What is the financial future of Unum?

To hear company officials tell it Unum is emphatically on the mend, this after the disability insurer was wracked by scandal and losses earlier in the decade.

In 2005, Unum reached a costly settlement with attorneys general in 49 states over allegations of unfairly terminating or denying coverage to disabled clients.

Its other big problem was in the profit department, the result of horribly underpricing policies sold to doctors, lawyers and other professionals. Those policies are now in “run-off” mode, with beefed-up reserves for claims, meaning they can die a slow but less costly death.

In fact, the Chattanooga, Tenn., company (ticker: UNM) has reported three profitable years, including 2007, when it said it made $679 million, or $1.91 a share, and 2008, when it said it earned $553 million, or $1.62. Unum’s latest estimates call for profit of $2.44 to $2.55 a share for 2009, no small feat in these tumultuous times. With the stock around $10 – well below book value of about $19 a share – investors may be tempted to jump aboard the Chattanooga Choo Choo, as Unum is known in the industry. Our advice: Book a plane ticket or drive. If past is prologue, there could be unfortunate surprises down the tracks. Indeed, even the recent profit gains might not be all they appear to be.

Back in 2005 & 2006 Barron’s ran several negative articles on Unum, as the stock was trading in the low 20s. Among other things, the stories examined Unum’s then-rogue culture, in which top-performing employees were given “Hungry Vulture” awards inscribed with the maxim “Patience, my foot… I’m gonna kill something.” Those honors have been discontinued.

We also described several major “finite” reinsurance deals that the company had struck over the years. These purported to reduce claims losses, the largest cost item on any insurer’s income statement, by getting the reinsurers to assume much of that burden. Yet the finite deals were, in effect, disguised loans, with Unum passing along agreed-upon premiums, reserves and profits to reinsurers in future years. Unum and other insurers pulled back from this practice after a regulatory crackdown in 2005.

But one problem still hangs over the company: a history of alarming setbacks. Unum Group has periodically reported large losses as a result of having to take mammoth reserve charges after several years of sprightly, but apparently illusory, earnings growth. Spectacular blow-ups occurred in 1999, 2003 and 2004, with annual losses of up $386 billion.

“Look, maybe Unum is operating in a more disciplined manner, as management has claimed over the past couple of years, but two years of good results isn’t enough for me to completely trust them,” says one analyst who is neutral on the stock. “I’ll need another couple of years of good earnings without big write-offs before I’ll completely buy in to the story.”

One place in Unum’s financials where investors might want to look closely is the company’s reserves for future claims. As insurance icon Warren Buffett points out, reserves in essence are self-graded exams allowing insurers, depending on their assumptions, to boost or punish earnings.

Here, Unum may have proven decidedly optimistic. This becomes apparent when one looks at a special reserve account called Incurred But Not Reported, for money set aside to cover claims that past experience tells insurers they will face even though the claims haven’t yet been filed. Over the past six years, this account has fallen from 6.3% of Unum’s total reserve (before mark-to-market adjustments) to 4.9% last year.

By paring this account, Unum has sharply boosted profit. The maneuver added $292 million to 2007’s pretax earnings of $1.1 billion, while a smaller IBNR release in 2008 pumped up pretax income by $138 million, to $1.3 billion. Company officials attribute the IBNR releases and the generally improved insurance results across their product lines to a variety of factors: policy-premium increases, improved claims-management efficiencies, a purge of lower-margin business, and a better selection and mix of insurance risks.

The company further argues that the IBNR releases went into reserves for actual claims. But that is arguably a distinction without a difference: Without the IBNR money, earnings would be penalized directly by a beefing up of those reserves.

Investors also should remember that Unum is operating in a competitive environment in which premium boosts are difficult to come by. The company, likewise, operates at a distinct disadvantage to such disability insurers as StanCorp (SFG) and MetLife (MET) because of Unum’s lower rating of claims-paying ability, as measured by industry arbiter A.M. Best.

The profit gains from cutting the IBNR have helped compensate for the disappearance of finite reinsurance. And there are signs that Unum may be carrying out other accounting maneuvers to burnish earnings.

Consider the company’s allowance for doubtful accounts money set aside for when customers fail to pay premiums. In 2006 and 2007, Unum tapped this account for $16.5 million and $4.5 million, respectively, with those sums going straight to profit.

Last year, Unum drew down only $2 million from the allowance – but it withdrew and added to earnings $7.3 million from a real-estate reserve account. Unum argues this was all the result of a better book of business than in the past.

Frequent accounting changes at Unum make tracking the company’s year-to-year financial performance difficult. For instance, according to a footnote in Unum’s fourth-quarter 2008 Statistical Supplement, the company was able to report $530.8 million in statutory, or regulatory, income in 2007 due to a new valuation system employed for its individual disability reserves. The change resulted in a $194 million gain in after-tax statutory income. That measure of income is closely watched by analysts because it is more conservatively calculated than earnings under GAAP.

Unum has operated in a conservative manner in at least one area – its investment portfolio. As JPMorgan analyst Jimmy S. Bhullar points out in a recent report, the quality of Unum’s $32 billion portfolio is better than that of many other life companies. Unum, for example, has no subprime securities and little in the way of non-government-guaranteed mortgage-backed and commercial real-estate risk.

Yet the company could have further investment charge-offs. More than 40% of its bond portfolio is rated triple-B or below, compared with its peer average of 23%, according to Bhullar. Also, the portfolio has nearly $2 billion in gross, unrealized losses that have been carried on the balance sheet for a year or more.

Unum claims those losses are the temporary result of swollen risk spreads in the bond market, rather than a measure of actual default risk. But given the length of time these losses have existed, Unum’s accountants might insist that the securities be adjudged permanently impaired, resulting in a huge charge to earnings.

It is often said a picture is worth a thousand words; in this case, it is worth at least 200 words. Look at the nearby chart, which reflects activity in Unum’s key group-disability business. Notice how the “benefit ratio” the percentage of each premium dollar eaten up by claims and administrative expenses traces a beautiful glide pattern lower, dropping about half a percentage point every quarter and two full percentage points each year.

Is this picture too good to be true? It is difficult to say. But look at the results posted by MetLife, operating in the very same business over the very same period. Its quarterly underwriting ratio jumps all over the place in what appears to be a random walk. Unum officials attribute MetLife’s results to the fact that MetLife does business with bigger employers, which Unum contends have more volatile patterns of claims. But that seems like a stretch, at best.

In “short-tail” insurance businesses like auto, claim expenses are far harder to manipulate. The insurer knows exactly what the body shop is charging to repair the vehicle of one of its insureds.

But long-term disability payments are typically made over a period of years, and ultimate claims losses depend on a host of malleable assumptions, such as how long a claimant will be on disability before making a satisfactory recovery. In other words, disability insurers must bring more judgment to the table.

MetLife appears to accept the real world, with all its inherent volatility, while Unum prefers a picture of order and smoothed results. But in the end, pretty pictures are only that – pretty pictures.

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Yes. We are a national disability insurance law firm that is available to represent you regardless of where you live in the United States. We have partner lawyers in every state and we have filed lawsuits in most federal courts nationwide. Our disability lawyers represent disability claimants at all stages of a claim for disability insurance benefits. There is nothing that our lawyers have not seen in the disability insurance world.

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Since we represent disability insurance claimants at different stages of a disability insurance claim we offer a variety of different fee options. We understand that claimants living on disability insurance benefits have a limited source of income; therefore we always try to work with the claimant to make our attorney fees as affordable as possible.

The three available fee options are a contingency fee agreement (no attorney fee or cost unless we make a recovery), hourly fee or fixed flat rate.

In every case we provide each client with a written fee agreement detailing the terms and conditions. We always offer a free initial phone consultation and we appreciate the opportunity to work with you in obtaining payment of your disability insurance benefits.

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No. For purposes of efficiency and to reduce expenses for our clients we have found that 99% of our clients prefer to communicate via telephone, e-mail, fax, GoToMeeting.com sessions, or Skype. If you prefer an initial in-person meeting please let us know. A disability company will never require you to come to their office and similarly we are set up so that we handle your entire claim without the need for you to come to our office.

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Bruce R. (Arizona)

Steve Dell has done an exceptional job with my disability application process. The firm is extremely well managed. They have acquired an incredible amount of experience over many years. I recommend them for disability insurance claims without reservation. 

Don (Florida)

I called this firm a few months ago completely disparaged due to a company cutting off disability benefits at a time that nearly caused me to lose everything.

Attorney Alex Palmera and Danielle worked hard to reach an amicable settlement and my case was settled a few months later. This is a good firm and the specific expertise in disability claims saved me countless hours of hassle at a time when an already fragile state existed.

Thank you Mr. Palamara and Danielle.

Sandra B. (Arkansas)

I have nothing but good things to say about how my buyout was handled with my disability claim. The level of professionalism was amazing. All of my questions and concerns were answered either by Danielle L. or Alex P. in such a timely manner and with such care I would recommend them in a heartbeat to anyone needing to approach their provider with buyout options.

They did a fantastic job communicating between the provider and me, always keeping my best interest at heart and always answering my many many questions. They really did take most of the stress out of this whole situation. I would give them a 10 out of 10 for every step of this crazy journey. Thank you so much for helping me through this.

Brenda R. (New York)

I needed assistance with an appeal for a LTD claim that was initially denied. Stephen understood what needed to happen to win the appeal and he did win the appeal for me.

Michael C. (Virginia)

Greg Dell and his assistant Anneli have been extremely responsive and helpful, not only our initial consultations, but in follow-ups 1 and 2 years later with the insurance company to ensure that they comply with their agreements (which they did), as well as a separate and only slightly-related inquiry about our health insurance. I always hear back from them very quickly, which is rare and greatly appreciated.

Jeff P. (Oklahoma)

After a very long and frustrating ordeal to keep my LTD payments coming I decided to seek assistance from and attorney. After much research and asking those in the legal profession Dell & Schaefer seemed to be the top choice. I reached out and Alex Palamara was the attorney assigned to my case. All I can say is the experience was outstanding. Both Alex and his Paralegal, Danielle Lauria were excellent to work with. They were very kind, concerned, understanding of my frustrations and treated me with the utmost respect. Communication was excellent with regular updates and telling me what I could expect in each stage of the process.

Alex was also very straight forward with what to expect and no pie in the sky promises or expectations were made. In the end we won our case and I believe it was solely due to their experience and knowledge of not only the laws but the insurance companies as a whole. I would highly recommend them and am very grateful for the help they afforded to me.

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