Sharpening the focus: UnumProvident is in the latter phases of a multiyear reorganization plan to become the leading disability writer and win the favor of equity and ratings analysts. (Life/Health: Company Profile).

Like the city in which they are based, the companies that I make up the UnumProvident Corp. have fought through tough times to become poised for better economic results. But Wall Street has yet to recognize the organization's accomplishments.

Rising seven stories above the rejuvenated business district of Chattanooga, UnumProvident's 875,000-square-foot, marble-walled headquarters is both a major landmark and home to a major employer--nearly 3,000 people work for the company--in this southeastern Tennessee city.

Chattanooga has diversified its economy by adding service industries and tourism to its manufacturing base. The city has spruced up its downtown district with new shops and restaurants, an aquarium and a stadium for its new minor league baseball team. Along the quarter-mile-wide Tennessee River, the city has constructed a long walking path, greenway and park, and a citizens group has refurbished an old highway bridge, converting it into a pedestrian river crossing.

UnumProvident is building a multistory parking garage as part of a plan to expand its headquarters by 250,000 square feet. But beyond that, the changes at the company cannot be seen from the city sidewalks that hug the original building and a 20-year-old addition.

The other changes are internal. Seven years ago, the companies now part of the UnumProvident Corp. were minor providers of an eclectic mix of life and health insurance products. Today, after two high-profile mergers and years of growing pains, the new company is a disability insurance colossus that towers in market share above competitors and continues to sharpen its focus on growing bigger and more specialized.

No Wall Street Darling

One might expect that equity analysts and investors would be impressed with the company's many improvements or be swayed by the optimism and confidence of executives and workers. But that is not the case. As of early July, this disability titan's stock traded on the New York Stock Exchange at slightly below book value. In June, its book value was less than one-quarter the price-to-book valuation of other members of the beaten-down S&P 500 Index, although the life insurance industry as a whole traded at about one-third the S&P 500 Index.

Analysts are not excited about prospects for the industry into which UnumProvident has placed its biggest bet, despite industry assertions that the average employee is much more likely to become disabled than to die prematurely. After attending a conference earlier this year, the investment firm Lehman Bros. said in an update that news out of the disability industry "isn't good," and it rated UnumProvident a "market perform," its third rating behind "strong buy" and "buy:' Credit Suisse/First Boston last fall rated the corporation a "hold." In August 2001, A.M. Best Co. analysts lowered the company's financial strength rating to A (Excellent) from A+(Superior), citing a concentration of premium income and profits tied to the disability line and a lack of product diversification.

Yet, concentration in disability is exactly the course that UnumProvident has charted and continues to follow. "Disability insurance is a specialty business that requires size and scale," said Tom White, vice president, corporate relations, who also handles investor relations. "Our strategy has been to create that size and scale. In doing so, we've gotten out of a number of businesses."

But White also acknowledged that the company is "at the point we have to deliver results to the financial marketplace."

J. Harold Chandler, president, chief executive officer and chairman, admits to being disappointed with Wall Street. "Our stock price does not reflect the true franchise we have built and the long-term potential," he said. But Chandler also recognizes a block of old business written before he joined the company and until 1996 is still a drag on corporate earnings. It was liberally written individual disability business sold mostly to doctors. "If it weren't for that, I'd be a much more frustrated individual," he said.

Regarding the A.M. Best rating, Chandler said: "We would prefer a higher rating, but it does not affect our ability to market our company. It's a reflection of the economic cycle we're in now. A company like ours is tied to economic trends. Concentration may be one of the issues we have to deal with, because we believe that the advantages far outweigh any concentration disadvantage. In the end, you can't have sustainable recoveries for disability policyholders without having impairment-specific expertise, which is accomplished by having gained size and scale."

A Need for Change

Recognizing the need for a new direction, the board of directors hired Chandler, now 52, in late 1993 from the board of directors at Bank of America. Soon thereafter, Chandler recruited Thomas Watjen, who was then managing director of the insurance practice at Morgan Stanley and had previously developed a working relationship with Chandler. Watjen serves as vice chairman and chief operating officer.

Together, the two used their energy and charisma to engineer their grand view on which the corporation's future depends. The two recognized in 1994 that disability insurers had done a poor job of selling their product and that to make headway in such a specialty business, a company needed to grow and to build more expertise.

"Most marketers would agree that the need for disability income precedes the need for life insurance, and yet one wouldn't understand that when you looked at the size of the industries," said Chandler. "We were impressed with the under-penetration of the market. Meanwhile, there were few suppliers, and their numbers were dwindling. That presented special opportunities."

Chandler and Watjen effected two major mergers despite the known perils of integrating companies' cultures, administration, claims, sales, underwriting, customer service, and even asset management. In 1997, Provident merged with the Paul Revere group of insurance companies, Worcester, Mass., then the second-largest writer of individual disability insurance behind Provident. A year later, they initiated merger talks with Portland, Maine-based Unum Corp., the largest group disability writer, and the companies merged in 1999. Thus the size and scale of the three leading disability writers came together to form UnumProvident, now the largest disability insurer in the world, according to A.M. Best data. UnumProvident has 25% to nearly 30% of the market share in most measurements of the disability industry, according to consulting firm John Hewitt & Associates, Portland, Maine. That's about 2.5 times its nearest competitor. (See "Top Group Disability Writers by Market Share," right.)

Chandler and Watjen also sold or discontinued several lines of business to marshal resources for disability. These divestments had the side benefit of generating currency to approach Paul Revere and Unum.

"If you don't have your total organization focused around the key drivers in the business, that's when everybody in this business gets into trouble," Chandler said.

Provident sold its group medical business to a health maintenance organization and discontinued its pension and guaranteed-investment-contract lines. It also exited individual annuities and tax-sheltered annuities. Unum sold its tax-sheltered annuity business, and both companies no longer write dental insurance. The company also sold Paul Revere's individual life and dental insurance as well as its annuity businesses, and it is no longer in international reinsurance, including participation in Lloyd's underwriting risks. "You'd better be sure all of your resources are very narrowly focused around a few things as opposed to trying to be all things to all people," said Watjen. "We've heavily organized around specialty skill sets, because if you're asking people to be generalists in a disability business, this is when you find yourself underachieving."

To improve their case management, an important capability in disability, the two in March 1997 bought Genex Services Inc., an independent provider of case-management services with a nationwide presence. They had originally sought a vendor relationship, but realized they could benefit from own ing the business. Only 10% of Genex's revenues currently come from UnumProvident, "so we again leveraged the concept of scale by encouraging them to do business with others," said Chandler. "When we need them, we get the benefit of the other 90% of their scale and size." Genex has 1,500 employees, including nurses and social workers at 120 locations throughout the country.

The integration of the three major companies was challenging. It came as UnumProvident strengthened reserves, reduced debt and faced stiff competition. Competitors raced to gain market share and increase revenues through aggressive marketing as UnumProvident was temporarily disabled, including its sales operations, by internal change and a new focus on profitability.

To Chandler, the integration felt like a nine-fold merger rather than three. "We had to do a lot of reorientation behind the scenes," he said. "There were a lot of moving parts. Each of those companies had three major divisions, so it was really like three times three."

As Chandler described it, the reorientation in the claims division was "horizontal" --reorganized by nature of the disabling impairment, as in a hospital--as opposed to "vertical," a reference to the way each company had been organized. For example, Chandler and Watjen set up a single structure to handle lower-back claims. Previously, a back claim could have been handled in Unum's long-term disability department, or its individual-disability department, or even in its voluntary-benefits department, or in similar departments at Provident or Paul Revere.

The executive leadership at Provident is now happy with where the company is strategically. "Many of our constituents respond in ways that suggest there's appreciation that we listen to their needs and concerns," said Chandler. He said that group includes customers-employers--who want comprehensive solutions from an insurer; intermediaries--brokers and consultants--who appreciate the level of service; and the company's employees. "A11 of us believe we do pretty meaningful work," Chandler said.

"There's a need for our product in the marketplace, and that gives us a sense of fillfillment."

Growth Phase

Now that the dirty work is done, Chandler and Watjen say they are spending more time on the growth phase of their multiyear plan after having devoted most of their energies to some painful restructuring and repositioning since the 1999 Unum merger. In the restructuring phase, they strengthened reserves by $600 million, reduced their debt/capital ratio to 30% from 35%, boosted risk-based capital ratio to 220% from 185%, and endured persistency and sales declines as they reorganized and integrated the companies.

They also restructured their investment portfolio to extend duration, enhance yield and better match assets to liabilities. Investors considered most of those actions to be red flags.

During the repositioning phase, sales and persistency improved, workers recovered sooner from disabilities thanks to better claims management, and market share improved. The company also introduced new products and services that appeal to employers, including individual disability insurance for executives and voluntary benefits for rank-and-file employees.

UnumProvident still has to prove to the equity marketplace "that we will fulfill their expectations of us, and we accept that requirement, because we have not delivered as much as we will in the future," Chandler said. "I'm confident that the patience that shareholders have shown will be rewarded in due course. The commitments we've made are all future-oriented and are achievable."

[GRAPH OMITTED]

Financial Contribution Generators for Disability Segment

Most income is generated by UnumProvident's brokerage operations, tops
in North America in group and individual coverages.

                                     Revenue  Pre-Tax Income

North American Brokerage Operations    86%         78%
Group Income Protection
Individual Income Protection
Voluntary Benefits

Genex Services                          2%          2%
Case Management Services

U.K. Operations                         4%          6%
Group Income Protection
Individual Income Protection

Colonial Life                           8%         14%
Voluntary Benefits

Source: UnumProvident

Note: Table made from pie Chart

RELATED ARTICLE: UnumProvident at a Glance

Headquarters: Chattanooga, Tenn.

Employees: 10,830 in North America 

Top Executive: J. Harold Chandler, president, chief executive officer and chairman

2001 Revenues: $9.44 billion

2001 Net Income: $579 million

Assets: $42.4 billion

Stockholders' equity: $5.94 billion

Products: disability, life, long-term care, special risk

Distribution: brokers, 45%; agents, 25%; consultants, 10%; national marketing organization partners, 17%; enrollment firms, 3%. Also, 70% of new business is through employers.

From the Desk of J. Harold Chandler

Quick takes from J Harold Chandler, president, chief executive officer and chairman of UnumProvident Corp.

On implementing the growth strategy and approaching Unum and Paul Revere about a merger:

"The difficult part of the equation in the early years was overcoming the inertia in many companies of just doing nothing, of accepting the status quo, particularly if you're being approached by your most significant competitor. In that scenario, it is incumbent upon you to present a compelling case. In the end, that is what we were able to do."

On when be started to feel the growth strategy was making headway:

"A year after merging with Paul Revere. In March or April 1998, we really began to feel a sense of momentum with better pricing in the marketplace and a real grip with our newly merged employees."

On times of disappointment:

"Our plan didn't anticipate certain internal or external events. After the merger with Unum in the fall of 1999, we thought it appropriate to make certain balance-sheet adjustments that resulted in a $600 million strengthening of reserves in our [long-term disability] book of business that we thought reflected more properly future trends and expectations. Most constituents were surprised, and any CEO has to admit that when any constituents are surprised, it's an indication you could have done something better."

On UnumProvident's ties to its home city:

"Chattanooga has always been very courteous to us. We've always felt at home and that we're not being taken for granted. Our employees are very involved in the community and the downtown area. We're the largest private employer in the city. There's also the Tennessee Valley Authority, Erlanger Medical Center and the University of Tennessee at Chattanooga. That's an advantage for us, our strong affiliation, both academically and in community-oriented projects. We house one of the university's academic departments, vocational rehabilitation."

Bringing Products and Marketing Together

On the marketing front, sales were up for UnumProvident last year, an indication that the company has been able to take advantage of the opportunities offered by the two major mergers.

Since the Unum merger in 1999, the company has beefed up its ability to sell through employers, as explained by J. Harold Chandler, president, chief executive officer and chairman, and Thomas Watjen, vice chairman and chief operating officer. The current package leads with long-term disability income protection, the product in which Unum specialized and is now backed by UnumProvident's more extensive customer service. But long-term disability carries a long waiting period before benefits kick in, so to address the impairment early, the company sells an short-term disability income protection. The two coverages combined allow UnumProvident to offer what it terms "absence management."

These coverages pay income replacement as a percentage of base pay, usually around 60%, but there are usually caps, and incentive or bonus income may not be protected. "That means the plans may not work well for executives," said Chandler. That leads to a third layer of protection the company can offer, executive supplemental income, which the company carves out and customizes for each employer. Paul Revere specialized in this type of protection.

Finally, with costs of employer benefits on the rise, UnumProvident offers a way for employers to cap their benefit costs by offering rank-and-file employees supplemental coverage on a voluntary basis offered at the workplace through payroll deduction. This coverage, in which the former Provident Corp. excelled, can allow employers to lower the income-replacement ratio on employer-paid plans, typically to 55%. For most employers, the question is not whether they will turn to voluntary workplace benefits, but when, said Chandler.

Due to its hard-won increase in size, UnumProvident is the only company that can offer this type of integrated product strategy, said Joseph Foley, senior vice president in product and market development. Competitor MetLife Inc. comes the closest. MetLife is strong in employee benefits, but has only a small presence in individual disability, voluntary and integrated solutions.

Foley identified other major disability competitors as Hartford Life, Cigna, Prudential, Standard and Guardian, all with major presences in employee benefits; Guardian, MassMutual and Northwestern Mutual, strong in individual coverages; and Aflac and American Heritage, which deal in voluntary supplemental coverages at the work site. Standard has a smaller presence in individual, and Guardian in employee benefits.

Rising Sales

Sales growth has been fastest for UnumProvident in voluntary workplace benefits. Quarterly increases were 66% in last year's second quarter, 53% in the third and 95% in the fourth. Individual disability sales at the workplace rose 12% last year over those in 2000 to 70% of total individual disability income sales. Last year, 61% of group coverages were packaged with another line, up from 56% in 1999.

According to John Hewitt & Associates Inc., which tracks the disability industry, UnumProvident significantly increased its market share in group disability and widened its lead over major competitors. (See "Top Group Disability Writers by Market Share," page 76.) A proprietary market survey by UnumProvident shows that since the merger, employers' and producers' perceptions of UnumProvident have risen substantially. Some 81% rated the company excellent or very good.

"All of the trends are extremely positive," said Foley "Perceptions are improving, and sales results are following."

Foley--who is among the 3,600 employees based at Unum's former headquarters in Portland, Maine--described the marketing problems and slide in sales both before and immediately following the merger. Both Unum and Provident had significant field forces in major cities. "Until the companies formally merged, for antitrust reasons the sales forces had to compete, right up to the clay of the merger," he said. "Then we had to decide which reps stayed and which didn't, and who would handle which territories. That whole process took time, and there was fallout as a result, We were potentially vulnerable, and competitors tried to take advantage of our situation."

That changed last year, as UnumProvident was able to raise its premium per life covered by 7% on inforce business, while the industry as a whole lowered prices 1%. "So, we've regained our grip in the marketplace, and we may have shaken out some companies that were purely price focused," Foley said. And people are no longer talking about the merger, he added.

Getting Workers Back to Work

Executives at UnumProvident all profess the importance of size and scale in giving the company competitive advantage. Probably nowhere is that more important than in customer care, the 3,000 employee division headed by Ralph Mohney, senior vice president of return-to-work services.

UnumProvident handled more than 400,000 new disability claims last year and paid out about $3.6 billion in benefits. (Including life insurance, accidental death and dismemberment and special risks, the company fielded 445,000 new claims and paid $4.6 billion in benefits.) But it is its investment in medical, clinical and vocational personnel and resources that allows it to operate an extremely active return-to-work program, the key to its value proposition to any employer.

Employers' interest in return-to-work capabilities is on the rise for several reasons, Mohney said. One is that they are looking for solutions to rising health insurance costs, and earlier and more returns to work can reduce medical costs. "We believe there's a relationship between disability and medical costs, and there's growing interest among employers in understanding that," he said. "It's stimulating more interest in return-to-work and the broader area of absence management."

Another factor is that in this period of economic recovery employers are searching for productivity improvements without hiring new workers. "So this is a way," said Mohney. "Current economic conditions will stimulate interest, and absence management is a key part of the solution."

In addition, employer cutbacks in staff have extended to human-resource departments, and those department managers now prefer to have fewer vendor relationships. In its drive to become the primary source for employers dealing with absence management, UnumProvident offers family leave administrative services and integrated disability management, which involves coordination of workers' compensation and disability coverages. The company provides instantaneous access to case information by phone or Web enabled tools. It also offers Social Security disability advocacy services and voluntary employee coverages that help employers limit amounts they spend on health plans.

A size advantage is that the company is able to provide via the Internet disability reports that compare the claim experience of a customer to other employers in similar industries or to the entire UnumProvident block. The service also can be used to identify trends and to analyze other factors.

Scale and Expertise

To achieve these capabilities, UnumProvident since its 1999 Unum merger has invested $210 million annually in customer-care scale and expertise. Over that time, it has tripled annual investment in physicians, nurse case managers and vocational rehabilitation specialists to $60 million. The company now employs 340 of these nurse case managers and rehabilitation specialists and 101 physicians in 14 subspecialties; 70 of the physicians are full-time. Mohney said the total cost of customer care has remained flat however, as the higher costs for clinical resources are offset by greater efficiencies and lower unit costs.

Customer-care representatives work out of offices in Chattanooga, Tenn.; Portland, Maine; Glendale, Calif.; Worcester, Mass.; and Toronto. At the time of the Unum merger, there were 13 sites, too many to reap the benefits of scale Mohney said.

When face-to-face contact is needed, employees can refer customers to Genex Services Inc., a subsidiary with 1,000 case managers and vocational specialists in 85 locations nationwide.

To achieve thoroughness, fairness and objectivity, the company trains new employees for 12 weeks. No one employee has the right to deny a claim; instead, other team members must sign off. The company also has a formal appeals process involving people independent of the original decision makers. An appeals process is required in group coverage by federal law, "but we also apply it to individual policyholders," said Mohney. "It's good business."

Other disability insurers allow claims representatives to handle any type of claim, said Mohney. "But then the one handling the claim never develops expertise around any one type of claim," he said. "We organize around the impairment, the way a hospital does. But you need huge scale to do it."

The company uses a triage system to sort its claims, ranging from quick-action, short-duration and maternity to long duration involving cancer, cardiac, orthopedic, psychiatric or general medical problems. The more serious the health condition, the more clinical intervention by medical and vocational specialists is required. Before the Unum merger, the company's duration of claims was at the industry average, but currently, recovery rates have improved 22% for short-term disability and 35% for long-term, Mohney said.

Customer care is a selling point for UnumProvident, and it literally goes the extra mile in courting new business prospects. The company owns three jets, each seating seven to nine passengers, that it uses to bring prospects to one of its offices in Chattanooga, Portland or Glendale for a tour of the customer-care operation. Company executives also use the planes to shuttle between Tennessee and Maine.

"The most effective way to get out our message is for customers to come here," said Mohney. "They want to see our resources and hear from the front-line people. They remember everything better if they see it as well as hear it."

Customer Tours

Visitors want to know what kind of people work for UnumProvident, whether they feel a passion for what they do and whether they feel good about the contributions they are making, Mohney added.

Customer tours wind past cubicles on several floors and involve impromptu conversations with supervisors and service representatives. Stops include visits with service reps specially trained in the federal Family Medical Leave Acts and similar laws in each state, which Ken Denton, vice president of the Chattanooga Customer Care Center, said is "one of the hottest new capabilities we have." Prospects also meet with early intervention nurses, 48 of whom work in Chattanooga and have expertise in different clinical areas. These nurses conduct full interviews with people filing claims. "They are more successful in getting information from them than are nonmedical people," said Denton. "They instill hope in claimants, and they ensure their recovery plans make sense."

Prospects tend to be very impressed with the two cardiac units staffed by doctors, nurses, vocational rehabilitation specialists and customer-care representatives. The cardiac units craft action plans to help the patient return to work as soon as possible and negotiate with the employer if necessary about finding the employee another position at the company, said Denton. About half of all claimants return to work within a year, he said. Representatives in the cardiac units have one to four years of experience, and consultants have 10 years of experience.

The tour ends with a visit to an active "roundtable review" of very complex cases by more than a dozen professionals, including intervention nurses, vocational rehabilitation specialists and doctors. They discuss cases that may require extraordinary treatment or try to resolve discrepancies between patient accounts and doctor reports. "It's a very efficient way of handling these cases," said Denton.

Since the roundtables are confidential, customers observe through a window or enter briefly, but they never know the details of claimants' personal information or cases, Denton said.

Staying in Touch

A business insures 25 million people, has 100,000 corporate accounts and deals with more than 200,000 producers. It needs information on products, services and even some claims. How does the company keep in touch?

Senior Vice President Robert Best is in charge of that job at UnumProvident. Since the 1999 merger of Unum and Provident, the company has worked hard to improve service for and relationships with benefit managers in human resource departments, producers and employees, Best said.

The company has 3,200 employees devoted to these services, with a special commitment to developing sales offices in the field that provide local contact. Some 1,200 service professionals work in 40 sales offices-- that's 250 more than two years ago, he said. They provide local sales support, account service and small-case quotes.

At the large service centers in Chattanooga, Tenn.; Portland, Maine; and Worcester, Mass., employees handle the individual brokerage business, producer compensation administration, the employee-benefits business and the voluntary-benefits business. They engage in new business issue, quotes for individual cases, in-force services, appointment of producers and commissions. They also handle large-case implementation and services, billing and collection. They run a call center for in-force business that provides claim status and handles enrollment.

A project office with 33 staffers creates and runs the systems that measure efficiency and that engineer new systems to interact with customers.

The company runs a service center for Canada in Burlington, Ontario, where 223 employees handle all of those same tasks.

Best said the efforts are paying off, with employer satisfaction levels of very good or excellent having risen from as low as 73% in 1999 in four measured areas to as high as 93% this year. In addition to giving more attention to benefit managers and more face-to-face consultation with larger customers, UnumProvident has made strides in using the Internet. Best said some 70% of new customers now receive their information booklets by e-mail or by downloading from a Web site, and Internet billing is on the rise. Some 1,500 customers currently pay bills on the Internet, and Best expects that number to grow to 25,000, or one-quarter of all group customers, in 2003.

The goal of UnumProvident call centers is to answer 80% of calls within 20 seconds, said Chuck Baker, head of individual and group call-center operations. The call-abandon rate is typically 2% to 3%. The company invested $2 million last year in the call-center operations, which are manned by 75 representatives for service and another 145 for claims, Baker said. "We do two surveys a year, and most customers have told us they don't mind holding, but they don't want to be passed around," he said. "They want to talk to one person. Our one-and-clone rate is 80% to 85%."

Employee manager Sandy Cox follows a screen that keeps track of incoming calls, answer times and abandon rates for her department and for individual reps. Spending the entire day on the phone can be draining, she admitted, but she said reps often enjoy the challenges of responding to the calls. Cox estimated that call-center representatives work in their positions an average of nearly four years, depending on their call-center location, with many continuing their careers in other areas of the company.

UnumProvident runs a separate sales support center for producers, said Rhonda Lindsay-Muller, vice president in charge of the center. "It used to take six days to generate a quote and deliver it via the mail service," she said. "Now it's immediate with our systematic fax and e-mail capabilities. We do more than 30,000 quotes a month. Also, we have no voice mail in the center. All calls are answered by a trained specialist."

The best producers on the individual side are property and casualty agents and agents representing life insurers without their own disability products, she said. Those include New York Life, New England Financial, Farmers, the MONY Group, Prudential and Lincoln National. "There are few insurance salespeople that specialize in disability insurance," she said. "DI sales to most life agents are ancillary. So we had to make big investments starting four years ago in systems and processes."