UnumProvident Corporation

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UnumProvident Corporation

One Fountain Square
Chattanooga, Tennessee 37402-1307
U.S.A.
Telephone: (423) 755-1011
Fax: (423) 755-3962
Web site: http://www.unumprovident.com

Public Company
Incorporated: 1887 as Mutual Medical Aid and Accident Insurance Company
Employees: 13,100
Total Assets: $42.44 billion (2001)
Stock Exchanges: New York
Ticker Symbol: UNM
NAIC: 524113 Direct Life Insurance Carriers; 524114 Direct Health and Medical Insurance Carriers; 551112 Offices of Other Holding Companies

UnumProvident Corporation is a holding company for a group of companies that collectively are the leading disability insurers in both North America and the United Kingdom. The company also operates in Japan, France, The Netherlands, and Argentina as well. Through its key brands—Unum, Provident, Paul Revere, and Colonial—the firm offers both group and individual disability insurance in addition to such complementary offerings as long-term care insurance, life insurance, and employer- and employee-paid group benefits. UnumProvident is the result of the 1999 union of UNUM Corporation, which had been the leading group disability insurer in North America, and Provident Companies Inc., which had been the leader in individual disability insurance.

Provident’s Late 19th-century Origins in Accident Insurance

Provident Companies traced its origins back to that of the Mutual Medical Aid and Accident Insurance Company, which was founded in Chattanooga, Tennessee, in May 1887. Founders included lawyers, an architect, and a real estate sales-man, none of whom had any real knowledge of insurance. Chattanooga was enjoying a boom at this time, as mineral hunters had discovered coal and iron ore nearby in the 1870s. There was an industrial explosion in the South in the 1880s. Chattanooga’s future seemed limitless in 1887, as steel went into production south of the Mason-Dixon Line for the first time, and the mineral wealth ignited development. The insurance industry was dominated by the eastern old-line companies who would not cover high-risk workers. Mutual Medical chose these “uninsurables”—workers at coal mines, blast furnaces, coke ovens, and certain railroad occupations—for its market niche. The employing company would withhold 2.50 a day from laborer’s wages in return for $7.50 coverage a week for lost time, and compensation for death or lost limbs. For workers whose only other recourse had been passing the hat, the policies were attractive.

The founders were forced to reverse their medical-aid policies almost immediately, after realizing that a single yellow fever epidemic—like the one in 1878—could wipe out the company. They bought back some 100 medical policies and resolved to sell only accident insurance. The company changed its name and incorporated as Provident Accident Insurance Company in December 1887. When local iron ores proved unsuitable for steelmaking, Chattanooga’s development stalled. Companies withdrew, businesses defaulted, and seven banks collapsed. In five years of business, Provident had moved five times. It had 850 accident policies and no life policies. By 1892 Provident also had moved through 15 directors, and two Scotsmen offered to pay $1,000 for a one-half interest in the directionless company. Thomas Maclellan and John McMaster bought out the other owners by 1895.

In those days the insurance industry was regarded with deep suspicion, as many unsound insurance companies had soured public confidence. Maclellan and McMaster applied themselves foremost to reversing this mistrust, even choosing to go without salaries when necessary in order to pay claims promptly. By 1893 the number of policyholders had doubled. The following year saw premiums coming in from out of state. As full owners in 1895, McMaster became president and Maclellan became secretary and treasurer. Their partnership ended in 1900 because of differences, and, by prior agreement, the company went to the higher bidder. Maclellan then took over the company and became its president.

Maclellan added two lines to Provident’s coverage: sickness insurance and industrial insurance. Sales—which had been Mc-Master’s strength—suffered with McMaster’s departure. In 1905, the Armstrong Committee’s investigation of New York State’s insurance industry sparked more public mistrust, and state legislatures moved to enact reforms, including requirements of larger reserves. In 1909 Provident was forced to withdraw from Alabama and West Virginia after legislative reforms. It remained, however, in Tennessee, Kentucky, and Virginia, collecting premiums of $108,000 in those three states in 1909. While its field of operations was shrinking, Provident was hit with increased competition when insurance companies flocked to the South, where regulatory laws were less severe than elsewhere. Maclellan reorganized the company in 1910 with added capital, changing it from a mutual to a stock company. In 1911 Provident’s previously shrunken territory doubled when it entered North Carolina, Georgia, and Alabama.

Expanding into Life Insurance and Completing Acquisitions: 1910s-30s

When World War I started in 1914, domestic fears affected financial markets, and Provident’s policy lapses were more than 20 percent. To combat this, the company slashed operating expenses and entered new sales regions. At the end of 1915, Provident had increased its premium income by $100,000 over the previous year. The war-revived economy combined with the coal boom of 1916, and Provident prospered as well. By the end of 1916, the company had a more than 65 percent increase in premium income. The year 1916 saw the sudden death of Thomas Maclellan, who was then succeeded by his son, Robert J. Maclellan, as president. Two new departments, railroad and life, were formed. The company, which was soon renamed Provident Life and Accident Insurance Company of America, sold its first life insurance policy to its new president, Robert J. Maclellan.

Provident was hard hit by the influenza epidemic in 1918-19 that killed nearly ten times the number of Americans lost in World War I. The disaster proved a good advertisement for insurance, however, and Provident’s premium income increased as a consequence in 1919 by more than 50 percent, exceeding $1 million.

Provident thrived along with the U.S. economy in the 1920s. It moved into a new 12-story building in 1924. That same year, the company wrote its first group plan, for the Tennessee Electric Power Company. Because the company maintained a policy of fair, prompt payment, only three of the 48,000 claims Provident processed in 1926 ended up in court. Most of its 100,000 policyholders were still working in the mines, lumber camps, steel mills, and railroad yards. An automobile liability department was formed as that industry blossomed in the 1920s, but losses closed the department in 1924. In 1925 the company’s operations were still concentrated in the Southeast, but they spread north and west in 1926, with the purchase of the Standard Accident Company of Detroit. Within two years, Provident had extended to 34 of the then-48 states. With the Standard purchase came $500,000 annually in premiums. The 1929 acquisition of the Meridian Insurance Company, of West Virginia, added another $300,000 in premiums.

After the stock market crash of 1929, Provident’s premium income declined. In 1931 Provident purchased the accident insurance business of the Southern Surety Company. The Des Moines, Iowa-based company’s accident premiums totaled $1 million annually. The acquisition of Southern also provided an experienced staff. Provident managed not to borrow during the difficult years of the early 1930s, and by 1934, sales were picking up slightly. By its 50th anniversary, in 1937, Provident’s assets were nearly $10 million, and it had an annual premium income of $7.5 million.

Company Perspectives:

UnumProvident combines the resources of the three income protection leaders—Provident, Unum and Paul Revere—each with over a century of industry leadership and experience. The resulting scale of our operation benefits customers through our strong focus, depth of resources and constantly growing expertise in a specialty business.

We offer insurance products and services that help people protect their incomes if they become injured or ill and unable to work, and we provide extensive resources to help them get back to work. We study the many facets of workplace health and productivity and develop products and services designed to help employers maintain a safe, productive workplace. Our efforts on behalf of customers include: integrated product offerings that meet customer needs; benefits emphasizing return to work; highly responsive service.

The results? Employees and individuals who are more productive and secure. Employers who are better able to recruit and retain a talented workforce. Partnerships based on commitment.

Postwar Development into Multiline Insurer

More industry changes came at the close of World War II as labor unions gained power and group insurance policies came into focus as an ordinary, and thus deductible, employer business expense. In 1946 Provident’s accident and health income had grown by 25 percent over the year before. This growth rate was more than double the national average for the industry. The company’s first subsidiary was formed in 1951, the Provident Life and Casualty Insurance Company. The subsidiary sold no casualty insurance; it was formed to allow Provident to do business in New York according to its state insurance laws, without subjecting the rest of the company to those same regulations. New York was the last frontier left for the company, as it had entered Canada in 1948. In 1952 R.L. Maclellan succeeded his father, Robert J. Maclellan, as president. The company moved into yet larger quarters. In 1955 it wrote the largest single group hospital and surgical policy in history, with premiums exceeding $5 million annually. Of 250 companies writing group life in 1954, Provident ranked 11th. Meanwhile, Provident’s insurance pension business had grown in just six years to a $2 million operation in 1954. The following year it was $5 million. Robert J. Maclellan died in 1956, not long after celebrating his 50th year with the company.

In 1960 Provident made another move into larger quarters. Growth also was reflected in its premium income, which nearly doubled between 1959 and 1965. Asset growth was fueled in large part by increasing individual life products sales. In 1964 Provident reported $5 billion worth of life insurance in force. It closed the decade with triple the assets and premium income of 1959.

The accident department signed one of its largest accounts in 1970, with the American Medical Association. R.L. Maclellan died in 1971, and Hugh Maclellan, another grandson of the company’s first Maclellan, assumed the presidency. Two subsidiaries were formed in 1974 to stimulate the company’s flexibility: the Provident General Insurance Company, which sold automobile and homeowners’ insurance; and the Provident National Assurance Company, which sold variable annuities. This last grew out of the purchase of the American Republic Assurance Company. Especially strong was Provident’s group department, whose premium income in the 1970s placed it among the top ten writers of group health insurance—ahead of established giants such as John Hancock and New York Life. Self-insurance flourished after the Employee Retirement Income Security Act was passed by Congress, sending ripples throughout the industry by the mid-1970s. In 1976 Forbes ranked Provident first in sales growth and in earnings per share among the top investor-owned life insurance companies. In 1977 Hugh Maclellan left the presidency to chair the finance committee, and H. Carey Hanlin took his place.

Struggles in the 1980s

The 1980s dealt Provident and the insurance industry a series of hard blows. By 1980 Provident ranked seventh among the nation’s stockholder-owned life insurers for insurance in force. Its primary business was group life, group accident, and health insurance, with the group business concentrated among groups of 500 or more. Between 1969 and 1979, sales of individual life insurance increased 73 percent, with the emphasis on tax-favored insurance plans. Then the mid-1980s brought a rash of regulations for the taxation of life insurance companies, starting with the stop-gap Tax Equity and Fiscal Responsibility Act (TEFRA) in 1982. Whereas TEFRA reduced company taxes, the 1984 Deficit Reduction Act increased them considerably. Then the 1986 Tax Reform Act, by redefining the nature of life insurance policies, restricted certain promising Provident tax-favored products, such as corporate-owned life insurance.

Key Dates:

1848:: Elisha B. Pratt founds the Maine-chartered but Boston-headquartered Union Mutual Life Insurance Company.
1881:: As president, John E. De Witt engineers the shifting of Union Mutual’s headquarters to Portland, Maine.
1887:: Mutual Medical Aid and Accident Insurance Company is founded in Chattanooga, Tennessee; medical aid policies are dropped and the company changes its name to Provident Accident Insurance Company.
1910:: Provident is reorganized—changed from a mutual to a stock company.
1917:: Provident begins offering life insurance and eventually changes its name to Provident Life and Accident Insurance Company of America.
1940:: Union Mutual expands into accident and health insurance.
1960s:: Union Mutual develops a group long-term disability business.
1970s:: Provident develops an increasingly diverse product line, with particular growth in group health insurance.
1986:: Union Mutual converts from a mutual firm to a public company and adopts the new name UNUM Corporation; in the aftermath, UNUM begins focusing on disability insurance, primarily the group variety.
1990:: UNUM acquires National Employers Life Assurance Co. Ltd., the largest disability provider in the United Kingdom.
1992:: UNUM acquires Duncanson & Holt, Inc., a leading accident and health reinsurance underwriting company.
1993:: UNUM acquires Colonial Companies Inc., parent of Colonial Life & Accident Insurance Company, which offers payroll-deducted nonmedical insurance.
1994:: Unum Japan Accident Insurance Company Limited is established.
1995:: Provident divests its group health insurance business.
1996:: A new holding company called Provident Companies Inc. is formed.
1997:: Provident acquires Paul Revere Corporation, one of the leading individual disability insurers in the United States, and GENEX Services, Inc.
1999:: Provident and UNUM merge to form UnumProvident Corporation, based in Chattanooga.

While adjusting to these changes, Provident also was contending with healthcare cost inflation, which rocketed in 1986 and 1987, with claims costs rising by 20 percent to 25 percent a year. The company suffered low earnings during these years. To right itself, Provident responded with large-loss-case management, preferred-provider organizations (PPO), and flexible benefit plans. Unlike most of its competitors, Provident decided not to invest in company-owned health maintenance organizations (HMOs). This decision proved sage when other companies with massive capital investments in HMOs were hit doubly hard by that industry’s problems. The combination of healthcare cost inflation; government regulation; AIDS; new high-tech, high-cost medical treatments; and stock market volatility proved significant hurdles for Provident and others in the industry. As the company celebrated its centennial in 1987, it also reached the trough in its down cycle, when declining earnings and the purchase of the group business of Transamerica Occidental further reduced company profits. Provident continued to experience low earnings in 1988 but rebounded with record earnings the following year, after addressing inadequate pricing and focusing on core business. The company’s after-tax net income increased 65 percent in 1989 over 1988, with an especially strong recovery in the employee benefits portion of its business. Meantime, in 1988, the presidency passed from Hanlin to Winston W. Walker.

Refocusing on Individual Disability Insurance in the Early to Mid-1990s

Although Provident’s earnings in the early 1990s were an improvement over those of the late 1980s, the company was still struggling because of a number of underperforming operations. In November 1993 J. Harold Chandler, a senior executive with NationsBank Corporation, was brought on board as president and chief executive. Chandler initiated a thorough restructuring that laid the foundation for the merger with UNUM.

One of the key moves of the restructuring involved the sale during the first half of 1995 of the firm’s group health insurance business to Healthsource Inc. for $231 million (the price was cut from the $310 million figure that was initially announced in December 1994). Provident also began winding down its guaranteed investment contract business and sold off the bulk of its commercial mortgage loan portfolio. To fund future growth, the company reduced its annual dividend on its common stock. During 1996 the parent holding company, Provident Life and Accident Insurance Company of America, was dissolved and replaced by a new holding company called Provident Companies Inc. In addition to simplifying the corporate structure through the elimination of a subsidiary holding company, this move also was coupled with the elimination of the company’s dual-class stock structure through which the Maclellan family had held super-voting rights. The latter step diminished the family’s control over the company, although the clan still retained more than 50 percent of the common stock and three slots on the 11-person board of directors. A final piece of Chandler’s turnaround program was a change in the types of individual disability insurance being sold, with the new policies generally offering less generous terms in a move designed to rein in soaring claims.

In carrying out these various maneuvers, Chandler made it clear that the future focus of the company was in the area of individual lines—not group insurance—particularly individual disability and life products. Provident then substantially bolstered its position in the individual disability sector by acquiring the Paul Revere Corporation from Textron Inc. in a cash and stock deal worth nearly $1.2 billion. This acquisition, completed in early 1997, combined the two biggest U.S. players in individual disability insurance, increasing Provident’s annual revenues to more than $4 billion and making it the clear number two disability insurer in the United States, trailing only UNUM. The merger also enabled Provident to expand its channels of distribution and provided opportunities to cut costs through economies of scale. To help fund the purchase of the Worcester, Massachusetts-based Paul Revere, Swiss insurance giant “Zürich” Versicherungs-Gesellschaft (later known as Zurich Financial Services) agreed to invest $300 million in Provident, gaining a 15 percent stake in the company and two seats on the company board.

Also in early 1997 Provident acquired GENEX Services, Inc. of Wayne, Pennsylvania. GENEX was a provider of case management, vocational rehabilitation, and related services used in the handling of disability and workers’ compensation claims. GENEX also had a dental insurance arm, but this unit was sold later in 1997 to Ameritas Life Insurance. In a further divestment of noncore lines, Provident sold its individual and tax-sheltered annuity business to American General Corporation during 1998. Then in November 1998 Provident reached an agreement to merge with UNUM Corporation.

UNUM’s Union Mutual Origins

UNUM Corporation traced its beginnings to the formation of the Union Mutual Life Insurance Company. Elisha B. Pratt had been one of the founders of Connecticut Mutual Life Insurance Company in 1848, but after a falling out with the management of that firm, Pratt obtained a charter in Maine to form Union Mutual, which was launched on July 17, 1848. Despite the location of the charter, Pratt ran the company out of his Boston home. Union Mutual soon expanded operations to the South and then to Oregon, Nevada, and Puerto Rico following the Civil War.

In 1876 John E. De Witt was named president of Union Mutual. Five years later, De Witt began plotting to move the company to Maine in response to a new law that required one-third of the company profits to be shared with Massachusetts General Hospital. DeWitt persuaded the Maine legislature to enact a law requiring Maine-chartered companies to be headquartered in that state. Then De Witt and one other director held a board meeting in Portland, Maine, at which they elected a new board. The following day, De Witt packed up the Boston office and moved it to Maine.

Union Mutual continued to grow during the next several decades. Then in 1940 the company took over the bulk of the business of Massachusetts Accident Company, an accident and health insurer that had gone into receivership. This marked the company’s first significant move outside of its traditional individual life and endowment lines, and the accident and health business gradually became Union Mutual’s most important line of business in the years that followed.

During the 1960s, under the leadership of Carleton G. Lane, Union Mutual began computerizing its operations and established a holding company to aid the company’s expansion and diversification. An equally important development during the decade was the company’s establishment of a group long-term disability business, an effort headed by Alfred J. Perkins, a company vice-president. Group disability insurance would later become the company’s flagship product.

Colin C. Hampton was named president of Union Mutual in 1969, becoming chief executive as well the following year. Also in 1969, the Maine legislature enacted a law permitting the conversion of mutual insurance companies to stock form. Responding quickly to this opening, Hampton formally proposed demutualizing the company—that is, converting it from ownership by policyholders to ownership by stockholders—in 1970. Hampton believed that going public would bring much needed expansion capital into the company. He also felt that Union Mutual would benefit from the accountability imposed by a corporate structure. But the support did not exist for what at the time was considered a radical move.

Demutualizing in 1986

By the early 1980s Union Mutual was managing assets of approximately $2.3 billion and employing a workforce of about 1,900. Although it was a leader in the long-term disability insurance segment of the industry, the company was not viewed as a competitor with major national or international prospects. Moreover, it was gradually being overshadowed by much larger insurance companies with national marketing programs and increasingly automated operations.

In recognition of the encroaching threat to the company, Hampton in 1982 took measures to shift Union Mutual’s focus away from market segments that were becoming dominated by the major national insurers. In addition, at the end of 1984 he formally began the process of converting the company from a mutual to a public firm, an effort that took nearly two years to come to fruition. In September 1986, company directors hired James F. Orr III to help Hampton oversee the demutualization. The 43-year-old Orr was an executive at Connecticut Bank and Trust Co. before joining Union Mutual. He recently had helped to complete the merger of that bank and The Bank of New England, and Union Mutual directors felt that his background complemented their situation. Orr, who had been a track star at Villanova University in the 1960s, was recognized as an intelligent, frank, even-tempered achiever. He welcomed the move to Maine for both personal and professional reasons. “The company was in a very, very exciting period of transition—demutualization. It was the first, if not only, major demutualization in insurance that’s ever taken place,” Orr recalled of the move in the October 1990 issue of Business Digest of Southern Maine. “The lifestyle in Maine was also appealing. My family and I had been coming to the Maine coast for 25 or 30 years, so putting it all together was just a tremendous opportunity.”

In 1986 Union Mutual changed its name to UNUM Corporation, unum being the Latin word for the numeral one. In November of that year, UNUM distributed its entire net worth of $700 million to its policyholders. The company simultaneously sold new shares to new shareholders, a move that brought $700 million into the corporation’s coffers. Although demutualization eventually proved to be a wise move, the transition was sometimes turbulent. Policyholders and employees were not accustomed to having the company’s business scrutinized by the general public. As a result, Orr was deluged with complaints at times. “Looking back on it, I think we all underestimated how difficult it would be to get the people in the company oriented to having a new stakeholder group out there, namely, our shareholders,” Orr noted in the Business Digest of Southern Maine. Orr helped smooth the transition by increasing the size of performance-based incentives for employees, a program that Hampton started.

Focusing on Group Disability Insurance in the Late 1980s

In addition to his efforts to engineer the transition to a public company, Orr began to aggressively reorganize and reposition UNUM to compete and grow. Within a year of his arrival—Orr officially assumed the chief executive slot in 1987—he slashed $25 million from UNUM’s annual expenses by trimming back the workforce and dumping some of the organization’s slumping divisions.

Union Mutual had been trying to exit various nonperforming businesses since the early 1980s. Orr intensified that effort in 1986, and UNUM eventually bailed out of several of its core businesses, including life insurance, general investment contracts, and individual annuities and pensions. Most important, Orr and fellow executives decided to eliminate the company’s involvement in the medical insurance business. Orr poured the resources saved from that business segment into sales and marketing programs for its remaining products.

With its diversified lines of insurance and financial products eliminated for the most part, UNUM had become primarily a provider of long-term disability insurance. UNUM sold most of its policies to groups—a company’s employees, for example—but also registered sales to individuals and small businesses such as medical practices. These agreements stipulated that, when a policyholder was out of work for an extended period because of a disability, UNUM would pay a percentage of the person’s salary for a predetermined time period until the individual could return to work. In 1988 nondisability businesses still accounted for roughly two-thirds of UNUM’s $1.5 billion in annual premiums. But nearly all of its $129 million in aftertax income came from disability premiums. Cognizant of this state of affairs, Orr continued to reduce UNUM’s large pension and individual life businesses.

Orr’s decision to concentrate on the long-term disability market was influenced in part by UNUM’s established leadership position in the relatively small industry. In addition, the long-term disability market was growing quickly in comparison with most other types of insurance. Between 1962 and 1986, in fact, the number of Americans prevented from working because of a disability more than doubled to 9.3 million, a rate of growth that outstripped population growth more than fourfold. Some industry observers noted that, although sales of disability policies were increasing at a rapid rate of about 15 percent annually, the potential U.S. market of 117 million (by one estimate) was only 36 percent saturated by the late 1980s.

Between 1985 and 1988 UNUM significantly bolstered its lead in the U.S. disability insurance market. By early 1989, UNUM’s portfolio held a heady 30 percent of all U.S. disability policies and had captured about 17 percent of industry revenues. UNUM’s market share was a whopping four times larger than that of its four largest competitors combined. It achieved those gains by underpricing the competition. One reason for the company’s impressive performance was its $13 million annual investment in what it called “benefits management,” which cut UNUM’s claim payouts through investigation and reduction of false claims. The program also helped clients to secure Social Security payments owed to them. UNUM’s competition scrambled to match the company’s efficiency. Allstate Insurance Co., for example, cut its policy prices by 15 percent in the mid-1980s in an effort to lure away UNUM policyholders. It was unable to post profits, though, and Allstate dropped out of the business in 1988.

Continued Restructuring Efforts and Acquisitions in the Early to Mid-1990s

As UNUM’s disability business surged, so did its revenues and profits. Between 1987 and 1990 sales rose from about $1.6 billion to roughly $2.2 billion. Profits, moreover, jumped from just under $100 million in 1987 to $160 million in 1989 and then to nearly $220 million in 1990. Orr was confident about UNUM’s future prospects for the early and mid-1990s: “When we go into a marketplace, we want to stake out a leadership position,” he asserted in Forbes. That confidence was reflected in Orr’s vision of the company’s standing in the latter part of the 1990s. Aside from dominance of the U.S. disability market, that vision included charitable efforts in the local community, a healthy corporate culture and workforce, and international expansion. One key action meant to help the company meet the latter goal was the 1990 purchase of National Employers Life Assurance Co. Ltd., the largest disability provider in the United Kingdom.

UNUM’s most powerful competitive advantage during the late 1980s and early 1990s was its coveted database. First established in the early 1970s, by the beginning of the 1990s the UNUM database consisted of information on 26,000 clients and 2.8 million insured individuals. Using the detailed information base, UNUM was able to precisely measure risks of disability stemming from numerous occupational, social, economic, and geographic factors. Such data gave UNUM an edge over its competitors in valuing risks, pricing policies, and creating specialized products for small niche markets. During the early 1990s, UNUM’s database advantage was reflected by a 15 percent return on equity from its long-term disability business, a rate of return significantly higher than the industry average.

As a result of increased operational efficiency and intense market focus, UNUM’s sales and profits continued to surge during the early 1990s. Annual revenues bolted to more than $3 billion in 1992 and then to $3.4 billion in 1993 as net income jumped to $300 million. By 1993, moreover, UNUM’s asset base had grown to nearly $12.5 billion. Part of the growth was attributable to various acquisitions and joint ventures. In December 1992, for example, UNUM finalized an agreement with Equitable, a leading U.S. insurance company, to have Equitable’s 8,300-member sales force sell only disability products designed by UNUM. The same year, UNUM purchased Dun-canson & Holt, Inc., a leading accident and health reinsurance underwriting manager. That acquisition increased UNUM’s reach in the United States, Great Britain, Canada, and Singapore. Similarly, in 1994 UNUM established UNUM Japan Accident Insurance Company Limited, a Japanese subsidiary. Back home, UNUM acquired Columbia, South Carolina-based Colonial Companies Inc., parent company of Colonial Life & Accident Insurance Company. Colonial Life specialized in payroll-deducted voluntary benefits, including disability, accident, and life insurance.

After posting successive and impressive gains throughout the late 1980s and early 1990s, UNUM stumbled in 1994. Assets and sales increased, but net income dropped to $154 million and the company experienced its first stock price drop (of 14 percent) since it had gone public in 1986. The slide was primarily the result of setbacks related to UNUM’s individual disability business. The company suffered serious losses from that segment during 1994, prompting executives to announce late in 1994 that UNUM would no longer market individual, noncancelable disability products in the United States. The losses occurred, in part, because of significantly increased claims by UNUM-insured doctors, which accounted for about 15 percent of the company’s business. UNUM believed that changes in the profession gave doctors more reasons to claim disability payments—which were often $20,000 to $30,000 per month—rather than recover and return to work. UNUM lost $61.7 million from the segment in the third quarter of 1994 alone, a figure that prompted it to lay off 350 workers.

UNUM continued its drive to divest noncore product lines by selling off its dental insurance and group tax-sheltered annuity businesses. The former was sold to Ameritas Life Insurance in 1995, while the latter was purchased by Lincoln National Corporation for $72 million the following year. Also in 1995, UNUM began selling individual disability policies once again, after creating a more flexible product line that recognized different degrees of disability and that offered policyholders incentives to return to work. In 1996, the company launched its first national television advertising campaign, which was mainly intended to build awareness of UNUM among the general public. By early 1997 the turnaround of the company’s financial performance was evidenced by the more than doubling of its stock price since the low that it hit in November 1994. UNUM responded by declaring a two-for-one stock split and increasing the quarterly dividend by a penny. Also in 1997 UNUM acquired Boston Compañía Argentina de Seguros S.A., a Buenos Aires-based insurer involved in the property/casualty, workers’ compensation, and life sectors.

Forming UnumProvident in 1999

Leading up to the late 1990s, Provident and UNUM had separately pursued similar strategies of divesting noncore operations and concentrating on the disability insurance sector, with Provident focusing on the individual market and UNUM the group market. UNUM’s Orr and Provident’s Chandler began discussing a possible merger of the two firms in April 1998, and in November of that year came the announcement that an agreement had been reached.

The merger, which was completed on June 30, 1999, and which was valued at about $5 billion, involved Provident shareholders receiving 0.73 shares of the new entity’s stock for each of their shares, while UNUM shareholders exchanged their shares on a one-for-one basis. Technically, Provident was the surviving entity and adopted the new name UnumProvident Corporation. Headquarters for the company remained in Chattanooga, but significant operations were kept in Portland, Maine, as well. The merger created the largest disability insurer in the world, with about $8.4 billion in combined revenue and total assets of $38.2 billion; in the United States, UnumProvident held about 35 percent of the overall disability market. Orr was named chairman and CEO of the new company, a position he was slated to hold until July 2001, and Chandler assumed the presidency.

Just prior to completion of the merger, UNUM announced that it intended to exit from the reinsurance business, selling Duncanson & Holt in the process, and through a series of transactions the successor company succeeded, for the most part, in this effort by the end of 2001. Provident and UNUM also announced that they planned to eliminate about 1,575 jobs, or about 11 percent of their combined workforce, following completion of the merger, through early retirement packages, layoffs, and job elimination. This was part of the companies’ effort to cut operating expenses by $130 million to $140 million by eliminating overlapping operations.

Postmerger Struggles at the Dawn of the New Century

Despite the logic that lay behind the combining of two leading disability insurers, UnumProvident got off to a very rough start. Difficulties integrating the sales forces led to a decline in policy sales. During the second and third quarters of 1999, the company took hundreds of millions in charges for merger-related activities, including severance packages and the elimination of duplicate facilities, and to the winding down of the reinsurance operations, as well as charges meant to bolster reserves. These charges resulted in net losses for the quarters and for the year overall. The losses sent the company stock plummeting, down a staggering 70 percent from June 1999 to February 2000. Five class-action lawsuits were subsequently filed on behalf of investors, charging that company management misled investors and failed to properly conduct due diligence prior to the merger (in October 2001 the parties reached a tentative agreement that would involve UnumProvident paying $45 million to settle all the claims). In November 1999 came the surprise announcement that Orr was resigning immediately and that Chandler would take on the additional titles of chairman and CEO. Orr’s departure highlighted for many of the former UNUM employees in Portland that power at the new company clearly resided in Tennessee and with Provident executives. The old UNUM culture—the firm was affectionately called “Mother UNUM” and known for having a worker-friendly environment—appeared to be vanishing, and morale in Portland was wilting.

The return to profitability in 2000 and 2001 appeared to indicate that UnumProvident had weathered the difficult integration and was operating more smoothly. Net income totaled $564.2 million in 2000 and $579.2 million in 2001. During 2001 UnumProvident acquired the assets of EmployeeLife.com, an Internet services company offering employers help with the management and administration of employee benefits. The operation was transferred to a new subsidiary called Benefits Technologies, Inc., which did business under the name Benefits America. Also during 2001, the company sold Provident National Assurance Company, an inactive subsidiary licensed to sell annuities in most states, to Allstate Life Insurance Company.

Despite the improving financial performance, UnumProvident’s stock continued to languish well into 2002. Investors were apparently concerned that the company’s performance and future prospects were being hampered by a number of factors, including low interest rates (which negatively affected the strength of the firm’s $28 billion in investments), the weak U.S. economy, and rising claims; the latter two factors typically work together, as workers in a weak economy are more likely to file claims. Adding to the company’s headaches was a series of revelations of investment losses related to a string of high-profile financially troubled firms, including Enron Corporation, WorldCom, Inc., TeleGlobe Inc., and Adelphia Communications Corp. Furthering the uncertainty surrounding UnumProvident was a lawsuit filed in June 2002 by a former medical director at the company’s headquarters in Chattanooga. According to an article in the Portland (Maine) Press Herald, the suit claimed that UnumProvident had a “policy of summarily denying disability claims and using its medical staff to back up the denial.” The company vigorously denied the allegations. For the first six months of 2002, UnumProvident recorded net income of $163.5 million, less than half the $329.1 million figure for the previous year.

Principal Subsidiaries

Provident Life and Accident Insurance Company; Unum Life Insurance Company of America; The Paul Revere Life Insurance Company; Colonial Life & Accident Insurance Company; First Unum Life Insurance Company; Provident Life and Casualty Insurance Company; GENEX Services, Inc.; Unum Limited (U.K.); Unum Japan Accident Insurance Company Limited; Benefits Technologies, Inc.; Provident Investment Management, LLC.

Principal Competitors

The Hartford Financial Services Group, Inc.; Metropolitan Life Insurance Company; Prudential Financial, Inc.; CIGNA Corporation; Aetna Inc.; AFLAC Incorporated; Aon Corporation.