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UnumProvident Announces Settlement of Multistate Market
Conduct Examination
Agreement Subject to Consent of Participating States;
Special Investor Call Set for 9:00 A.M. (EST) on November 19
CHATTANOOGA, TN (Nov. 18, 2004) – UnumProvident Corporation
(NYSE:UNM) today announced that certain of its insurance subsidiaries had
entered into settlement agreements with state insurance regulators upon
conclusion of a multistate market conduct examination led by Maine,
Massachusetts and Tennessee relating to disability claims handling practices.
In addition, the U.S. Department of Labor, which has been conducting an inquiry
relating to certain ERISA plans, has joined the settlement agreements, and the
New York Attorney General’s Office, which had engaged in its own investigation
of the Company’s claims handling practices, has notified the Company that it is
in support of the settlement and is, therefore, closing its investigation on
this issue. The insurance authorities of the 47 remaining states and two other
jurisdictions also participated in the examination. The agreements are
conditioned upon obtaining the consent of two-thirds of these 47 states and two
jurisdictions.
The examination report did not make any findings of violations of law or market
conduct regulations. However, the exam report did identify areas of concern.
These became the focus of specific changes and enhancements to the Company’s
disability claims handling operations which were designed to assure each claim
decision is made in a consistently high quality manner.
The primary components of the settlement agreement include: enhancements to the
Company’s claims handling procedures; a reassessment of certain previously
denied or closed claims; additional corporate and board governance to support
the oversight of the reassessment process and general claims handling
practices; and payment of a fine in the amount of $15 million to be allocated
among the states and jurisdictions that join the agreement.
UnumProvident anticipates recording a loss of $127 million, before tax, or $88
million, after tax, which is $0.29 per diluted common share, upon obtaining
consent of two-thirds of the 47 other states and two jurisdictions, or such
lesser number of consents as the Company may choose to accept for the
agreements to be binding. The Company expects to receive the required number of
consents during the fourth quarter 2004. The loss is comprised of four
elements: $27 million of incremental direct operating expenses to conduct the
two-year reassessment process; $44 million for benefit costs and reserves from
claims reopened from the reassessment; $41 million for additional benefit costs
and reserves for claims already incurred and currently in inventory that are
anticipated as a result of the claim process changes being implemented; and the
$15 million fine. The ongoing costs of changes in the claims handling process
and governance improvements will be included in the Company’s operating
expenses as incurred going forward. These ongoing costs are not anticipated to
materially affect the Company’s results of operations.
“UnumProvident is committed to handling customers’ claims in a fair, thorough
and objective manner,” said Thomas R. Watjen, UnumProvident president and chief
executive officer. “We have committed significant resources over a number of
years to build a sound claim process. At the same time, we have always been
willing to make changes as needed. We have learned from this process,
especially the regulators’ view of this important activity at our Company, and
I am confident the steps we are taking in response to this review will improve
the consistency and quality of our claims decisions, improving further the
quality of service we provide our customers, and help establish best practices
throughout the industry. I am very pleased with the efforts of those leading
the multistate examination process, that the U.S. Department of Labor has
joined the settlement agreement and that the Office of the Attorney General of
New York is supporting the settlement agreement and closing its investigation
on this matter. Although the number of parties obviously led to complicated
negotiations, by successfully concluding this settlement we will have put a
number of related matters behind us. I am very confident that through the
actions we are taking internally we will meet the requirements contained in
these settlement agreements.”
The insurance commissioners of Maine, Massachusetts and Tennessee, the states in
which the Company’s three principal insurance subsidiaries are domiciled, began
the multistate targeted market conduct examination in September 2003 and, as
the lead state regulators, directed the course of the exam. The Company also
has an insurance subsidiary domiciled in New York, but New York had been
proceeding separately with its market conduct exam prior to commencement of the
multistate exam. It became a participating state and also entered into a
substantially identical settlement agreement covering the subsidiary domiciled
in New York. The insurance departments of 46 other states, the District of
Columbia and American Samoa have since joined as participants in the exam. The
purpose of the exam was to determine whether the long-term disability claims
handling practices of the Company’s insurance subsidiaries reflected unfair
claim settlement practices. Examiners working under the direction of the three
lead state regulators reviewed policy forms, manuals and administration and
organization charts, but primarily focused on reviewing individual or group
long-term claim files closed, appealed or open during two time periods from
2002 to early 2004. The claim file review led to discussions with the Company
that resulted in the settlement agreement.
A principal feature of the settlement is a reassessment process. Under the
agreement, UnumProvident is offering to reassess any individual or group
long-term disability claim that was denied or closed since January 1, 2000,
except for specific categories of closures such as settlement, death or payment
of maximum benefits. The potential pool of claims decided over the nearly five
year period that may be eligible for reassessment if the claimant elects to
participate is approximately 215,000 claims. However, almost half of these
claims are subject to a preliminary determination as to whether the claimant
seeking reassessment “returned to work” under the policy, in which case the
claim is not eligible for further reassessment. Once the agreement is
effective, the Company will begin notifying these claimants over a several week
period that they may elect to have their prior claim decision reassessed by a
special reassessment unit of experienced claims professionals applying the
enhanced claim procedures outlined in the settlement agreement. The special
unit is headed by an officer of the Company with over 28 years experience in
claims handling. The Company will also accept requests for reassessment from
other individuals whose claims were closed after January 1, 1997, and through
December 31, 1999, subject to the same closure exceptions as the group
receiving notice, and from claimants who dispute the category for closure if it
affects their eligibility for reassessment. There will be ongoing oversight by
the Company and lead state regulators of the reassessment process. The DOL may
also participate in this monitoring of the reassessment process.
UnumProvident has also agreed to enhance certain aspects of its claim
operations, including making changes to its organization and procedures to
improve the consistency of and the support for each claim decision and create
an easier process for claimants. First, UnumProvident is increasing the number
of experienced claims professionals involved in making claims decisions, as
well as more heavily involving higher levels of management in the signing off
on adverse claim decisions. Doing so will not only put more experienced people
into closer contact with claim decisions, but it should also improve turnaround
times and clarify accountability for claims decisions. Second, to improve the
support for the initial claim decisions, the Company is modifying its policies
regarding medical information, including guidelines for the use of independent
medical evaluations and the process for handling claimants with multiple
medical conditions. Third, to make it easier for a claimant to understand and
proceed through the claim process, the Company is adding a number of service
components, including referring certain claims to a field case manager who will
meet with the claimant in an effort to make the process less burdensome. Also,
there will be an additional telephone hotline available to claimants who seek
additional assistance. Finally, to further assure consistency in the initial
claim decision, the Company is adding a position of quality compliance
consultant to assess the totality of the claim decision and to focus on issues
of compliance and documentation.
The final principal part of the settlement agreement addresses aspects of
corporate governance which are intended to reflect today’s greater emphasis in
this area and to help establish best practices for the industry. A regulatory
compliance unit is being created to monitor the reassessment process,
compliance with market conduct regulations and ERISA requirements, as well as
general claims handling compliance. This unit will be headed by the Company’s
chief ethics officer and will report directly to a newly formed regulatory
compliance committee of the board of directors. This committee will be
responsible for monitoring compliance with the settlement agreement as well as
with a broader range of regulatory and compliance laws and regulations. The
committee will be composed of five independent directors, including two
directors with significant insurance industry or insurance regulatory
experience and subject to the approval of the lead state regulators.
Additionally, the board of directors intends to add an additional director with
significant insurance or regulatory experience by June 30, 2005. As previously
announced, three independent directors with senior management experience in the
insurance or financial services industries were elected at the company’s August
2004 board meeting.
Separate settlement agreements have been approved and executed by the respective
insurance subsidiaries of UnumProvident, the lead state regulators for the
Maine, Massachusetts and Tennessee insurance subsidiaries, the Superintendent
of Insurance of New York for the company’s insurance subsidiary domiciled in
New York, and the U.S. Department of Labor. In addition to these parties who
have executed settlement agreements, the effectiveness of the agreements is
conditioned upon the consent of at least two-thirds of the “participating
states,” which does not include the three lead states, but includes the 47
other states and two other jurisdictions, so that two-thirds would be 33 of the
participants, unless the company approves a lesser number. The agreements are
being circulated to the participating states, which have until December 20,
2004, to sign the documents in order to consent. Once the settlement agreements
are effective, they will remain in place until the later of January 1, 2007 or
the completion of an examination of claim handling practices and an examination
of the reassessment process, both of which will be conducted by the lead state
regulators. In addition to the fine of $15 million to be paid when the
settlement agreements become effective, the insurance subsidiaries that are
parties to the settlement agreements are subject as a group to potential fines
for non-compliance with the settlement agreements, including contingent fines
of $100,000 per day if certain implementation deadlines are not met and a
contingent fine of $145 million for failure to satisfactorily meet the
performance standards in the settlement agreements relating to the examinations
referred to above, which will be conducted in approximately two years. This
latter contingent fine relating to examination of the claims handling practices
or the reassessment process is limited to a maximum of $145 million for both
examinations should the performance standards not be met. The performance
standard is based on compliance with a maximum tolerance standard for claims
procedures based on review of a statistically credible random sample of
individual or group claims. The company believes that the changes it has made
and will be making to its claims operations and to enhance its oversight
functions will substantially reduce the likelihood that the company would fail
to meet the performance standards in the agreement when these examinations are
concluded.
“I am confident that the plans and people are in place to meet the requirements
of these agreements,” Mr. Watjen stated. “In addition to the changes occurring
in our benefits area, we will also have a special internal claim audit team
dedicated to reviewing the matters required by the settlement agreements,
including claim decisions in the reassessment process as well as those made in
the normal claims operations. We will be reviewing the results of this audit
team’s work on a regular basis. The multistate exam team will also be reviewing
claim decisions and compliance with procedures contained in the agreements. We
expect to have frequent discussions with this multistate exam team to jointly
review our progress. We believe these activities over a period of almost two
years prior to these examinations will minimize the potential for any failure
of the Company to meet the requirements of the agreements when the exams are
undertaken.”
Arizona, California, Minnesota and New Mexico are participating in the
multistate examination; however, while the multistate examination was in
progress these states chose to continue pursuing their own market conduct
examinations and investigations, each of which had begun prior to the beginning
of the multistate exam. The Company has reached agreement with the Minnesota
Department of Commerce covering three exam periods dating from 1995 and
involving three of the Company’s insurance subsidiaries, which have agreed to
pay a penalty totaling $250,000 relating to various matters outside the general
scope of the multistate examination. California has conducted an examination
with two phases and an investigation relating to claims handling. Discussions
with the California Department of Insurance have been ongoing relating to
various issues, some of which are within the general scope of the multistate
examination and others that are outside its scope and relate to such matters as
policy provisions. It is uncertain as to whether California, Arizona or New
Mexico will consent to the multistate settlement agreements, pursue their own
examinations to conclusion or a combination of joining the multistate
settlement agreements and resolving certain state specific issues separately.
Through a significant investment of resources, UnumProvident has developed the
industry’s largest disability claims and return-to-work organization, managing
approximately 450,000 new short term and long term disability claims annually.
In 2003, UnumProvident paid $4.1 billion in disability benefits, more than
double any other insurance provider. To meet future policyholder obligations,
the company maintains a sound balance sheet, including $16 billion in statutory
disability reserves.
UnumProvident Corporation senior management will host a conference call on
Friday, November 19, at 9:00 a.m. (Eastern) to discuss the multistate market
conduct examination and settlement agreements and may include forward-looking
information as well as other material information. The dial-in number is (913)
981-5591. Alternatively, a live webcast of the call will be available at
www.unumprovident.com in a listen-only mode. About fifteen minutes prior to the
start of the call, you should access the “Investor and Shareholder Information”
section of our website. A replay of the call will be available by telephone
(888) 203-1112 and on our website through Wednesday, November 24.
For full examination report and regulatory settlement agreement,
please visit www.unumprovident.com/commitment.
For a printer friendly version,
click here
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