual obligations and related expenses of the Company.
During the later portion of 2002, and continuing throughout 2003 and into part of 2004, the Company experienced adverse morbidity associated with disability income policies. This adverse morbidity experience took the form of higher than anticipated disability incidence, and lower than anticipated recovery from disability. As a result, policy reserves, calculated using actuarial assumptions based in part on prior Company experience, in my opinion, are not adequate to provide for the anticipated cash flows required by the contractual obligations and related expenses of the Company.
In my opinion, there are three segments of the disability reserves which are not adequate:
Therefore, in my opinion, the statutory reserves and related items of the Company as of year-end 2002 are deficient by approximately $300,000,000.
Because this conclusion is based in large part on the analysis of actual morbidity experience which has occurred after the filing of the Annual Statement, the Bureau of Insurance of the State of Maine requested that I also conduct an actuarial examination of the Company’s reserve adequacy as of June 30, 2004. As a result of this subsequent examination, in my opinion, the corresponding reserve inadequacy is approximately $30,000,000 as of June 30, 2004.
Between year-end 2002 and mid-year 2004, the Company adjusted the Incurred But Not Reported Reserve methodology to strengthen these reserves, and, in my opinion, the reserve is adequate as of June 30, 2004.
The reinsurance treaty which requires strengthening of the Reserves for Disabled Lives remains in effect as of June 30, 2004, but most of the policies for which this treaty is applicable have been effected to-date. Therefore, in my opinion, there remains a deficiency in this segment of the reserves of approximately $20,000,000.
The remainder of the Reserves for Disabled Lives was strengthened for more recent disabled lives and, in my opinion, is deficient at June 30, 2004 by approximately $10,000,000.
The impact of unanticipated events subsequent to the date of this opinion is beyond the scope of this opinion. For instance, a multi-state regulatory review of the Company’s claim handling practices is expected in the future, and the results of this review may impact the Company’s obligations for reserves and related items, perhaps materially.
Robert L. Hoyer, FSA, MAAA
Principal
Hoyer Actuarial Litigation, LLC
Hoyer Actuarial Litigation, LLC
154 Needletree Lane
Glastonbury, Connecticut, 06033
Phone: (860) 716-6757
Fax: (860) 657-4284
E-mail: rlhover@cox.net
September 13, 2004
Last Updated: March 27, 2012
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