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Rating Action:

MOODY'S DOWNGRADES UNUMPROVIDENT CORPORATION (SENIOR DEBT TO Ba1) AND ITS AFFILIATES

11 May 2004
MOODY'S DOWNGRADES UNUMPROVIDENT CORPORATION (SENIOR DEBT TO Ba1) AND ITS AFFILIATES

Approximately $2.8 Billion of Securities Affected

New York, May 11, 2004 -- Moody's Investors Service downgraded the credit ratings of UnumProvident Corporation (UnumProvident - senior debt to Ba1 from Baa3) and the insurance financial strength ratings of UNUM Life Insurance Company of America and the company's other operating life insurance subsidiaries to Baa1 from A3. The outlook for the ratings is negative. This concludes the review that was initiated on February 5, 2004.

Moody's indicated that the primary drivers in the rating action were concerns about the substantial execution risk associated with the company's strategic plan to restore profitability to its core U.S. group long-term disability (LTD) business. In addition, the rating agency said that the Ba1 senior debt rating better reflected the company's financial flexibility and risk profile.

Moody's believes that UnumProvident will have challenges in implementing its business strategy. The rating agency indicated that competitors with greater financial resources may have greater pricing flexibility in markets which UnumProvident is emphasizing. This could also hurt the company's ability to retain distribution according to the rating agency. Moody's said that if persistency worsens or if sales are lower than the company's expectations that UnumProvident could experience pressure on its expense structure. The rating agency also noted that unfavorable results of the multi-state or other regulatory examinations could have a detrimental effect on the company's ability to execute its business plan.

Moody's said that the rating action also reflected the challenge of sustaining sufficient statutory earnings to provide adequate capital for insurance company operations and for dividends to the holding company to service interest and common stock dividend payments. The rating agency said that the regulatory restrictions on dividends taken from the operating companies and the tightness of the coverage ratios gave less cushion for adverse deviations in statutory earnings or capital, and placed the current debt service coverage ability more appropriately positioned in the Ba range for senior unsecured debt.

Moody's added that it views positively the $300 million of mandatorily convertible securities that the company has recently raised, and anticipates that the proceeds will be used to reduce debt, to support statutory capital at the operating companies, and to provide a liquidity cushion at the holding company. The availability of a portion of the proceeds to the holding company, lessens, at least temporarily, the impact of statutory dividend uncertainty.

The rating agency also cited a concern about the substantial GAAP one-time charges that the company has taken over the last five quarters. Charges include reserve strengthening related to the group and individual disability businesses and the write-off of intangibles associated with the individual disability and Canadian disability lines and totaled approximately $2 billion pre-tax and $1.4 billion after-tax. These items led to a lower level of GAAP equity, (adjusted for other comprehensive income), of $5.5 billion at the end of the first quarter of 2004, down by $581 million from year end 2003 and down by $547 million from year-end 2002, despite the second quarter 2003 equity issuance of $575 million.

The rating agency added that while management has completed several transactions that have contributed to an improved capital and liquidity position, this is tempered by ongoing weakness in key business lines. Moody's noted, however, that UnumProvident made considerable progress in improving its capital position throughout 2003, and has increased the absolute and risk-adjusted capital position of its life insurance subsidiaries, with consolidated NAIC risk-based capital (RBC) increasing to 247% at year-end 2003 from 210% at year-end 2002. The bulk of the 2003 improvement resulted from the company raising over $1 billion of common equity and convertible securities, using a portion of the proceeds to contribute capital to its life insurance operation, as well as to repay loans to its operating subsidiaries (improving the quality of capital). In addition, although these and other capital actions have been positive for the company, the rating agency stressed the importance of the company's ongoing statutory earnings capacity to ensure that the improvements in capital adequacy and dividend capacity are sustainable.

The ability to generate capital internally, driven by profitable business, will continue to be a strong driver in the company's rating profile, according to the agency. Moody's stated that it the lowered rating incorporated an expectation that UnumProvident's consolidated adjusted financial leverage (adjusted debt / total adjusted GAAP capital (approximately 32% as of March 31, 2004 proforma to reflect the $300 million in new convertible securities), to remain at or below 35%. The rating also incorporates an expected NAIC RBC for the consolidated life insurance operations of at least 260%, as well as GAAP after tax net income of approximately $450 million (adjusted for Q1 one-time charges) for 2004, and $500 million in 2005. The rating agency said that it expects after-tax statutory operating earnings in excess of $450 million for 2004, and $325 million for 2005.

Other expectations embedded in the current rating include an absence of significant one time charges. The rating agency also said that it expects cash flow available to UnumProvident to cover holding company interest and common dividends by at least 1.5 times, and that UnumProvident will maintain liquidity at the holding company on an ongoing basis of at least $80 million.

Factors that could positively influence the rating, Moody's added, include a reduction in financial leverage to less than 25%, a sustained NAIC RBC level of at least 280%, GAAP and statutory income higher than the company's plans, cash coverage of interest expense and shareholder dividends of the holding company of at least two times, and return on revenues of at least 5%.

The rating agency said that negative rating pressure could develop if financial leverage rose above 35%, if NAIC RBC declined below 220%, the company experienced statutory net income of less than $250 million, the company suffered significant adverse consequences from litigation or regulatory examinations, or the company saw sales and persistency levels drop significantly differently from the company projections.

The following ratings have been downgraded with a negative outlook:

UnumProvident Corporation - senior unsecured debt to Ba1 from Baa3; subordinate debt to (P)Ba2 from(P)Ba1; preferred stock to (P)Ba3 from (P)Ba2; mandatorily convertible units/preferred stock to Ba1 from Baa3.

UNUM Corporation (UnumProvident Corp.) - senior unsecured debt to Ba1 from Baa3; junior subordinate debt to Ba2 from Ba1.

Provident Companies, Inc. (UnumProvident Corp.) - senior unsecured debt to Ba1 from Baa3.

Provident Financing Trust I - preferred stock to Ba2 from Ba1.

UnumProvident Financing Trust II - preferred stock to (P)Ba2 from (P)Ba1.

UnumProvident Financing Trust III - preferred stock to (P)Ba2 from (P)Ba1.

UNUM Life Insurance Company of America - insurance financial strength to Baa1 from A3.

First UNUM Life Insurance Company - insurance financial strength to Baa1 from A3.

Colonial Life & Accident Insurance Company -- insurance financial strength to Baa1 from A3.

Provident Life and Accident Insurance Company -- insurance financial strength to Baa1 from A3.

Paul Revere Life Insurance Company -- insurance financial strength to Baa1 from A3.

Paul Revere Variable Annuity Insurance Company -- insurance financial strength to Baa1 from A3.

UnumProvident Corporation, headquartered in Chattanooga, Tennessee and Portland, Maine, is the industry's leading provider of group and individual disability insurance. As of March 31, 2004, the company reported consolidated assets of approximately $50.5 billion and shareholders' equity of $7.1 billion.

Moody's Insurance Financial Strength Ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations. For more information, please visit our website at www.moodys.com/insurance

Jersey City
Ann G. Perry
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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