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Unum Leaves Group LTCI Market

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Unum Group Corp. (NYSE:UNM) is getting out of the group long-term care insurance (LTCI) and preparing to increase the premiums it charges for in-force group LTCI coverage.

“We intend to aggressively manage the long-term care business,” Thomas Watjen, president of Unum, Chattanooga, Tenn., said today during the company’s fourth-quarter earnings conference call. “This will include continuing our practice of seeking rate increases on the in-force business where warranted and also exploring opportunities for capital management.”

Unum is hoping to use reinsurance to reduce the amount of capital backing the closed block of group LTCI business, company executives said.

Unum, best known as a disability insurer, is reporting a $425 million net loss for the fourth quarter of 2011 on $2.6 billion in revenue, compared with $226 million in net income on $2.6 billion in revenue for the fourth quarter of 2010.

Company executives said continuing operations did well.

Operating earnings at the operations Unum is keeping increased to $228 million after taxes in the latest quarter, from $209 million in the comparable quarter in 2010.

Book value per common share increased to $29.30 at the end of 2011, from $28.25 a year earlier. The company also ended the year with about 4 times as much risk-based capital (RBC) as it needed to meet regulators’ RBC requirements. In addition to having an RBC ratio above the 400% level, the company had $756 million in cash and marketable securities.

“Our capital position continues to be an asset and gives us a great deal of financial flexibility,” Watjen said.

The Colonial Life voluntary benefits business increased sales 4.2%, to $126 million. Operating income increased 11%, to $68 million, and premium revenue increased 5.7%, to $289 million.

Strong sales at commercial employers offset a drop in sales at government employers, Unum says.

The U.S. group disability business is reporting $77 million in operating income for the latest quarter on $511 million in premium revenue, compared with $77 million in operating income on $514 million in premium revenue for the comparable quarter in 2010.

Sales of fully insured group long-term disability insurance jumped 12%, to $75 million, and sales of fully insured group short-term disability insurance rose 9.1%, to $41 million.

Unum held U.S. group disability operating income steady in spite of a weak economy that continued to hurt employment levels and wage growth the company says.

But Unum looked hard at its LTCI operations, and at an LTCI experience study prepared by the Society of Actuaries (SOA), Schaumburg, Ill. The SOA study confirmed anecdotal evidence that LTCI policyholders are keeping policies in force longer than insurers had expected.

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Unum decided that it was a relatively small player in the group LTCI market and ought to reallocate the resources going to the group LTCI operation to other activites, executives said during the earnings call.

“While there is, no doubt, a tremendous market need for long-term care coverage, in an extended period of low interest rate and at a relatively immature product with difficulty in projecting future loss costs, it simply does not have the risk and return characteristic we find so attractive in our other businesses,” Watjen said.

LTCI has accounted for about 5% of Unum’s operating earnings, the company says.

The company increased policy and claim reserves by about $574 million, and it says about $280 million of the increase in reserves is due to the effects of the current ultra-low interest rate environment on investment earnings.

The company also decided that it is unlikely ever to recover about $290 million in LTCI deferred acquisition costs (DAC), or costs associated with efforts to generate new LTCI business.

The company noted that, because of DAC accounting changes, it would have had to write off some of the LTCI DAC amount this quarter even if it had kept the LTCI business.

Executives said during the earnings call that one factor affected reserving decisions for the both the group LTCI business and the individual disability insurance: A realization that both LTCI and disability insurance insureds are living longer than the company had originally expected.

Unum stopped selling individual LTCI in 2009.

In 2004, Unum put the individual disability insurance policies it had already written in a closed block. The group LTCI business will now reside with the individual LTCI business and the pre-2004 individual disability business in the company’s “closed block segment.”

“There is very little industry experience for lifetime disability benefits, as Unum Group’s insurance subsidiaries were the primary disability companies in the insurance industry at the time lifetime disability benefits were offered,” the company says. “These benefits were offered during the 1980s and 1990s, recent enough such that claimants are just reaching the older ages and providing the company with data to build its claim experience base. Emerging experience indicates a longer life expectancy for the older age, longer duration disabled claimants, which lengthens the time a claimant receives disability benefits.”

Unum talked about a review of its LTCI business during a November 2011 investor meeting, but John Nadel, a securities analyst in the New York office of Sterne Agee & Leach Inc., has expressed disappointment in a commentary on the fourth-quarter earnings announcement.

“We recognize the rate environment is a serious headwind, but we note just over a year ago the company highlighted its 20% plus [return on equity] in group LTC while defending the business following at least one major competitor’s exit,” Nadel writes.


CORRECTION: An earlier version of this story described Unum’s individual disability insurance business incorrectly. Unum put individual disability policies written before 2004 in the closed-block unit.