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REPORT OF EXAMINATIONUnum LIFE INSURANCE COMPANY OF AMERICAAS OFDECEMBER 31, 2005I hereby certify that the attached report of examination dated May 11, 2007 shows the condition and affairs of the Unum Life Insurance Company of America, Portland, Maine as of December 31, 2005 and has been filed in the Bureau of Insurance as a public document.
Dated the _____ day of _________, 2007
TABLE OF CONTENTS SCOPE OF EXAMINATION ......................................................................................................2
FIDELITY BOND AND OTHER INSURANCE ...........................................................................8
May 11, 2007
Eric Cioppa, 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.
Unum Life Insurance Company of America (hereinafter referred to as “the Company”) was last examined as of December 31, 2002 by the Bureau of Insurance of the State of Maine. This examination covers the period from January 1, 2003 to the close of business on December 31, 2005. 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, 2005 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, 2005. 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, 2005. 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. On December 22, 2004 Unum Holding Company was merged into UnumProvident Corporation. Accordingly, at December 31, 2005 ULIC is a wholly owned subsidiary of UnumProvident Corporation. Board of Directors As of December 31, 2005, the Board of Directors consisted of the following members:
Officers As of December 31, 2005, officers of the Company consisted of the following:
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 100.0% owned by UnumProvident Corporation. The following is an organizational chart of the UnumProvident Corporation at December 31, 2005: ORGANIZATION CHART
(1) UnumProvident Corporation owns 100% of the Class A common stock and UnumProvident Finance owns 100% of the Class B The Company is a party to a written tax sharing agreement with the consolidated group members listed above. The agreement provides that the portion of the consolidated tax liability allocated to the Company is based on its separate return tax liability. The Company provides to and receives from its affiliates certain administrative, technical and managerial support pursuant to the terms of service agreements. In addition, the Company participates in short-term borrowing arrangements with affiliated companies. 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 individual disability insurance, group long term disability insurance, long-term care insurance, group life insurance and group accidental death & dismemberment insurance. Products are marketed using the brand name “UnumProvident”. Distribution is primarily through a network of Company sales representatives and independent brokers. Individual Disability Insurance (“IDI”) The Company’s IDI contracts provide monthly or lump sum benefits to policyholders during periods of total or residual (partial) disability after the satisfaction of an elimination period. The portfolio of products includes a broad array of policy forms for both personal and business uses with optional riders such as cost of living, future purchase options, etc., which provide for additional benefits. Certain policy forms include a provision that allows the policy holder to convert the IDI policy to a long term care policy form that is being issued at the time of conversion. The definition of disability ranges from “loss of earnings” to “inability to perform your own occupation”, and benefits are generally provided until age 65 or for the policyholder’s lifetime. Group Long-Term Disability Insurance (“LTD”) Group LTD contracts are generally written to employer groups and protects the insured from loss of income due to disability. Benefits begin after the satisfaction of an elimination period until a maximum benefit duration, which is most frequently to age 65, is reached. Income replacement is generally set at 50% to 70% of pre-disability income. Elimination periods range from 30 days to 365 days with the most common being 90 days and 180 days. The majority of contracts include a 2-year “Own Occupation” definition of disability followed by an “Any Occupation” definition. Long-Term Care Insurance (“LTC”) LTC insurance pays for services needed for those who cannot take care of themselves. Services include skilled nursing care and personal care services that may be received in a nursing home, assisted living facility, or at home. LTC benefits are paid if the policyholder suffers the loss of two or more Activities of Daily Living (ADLs) and requires stand-by assistance of another person or suffers cognitive impairment. There are six ADLs, which include bathing, dressing, transferring, toileting, continence, and feeding. The LTC policyholder can choose from various combinations of daily or monthly benefit amounts, elimination periods (waiting period), and benefit periods. The maximum lifetime benefit available to the policyholder is the daily or monthly benefit amount multiplied by the benefit period Virtually all of the Company’s in force LTC as of December 31, 2005 was indemnity type coverage that pays the full daily or monthly benefit amount without regards to the actual expenses incurred. Group Life Insurance Group term life insurance provides death benefit coverage. Group universal life insurance allows the certificateholder to accumulate the premium they deposit in excess of what is required to cover the cost of insurance deductions in a side fund that earns interest. Group paid-up life insurance provides death benefit coverage. A premium waiver benefit is provided under group term life insurance contracts. In the event of disability the benefit under the contract is extended without the payment of any additional premium. The disability must occur prior to age 60. An elimination period applies. Beneficiaries can elect for the death benefit under group life insurance to be received in the form of a supplementary contract with or without life contingencies. The result is a deferral in the payment of cash to the beneficiary allowing the beneficiary time to make decisions about the benefit payment while earning interest. The procedure also allows the Company to collect a small amount of interest margin. Group Accidental Death & Dismemberment (“AD & D”) Insurance AD&D insurance provides a payment in the event of accidental death or the loss of one or more body parts. The Company sells AD&D insurance in combination with group life policies and also as stand-alone policies. Beneficiaries can elect for the benefit under group AD&D to be received in the form of a supplementary contract with or without life contingencies. The result is a deferral in the payment of cash to the beneficiary allowing the beneficiary time to make decisions about the benefit payment while earning interest. 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. The Company routinely assumes and cedes reinsurance with other insurance companies. The following describes some of the Company’s significant reinsurance programs in effect at December 31, 2005. Individual Disability Income (IDI) Reinsurance Ceded Effective August 8, 2005 the Company recaptured a block of individual disability insurance business originally ceded to Centre Life Reinsurance Ltd. in 1996. The recaptured business included approximately $1.6 billion in invested assets, $1.5 billion in claim, active life and other miscellaneous reserves, and approximately $185.0 million of annual inforce premium income. The Company reported an after tax gain of $129.7 million in 2005, including $57.3 million to recognize the remaining balance of the reinsurance gain initially deferred at inception of the contract in 1996. In accordance with statutory accounting principles, the Company recorded the fair value of invested assets as a ceded paid benefit and the $1.5 billion of reserves recaptured through the applicable change in reserves in the statement of income. The recapture resulted in a $57.5 million increase in surplus. The Company has excess of loss reinsurance contracts with Cologne Re, Lincoln National, Munich Re and Swiss Re (formerly Mercantile and General). The retention limit for personal IDI business is generally $20,000 monthly benefit. The retention limit for business buy/sell contracts is generally $500,000 total benefits. 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. The reserve credit taken for this business at December 31, 2005 was $85.9 million. 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. The Company assumed a 100% quota share of all non-cancelable IDI policies issued by affiliate First Unum Life Insurance Company. The agreement was effective January 1, 1996. Existing claims as of January 1, 1996 were not assumed. Long Term Disability (LTD) Reinsurance Ceded A treaty with Unum International Limited (“UPIL”) 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. 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 for this treaty at December 31, 2005 was $2,196.1 million. 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, 2005 amounted to $354.0 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, 2005 the assumed reserves and unpaid losses totaled $778.8 million. At December 31, 2005 the balance of the related unamortized deferred gain was $6.1 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, 2005 amounted to $194.7 million. 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, 2005 ceded reserves for this block of business totaled $54.4 million. 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, UPIL, through a funds withheld reinsurance arrangement. The Company recorded a deferred gain of $64.2 million which will be amortized into income over the future life of the business ceded beginning in 2006. The reserve credits taken and loss recoverables for this reinsurance were $1,813.5 million at December 31, 2005. The Company participates in many treaties that cede LTC risk to other carriers. The Company has a reinsurance agreement with American United Life (“AUL”) whereby risk participants of the Company in certain reinsurance facilities associated with D&H is ceded. Ceded reserves pertaining to this agreement totaled $185.8 million as of December 31, 2005. 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 $32.1 million at December 31, 2005. Reinsurance Assumed Effective January 1, 1993, the Company entered into an agreement to assume individual long term care business from ALTCRG. The reinsurance was executed on an arms-length basis. As of December 31, 2005 the assumed reserves and unpaid losses totaled $152.0 million. This business is fully retroceded to AUL. 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 was 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. 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 (“Lead States”) with respect to issues arising from the Multistate Market Conduct Examination 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 (“ERISA”). The multistate examination resulted in a report and settlement agreements that became effective on December 21, 2004, which was agreed to by 48 states and the District of Columbia. The examination report made no findings of violations of law or regulations. The examination identified a number of areas of concern with the examiners and the Lead States concluding that the level of claim handling errors was sufficient to merit further regulatory action. The settlement agreements include a reassessment of certain previously denied or closed claims, additional corporate and board governance, and payment of a fine in the amount of $15.0 million that was allocated among the states and jurisdictions participating in the agreements. The agreements will remain in place until the later of January 1, 2007, or the completion of an examination of claims handling practices and an examination of the reassessment process, both of which will be conducted by the lead state regulators. The settlement agreements also provide for a contingent fine of up to $145.0 million in the event that the companies fail to satisfactorily meet the performance standards in the settlement agreements. The parties to the agreements have subsequently agreed to extend the reassessment process until December 31, 2007. The U.S. Department of Labor, which had been conducting an inquiry relating to certain ERISA plans, joined in the settlement agreements. The Office of the New York Attorney General, (“NYAG”) which had engaged in its own investigation of claim handling practices, supported the settlement and closed its investigation on this issue. On October 3, 2005, UnumProvident Corporation entered into a settlement agreement with the California Department of Insurance (“CDOI”) on behalf of 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 in connection with a market conduct investigation of the companies’ disability claims handling practices. The CDOI had chosen not to join the 2004 multistate settlement agreements. As part of the settlement the companies paid a civil penalty of $8.0 million and agreed to change certain practices and policy provisions related to California business. In the fourth quarter of 2004 UnumProvident Corporation recorded a charge to income of $127.0 million relating to the multistate settlement agreement and in the third quarter of 2005 recorded a charge of $75.0 million relating to the CDOI settlement agreement. 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. CLAIMS HANDLING MATTERS Multidistrict Litigation On September 2, 2003, the Judicial Panel on the Multidistrict Litigation entered an order transferring more than twenty putative class actions, described below, filed in various courts against UnumProvident, several of its subsidiaries and some of their officers to the U.S. District Court for the Eastern District of Tennessee for coordinated or consolidated pretrial proceedings. The defendants strongly deny the allegations in each of these actions and will vigorously defend the substantive and procedural aspects of the litigations. Policyholder Class Actions On July 15, 2002, Rombeiro v. Unum Life Insurance Company of America, et al., was filed in the Superior Court of California and subsequently was removed to federal court, alleging that the plaintiff was wrongfully denied disability benefits under a group long-term disability plan. On January 21, 2003, an Amended Complaint was filed on behalf of a putative class of individuals that were denied or terminated from benefits under group long-term disability plans, seeking injunctive and declaratory relief and payment of benefits. On April 30, 2003, the court granted in part and denied in part the defendants’ motion to dismiss the compliant. On May 14, 2003, the plaintiff filed a Second Amended Compliant seeking similar relief. Between November 2002 and November 2003, six additional similar putative class actions were filed in (or later removed to) federal district courts in Illinois, Massachusetts, New York, Pennsylvania, and Tennessee. The complaints alleged that the putative class members’ claims were evaluated improperly and allege that UnumProvident and its insurance subsidiaries breached certain fiduciary owed to the class members under ERISA, Racketeer Influenced Corrupt Organizations Act (“RICO”), and/or various state laws. The complaints sought various forms of equitable relief and money damages, including punitive damages. These actions all were transferred to the Eastern District of Tennessee multidistrict litigation. On December 22, 2003, the Tennessee Federal District Court entered an order consolidating all of the above actions for all pretrial purposes under the caption In re UnumProvident Corp. ERISA Benefit Denial Actions and appointed a lead plaintiff. A consolidated amended complaint was filed on February 20, 2004. On March 26, 2004, the defendants answered the complaints and simultaneously filed a motion for judgment on the pleadings in the ERISA Benefit Denial Actions. The court has not yet ruled upon that motion. On April 30, 2003, a separate putative class action, Taylor v. UnumProvident Corporation, et al., was filed in the Tennessee Circuit Court and subsequently removed to federal court. The complaint alleges claims against UnumProvident and certain subsidiaries on behalf of a putative class of long-term disability insurance policyholders who did not obtain their coverage through employer sponsored plans and who had a claim denied, terminated, or suspended by a UnumProvident subsidiary after January 1, 1995, seeking equitable and monetary relief. Plaintiff alleges that the defendants violated various state laws by engaging in unfair claim practices and denying improperly claims. On April 9, 2004, the plaintiffs in Taylor and in the ERISA Benefit Denial Actions separately filed motions seeking certification of a plaintiff class. On July 1, 2005, the defendants also filed motions for summary judgment in each action. On December 14, 2005, the court granted in part the defendants’ motion for summary judgment in Taylor, dismissing plaintiff’s request for equitable relief on her breach of contract claim and dismissing any claim plaintiff may make for punitive damages under the Tennessee Consumer Protection Act. The former claim is the principal claim upon which class certification is sought. The court reserved ruling on the remainder of the pending motion for summary judgment pending further mediation of the Taylor and ERISA Benefits actions. Other Claim Litigation UnumProvident and its insurance company subsidiaries, including the Company, 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. Most 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, UnumProvident and its insurance company subsidiaries, including the Company, 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 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 the range of reasonably possible losses. On December 20, 2004, Weiller v. New York Life Insurance Company, et al., was filed in New York Supreme Court against, among others, UnumProvident and certain subsidiaries on behalf of a putative class of insureds under policies issued by several third-party insurers on behalf of whom UnumProvident administers claims. The complaint alleges that the defendants breached the insurance policies by improperly denying or terminating benefits, and seeks equitable relief on behalf of the class and benefits on behalf of the named plaintiff. On February 18, 2005, the defendants filed a motion to dismiss this action. On June 20, 2005, the plaintiff filed a motion seeking certification of a putative class, which the defendants opposed. These motions remain pending. UnumProvident denies the allegations and will vigorously defend against the allegations raised in the complaint. From time to time class action allegations are pursued, as in Weiller, where the claimant or policyholder purports to represent a larger number of individuals who are similarly situated. Since each insurance claim is evaluated based on its own merits, there is rarely a single act or series of actions, which can properly be addressed by a class action. Nevertheless, UnumProvident monitors these cases closely and defends itself appropriately where these allegations are made. BROKER COMPENSATION, QUOTING PROCESS, AND RELATED MATTERS Examinations and Investigations In June 2004, UnumProvident received a subpoena from NYAG requesting documents and information relating to compensation arrangements between insurance brokers or intermediaries and the Company and its subsidiaries. UnumProvident has received additional subpoenas or requests for additional information from the NYAG concerning its relations with insurance brokers. The NYAG has filed several lawsuits against brokers arising out of its investigation. Several insurers were cited in the complaints but not named as defendants - - one such complaint cited Unum Provident but did not name it as a defendant. UnumProvident is cooperating with the NYAG’s investigations and inquires. Since October 2004, UnumProvident and/or its insurance subsidiaries have received subpoenas or information requests from the Office of the Attorney General, pursuant to a Federal Grand Jury in San Diego, insurance departments, and/or other state regulatory or investigatory agencies of at least eight additional states including California, Connecticut, Florida, Maine, Massachusetts, North Carolina, Oklahoma, and South Carolina. The subpoenas and information requests sought information regarding, among other things, quoting processes, producer compensation, solicitation activities, policies sold to state or municipal entities, and information regarding compensation arrangements with brokers, particularly with regard to Universal Life Resources, Inc. UnumProvident is cooperating fully with these investigations. UnumProvident also has had discussions with the DOL regarding compliance with ERISA, relating to UnumProvident’s interactions with insurance brokers and to regulations concerning insurance information provided by UnumProvident to plan administrators of ERISA plans, including specifically the reporting of fees and commissions paid to agents, brokers and others in accordance with the requirements of Schedule A of Form 5500. The DOL is pursuing an investigation of UnumProvident concerning these issues, both generally and specifically in connection with certain brokers, including ULR, which is a defendant referred to below under “Broker-Related Litigation.” UnumProvident is cooperating with the DOL’s investigation. Broker-Related Litigation UnumProvident and certain of its subsidiaries, along with many other insurance brokers and insurers, have been named as defendants in a series of putative class actions that have been transferred to the U.S. District Court for the District of New Jersey for coordinated or consolidated pre-trial proceedings as part of multidistrict litigation (“MDL”) No. 1663, In re Insurance Brokerage Antitrust Litigation. The Plaintiffs in the MDL filed a consolidated amended complaint in August 2005, which alleges, among other things, that the defendants violated federal and state antitrust laws, RICO, ERISA and various state common law requirements by engaging in alleged bid rigging and customer allocation and by paying undisclosed compensation to insurance brokers to steer business to defendant insurers. Defendants filed a motion to dismiss the complaint on November 29, 2005, and that motion is pending. Plaintiff’s filed a motion for class certification on February 13, 2006, and UnumProvident will oppose class certification on or before May 5, 2006 in accordance with the present scheduling order in this matter. The Company is a defendant in a case brought by the California Insurance Commissioner, styled California v. Universal Life Resources, et al., pending in California Superior Court. The complaint purports only to seek injunctive relief under the California Insurance Code based on allegations of undisclosed or inadequately disclosed compensation paid to brokers, steering, bid rigging and customer allocation similar to the claims asserted to MDL No. 1663. The defendants filed a demurrer to the Second Amended Complaint on July 21, 2005. The demurer was overruled on December 23, 2005, and the Company filed an answer denying all material allegations on January 18, 2006. The Company is defendant in an action styled, Palm Tree Computers System, Inc. v. ACE USA, et al., which was filed in the Florida state Circuit Court on February 16, 2005. The complaint is a putative class action and alleges violations of the Deceptive and Unfair Trade Practices Act of Florida and other states, breach of fiduciary duty, and unjust enrichment. The allegations are brought against numerous broker organizations and insurers and assert UnumProvident and its subsidiaries engaged in illegal and unethical contingent commission arrangements. The case was removed to federal court and, on October 20, 2005, the case was transferred to the District of New Jersey multidistrict litigation. A motion to remand the case to the state court in Florida remains pending, but no further action has been taken in the case subsequent to the transfer. The Company is a defendant in an action entitled, Bensley Construction, Inc. v. Marsh & McLennan Companies, Incl, et al., filed in Massachusetts Superior Court by the same counsel as in Palm Trees. The complaint names numerous insurance brokers and insurers and purports to be brought on behalf of Massachusetts insureds, alleging violations of breach of fiduciary duty and unjust enrichment under Massachusetts law. The case was removed to Federal Court and a tag-along notice filed seeking transfer to MDL No. 1663. The Judicial Panel on Multidistrict Litigation ordered the case transferred to MDL No. 1663 on February 13, 2006. Plaintiff’s motion to remand the matter to state court remains pending. UnumProvident denies the allegations in these matters and intends to vigorously contest them. The Company denies the allegations in these matters and intends to vigorously contest them. Miscellaneous Matters In September 2003, United States of America ex. rel. Patrick J. Loughren v. UnumProvident Corporation and GENEX Services, Inc., was filed in the United States District Court for the District of Massachusetts. This is a qui tam action to recover damages and civil penalties on behalf of the United States of America alleging violations of the False Claims Act by UnumProvident and GENEX. In accordance with the False Claims Act, the action was originally filed under seal to provide the government the opportunity to investigate the allegations and prosecute the action if they believed that the case had merit and warranted their attention. The government declined to prosecute the case and the case became a matter of public record on December 23, 2004. The complaint alleges that UnumProvident defrauds the government by inducing and or assisting disability claimants to apply for disability benefits from the Social Security Administration (SSA) when UnumProvident allegedly knows that the claimants are not disabled under SSA criteria. On September 13, 2005, the magistrate judge filed a recommended decision granting UnumProvident’s motion to dismiss. The plaintiff’s appealed that finding to the district court judge. On October 6, 2005, the district court judge adopted, in full, the recommended decision of the magistrate judge thereby granting dismissal of the case. The plaintiff’s subsequently amended their pleading, and UnumProvident filed a motion to dismiss the pleading as amended for the same reasons that the court dismissed the original pleading. On February 9, 2006 the Court denied the motion to dismiss. UnumProvident will proceed forward to answer the complaint and otherwise defend the action. In certain of the Company’s reinsurance businesses there are disputes among the pool members, reinsurance participants, and/or reinsurers concerning the scope of their obligations and liabilities within the reinsurance contracts, including the reinsurance pools for which subsidiaries of the Company acted either as pool managers or underwriting agents, as pool members, or as reinsurers. The Company either has been or may in the future be brought into disputes, arbitration proceedings, or litigation with other pool members or reinsurers in the process of resolving the various claims. Various other lawsuits against the Company have arisen in the normal course of its business. Contingent liabilities that might arise from such other litigation incurred in the normal course of business are not deemed likely to materially adversely affect the consolidated financial position or results of operations of the Company in a period, depending on the results of operations of the Company for the particular period. On a GAAP basis, the UnumProvident Corporation strengthened reserves by $86.0 million in the first quarter of 2006 and by $325.4 million in the third quarter of 2006 relating to the multistate reassessment process. For further information please refer to MultiState Market Conduct Examination on page 12 of this report. On March 29, 2006 UnumProvident received a subpoena from the SEC seeking information regarding certain reinsurance transactions and transactions regarding “Non Traditional Products” entered into after January 1, 2002. UnumProvident is cooperating fully with the SEC in its investigation. On November 1, 2006, Tailwind Holdings, LLC (“Tailwind Holdings”), a newly formed Delaware limited liability company, established as a special purpose reinsurance vehicle to reinsure a specific block of group long term disability claims, and a wholly-owned subsidiary of UnumProvident, issued $130.0 million of senior, secured notes, in a private placement. Recourse for the payment of principal, interest, and other amounts due in the notes will be dependent principally on the receipt of dividends from Tailwind Reinsurance Company (“Tailwind Re.”), the sole subsidiary of Tailwind Holdings. The ability of Tailwind Re to pay dividends to Tailwind Holdings will depend on its satisfaction of applicable regulatory requirements and on the performance of the reinsured claims of Unum Life Insurance Company of America reinsured by Tailwind Re. During 2006 UnumProvident Corporation analyzed the reassessment process and increased their estimate of the cost of the reassessment process by $396.4 million. The amount of this increase, net of applicable reinsurance, attributable to the Company was $317.6 million before tax or $206.4 million after tax. In December 2006 the Company received a $300,000,000 capital contribution from UnumProvident. On March 2, 2007 UnumProvident formally announced its name change from UnumProvident Corporation to Unum Group. 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, 2005 as determined by this examination.
UNUM LIFE INSURANCE COMPANY OF AMERICA
UNUM LIFE INSURANCE COMPANY OF AMERICA
UNUM LIFE INSURANCE COMPANY OF AMERICA
UMUM LIFE INSURANCE COMPANY OF AMERICA
*See note 8 of the notes to financial statements. The additional reserves result from a reassessment of reserves in 2006 pursuant to the Regulatory Settlement Agreement and the California Settlement Agreement offset, in part, by redundancies
NOTES TO STATUTORY FINANCIAL STATEMENTS
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.
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
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.
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.
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.
The balance for Investment Income Due and Accrued is unchanged from that reported by the Company.
The Bureau engaged Deloitte Consulting LLP, to assist in this financial examination and to provide an actuarial analysis of the Company’s reported reserves. Deloitte Consulting’ work is documented in the Statement of Actuarial Opinion – UNUM Life Insurance Company of America – For the year 2005, as dated May 11, 2007 (the Statement of Actuarial Opinion) and the Actuarial Analysis of Reserves – UNUM Life Insurance Company of America – For the year 2005, as dated May 11, 2007 (the Actuarial Analysis of Reserves).
The balance for Aggregate Reserves for Life Policies as reported by the Company at December 31, 2005, net of reinsurance, consisted of the following:
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.
The balance for Aggregate Reserves for A&H Policies at December 31, 2005, net of reinsurance, consisted of the following:
The balance as stated above is $183.8 million greater than the amount reported by the Company. The additional reserves result from a reassessment of reserves in 2006 pursuant to the Regulatory Settlement Agreement and the California Settlement Agreement offset, in part, by redundancies identified elsewhere in the Actuarial Report. For further information see “MultiState Market Conduct Examination” on page 13 of this report. The Actuarial Opinion and the Actuarial Analysis of Reserves provide further details regarding the settlement agreements and reserve valuations.
The liability for deposit-type contracts as reported by the Company at December 31, 2005, net of reinsurance, consisted of the following:
Claim reserves represent incurred but not reported claims and claims in the course of settlement. Contract claims reserves consisted of $241,041,116 of life reserves and $649,323,075 of accident and health reserves. As a result of the examiners reviewing life claim files and noting the disposition of the pending claim subsequent to year-end 2005 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.
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, 2005.
The examiners conducted a search for unrecorded liabilities, which was designed to detect significant amounts not properly accrued for as of December 31, 2005. No material exceptions were found.
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, 2005, indicated that the Company is clearing suspense items on a timely basis.
A summary of this liability is as follows:
Significant balances were reviewed by examiners and found to be reasonable.
This amount represents the deferred gain net of taxes on two reinsurance transactions. (i) Effective October 1, 2002, a portion of the group long-term disability business of Provident Life and Accident Insurance Company (“Provident”) and The Paul Revere Life Insurance Company (“Paul Revere”) was ceded to the Company. Provident and Paul Revere are affiliates of the Company. The reinsurance was executed on an arms-length basis. The Company assumed reserves of $868.3 million and recorded a deferred gain of $94.9 million. The deferred gain is being amortized into income as earnings emerge over the life of the business. At December 31, 2005 the balance of the deferred gain was $6.1 million.
This fund balance was comprised of the following:
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. 17-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, 2005 securities having a statement value of $210,186,050 are 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 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. COUNTY OF KENNEBEC, SS Kendra Godbout, CFE, being duly sworn according to law deposes and says that, in accordance with authority vested in her by Eric Cioppa, Acting Superintendent of Insurance, pursuant to the Insurance Laws of the State of Maine, she has made an examination of the condition and affairs of the Unum Life Insurance Company of America of Portland, Maine as of December 31, 2005, and that the foregoing report of examination subscribed to by her is true to the best of her knowledge and belief.
STATEMENT OF ACTUARIAL OPIMONUnum Life Insurance Company of AmericaDecember 31, 2005I, Timothy D. Gustafson, a member of the American Academy of Actuaries, am associated with the firm of Deloitte Consulting LLP. Deloitte Consulting has been engaged by the State of Maine Bureau of Insurance to render this opinion in connection with the examination of the Unum Life Insurance Company of America (“the Company”) as of December 31, 2005. I meet the Academy qualification standards for rendering this opinion and am familiar with the valuation requirements applicable to life and health insurance companies. I have examined the actuarial assumptions and actuarial methods used in determining reserves and related actuarial items listed in the attached schedule, as shown in the annual statement of the Company, as prepared for filing with state regulatory officials, as of December 31, 2005. In forming my opinion, I have relied upon the actuarial staff of the Company for information regarding reserve methodologies used as of December 31, 2005, and for listings and summaries of policies and contracts and other liabilities in force as of December 31, 2005. I also relied on asset adequacy information summarized in the Actuarial Memorandum supporting the December 31, 2005, Actuarial Opinion prepared by Albert A. Riggieri, Vice President and Appointed Actuary. In other respects my examination included review of the actuarial assumptions and actuarial methods and such tests of the actuarial calculations as I considered necessary. During the course of our examination of the Company, we noted instances where held reserve balances differed from State of Maine requirements. We determined that the Company’s held reserves as of December 31, 2005, required an aggregate increase of $183,833,036 on a net of reinsurance basis. Further detail supporting this adjustment is provided in our actuarial report dated May 30, 2007. This adjustment impacted Exhibit 6 of the annual statement and is included in the attached schedule. My opinion is based on the amounts shown in the “As Examined” column of the attached schedule. In my opinion the exam adjusted amounts identified in the attached schedule:
The reserves and related items, when considered in light of the assets held by the Company with respect to such reserves and actuarial items including, but not limited to, the investment earnings on the assets, and the considerations anticipated to be received and retained under the policies and contracts, 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. The actuarial methods, considerations and analyses used in forming my opinion conform to the appropriate Standards of Practice as promulgated from time to time by the Actuarial Standards Board, which standards form the basis of this statement of opinion. This statement of opinion was prepared for, and is only to be relied upon by, the State of Maine Bureau of Insurance.
_______________________________ (312) 486-1786 May 31, 2007
Schedule Unum Life Insurance Company of America
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