Consumer Fraud

Denying disability may be just one of Unum’s profitability tricks

Barron’s ran an article this month that claimed the disability insurer Unum “may be casting its numbers in an overly rosy light” in an effort to appear profitable and attract investors. The article, which can be read here, casts doubt about Unum’s reported health: “To hear company officials tell it, Unum Group is emphatically on the mend, this after the disability insurer was wracked by scandal and losses earlier in the decade.”

Lawsuits against the insurance giant began almost immediately after its merger in 1999. Unum (formerly named UnumProvident) was formed by the merger of Portland, Maine’s Unum and Chattanooga, Tennessee’s Provident. In 2002, the company was sued by a group of attorneys representing denied disability claimants.

The CBS new program 60 Minutes picked up the story and aired a devastating expose of Unum’s unsound business practices. Its reputation has never rebounded, probably because its ways of doing business have hardly changed.

Unum has been called an “outlaw company” by California Insurance Commissioner John Garamendi and a “rogue firm” by the BBC. Yet Unum reported 2 positive years with a third one in the making despite all the negative press, the major setbacks, and the notorious track record of wrongly rejecting legitimate claims. In 2007 and 2008, Unum professed to have made $679 and $553 million respectively, even though its shares were valued under $2. Latest estimates show Unum profiting at about $2.50 per share, which is remarkable in today’s economy.

Too remarkable, perhaps. According to Barron’s, “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.”

Barron’s reports that Unum is able to report profits by paring its reserves. “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,” the report says.

It would be interesting to see whether Unum could post some real profits by changing its ways — however risky or maligned with Wall Street those ways might be – real change from the inside out and not just an image makeover. In this age, with so many of the old economic and political paradigms crumbling around us, it probably wouldn’t be a bad idea for Unum to bank on honesty instead of smoke and mirrors for a change.